CTBK Fraud Insights

Take Control This Year: It’s Time to Implement Anti-Fraud Controls in Your Small Business

Small businesses are becoming increasingly more vulnerable to fraud amidst the COVID-19 pandemic. Discover what anti-fraud controls you can implement to protect your small business against fraud.

The COVID-19 pandemic has had a severe economic impact on many small businesses. The enhanced financial pressures brought on by the pandemic have resulted in small businesses, which are already highly susceptible to fraud, becoming increasingly more vulnerable. While fraud prevention may not currently be foremost in small business owners’ minds, it is becoming exceedingly important for owners to consider how best to protect their businesses against fraud. By implementing anti-fraud controls within your small business, you can begin to effectively manage your fraud risk and minimize the opportunities for fraud.

The Association of Certified Fraud Examiners (“ACFE”) published its most recent report, 2020 Report to the Nations, which is a bi-annual study on the costs and effects of occupational fraud. According to this study, small businesses (organizations with fewer than 100 employees) suffered the highest median fraud loss of $150,000, while large organizations had a median loss of $140,000. At first glance, the difference in median fraud loss between small and large organizations may not seem like much. However, the size of the fraud losses may have a far more adverse impact on small businesses than large organizations. The pandemic further exacerbates the financial impact of these fraud losses on small businesses.

Small businesses are fundamentally intimate, and there tends to be a higher degree of trust between owners and their employees. While this is often one of the most attractive characteristics of working in a small business, it also presents a distinctive challenge when it comes to fraud prevention and detection. The culture of trust, limited personnel and resources, and a lack of consciousness of fraud make small businesses inherently more susceptible to fraud.

Given all these factors, what can small business owners do to increase their protection against fraud? The answer is to implement anti-fraud controls within their business. While the following anti-fraud controls may seem relatively straightforward, their efficacy at reducing fraud loss and duration is evident. The 2020 Report to Nations reported that implementation of controls such as these resulted in a 50%, or greater, reduction in both fraud losses and duration. Not surprisingly, the study also found that small businesses were generally slower at implementing the most common controls when compared with their larger counterparts. This means that small businesses have a considerable opportunity to become better-equipped at managing their fraud risk.

Some of the most common anti-fraud controls include:

  • An external audit of the financial statements
  • A code of conduct
  • Management’s certification of financial statements
  • Management review of internal controls, processes, accounts, or transactions
  • A whistleblower hotline
  • An anti-fraud policy
  • Fraud training for employees
  • Fraud training for managers/executives
  • Formal fraud risk assessments
  • Job rotation/mandatory vacation

It is important to note that not all of these anti-fraud controls are created equal, and some may not directly align with your business’ fraud risks. Therefore, small businesses should weigh the cost versus the benefit of implementing each of these controls. While a few of these controls require a greater deal of resources to implement, there are several that can be implemented without requiring any substantial investment. The adoption of a code of conduct and anti-fraud policy, annual anti-fraud training for employees, and requiring secondary management review of subordinate’s work, are all actions that are associated with a notable reduction in fraud loss and duration, yet do not require a significant investment of resources.

Although these anti-fraud controls can be relatively simple to enact, if you are at a loss for how to get started, you should consider hiring an expert to perform a fraud risk assessment. An expert will be more readily able to identify your organization’s fraud risks and can propose the most worthwhile measures to address those risks.

While we may have entered a new year, fraud is unfortunately here to stay. By being proactive and taking steps to implement these anti-fraud controls now, you can substantially reduce your small business’ exposure to fraud.

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Kaitlyn M. Pettit, CPA, CFE

Kaitlyn Pettit is a Manager in the Consulting Services Group at Chiampou Travis Besaw & Kershner LLP (“CTBK”) and has experience providing Audit, Forensic Accounting and Fraud Investigation, and Litigation Support Services, on behalf of clients.