According to a 2016 study by Hiscox, 80% of embezzlement and fraud occur in small businesses – which they define as fewer than 150 employees, for reference.

30% of these fraud cases involved a loss greater than $500,000.

A 2018 update of that same survey found that 70% of fraud cases went on for more than one year, and 31% of those embezzlement and fraud crimes went on for three or more years.

The average length of service of an employee committing fraud is eight years. The average loss to a company is $350,000. And only 39% is recovered either through settlements, restitution, or insurance. These are staggering statistics.

But now the question is, why? Why do businesses suffer from embezzlement and fraud?

Well, for starters, small businesses lack checks and balances, or internal controls. And this is one of the major reasons that scammers and fraudsters target small businesses. It’s easy pickings.

The second reason is that, typically, our first hires in a small company are friends and family members. Now, that’s not to say that friends and family members are dishonest. But generally, they don’t have the background and expertise that outside professionals may bring with them to prevent some of these issues from occurring.

The other reason for this dilemma is that our first employee pretty much has access to everything. If you think back to the beginning of your business, your first employee was cutting checks, making deposits, billing customers, taking cash, running things to the bank, and reconciling the checkbook. These tasks are ripe for taking money from the business.

And, most importantly, we as owners have this attitude of, “It won’t happen here,” or, “It can’t happen here.” This tends to put a blind spot right in the way of seeing what’s really going on in our companies.

The final main reason for the risk of embezzlement and fraud in small businesses is the environment. Financial pressure is everywhere, even at home, for employees. We need to look at some of the warning signs.

So, according to this Hiscox survey, some of the warning signs that we need to be aware of include:

Intelligent and curious people

These people are overly eager to know everything and how everything works in the office. Once they learn the processes, they can manipulate them for their own gain.

Extravagant lifestyle or living beyond one’s means

Embezzlers will often flaunt their wealth. And so, you need to watch for those employees who are clearly living a lifestyle that is beyond their means. They may have a wheeler-dealer type of attitude, and they’re likely the type to take risks that they probably shouldn’t.

Diligence and ambition

An embezzler may come in early to work each day and leave late, and they may rarely take vacations. In fact, vacation is one of the best ways to uncover fraud and embezzlement,
because things tend to bubble up to the surface during those periods of time.

For example, if another employee is covering for that person’s time off, they might see some things that the incumbent employee might usually cover up. You should also keep your eyes open for a disgruntled employee or an employee who may feel that they’re being treated unfairly. They might be tempted to, let’s call it, “even the score.”

Now, let’s take a look at how people commit these types of embezzlement and fraud crimes.

Payroll – One of the very common ways fraud happens is via payroll. This could mean anything from inaccurate pay rates to inflating their hours, or even paying fictitious employees.

Billing fraud – This means inaccurately reporting spending or creating fictitious vendors, or simply overstating payments.

Plain old theft of cash – If there’s petty cash on hand or actual cash coming into the business, this behavior usually looks like people skimming it out of a cash drawer or wherever it’s being kept because the cash is not being reconciled properly. Theft of property also sits under this umbrella – stealing company property, or personal property of owners or other employees at the place of business.

Check or payment tampering – This mostly shows up as diverting payments made to the company into personal accounts, or writing company checks into personal accounts, basically, diverting company resources into personal accounts.

With all this in mind, what do we do if we suspect fraud?

Well, in 65% of the cases, someone noticed something and said something, and the scheme was uncovered.

But you can take these steps if you suspect fraud:

First of all, if no one is in immediate danger, call your attorney. You’ll want to report the issue and what you suspect is going on.

But you also need to keep detailed notes of what happened and when. You’ll need some documentation if you end up working with the authorities. Next, review your records – and obviously, you will want to do this review on your own or with a very small team in secrecy.

The next step would be to contain the damage, especially if it relates to cash and bank accounts. That looks like transferring money away from that account, or maybe placing a hold on it. Another thing you want to do is fix internal controls that may have allowed whatever embezzlement and/or fraud activity occurred, either because they didn’t exist or were broken.

Next, once you have enough information, you need to report the fraud to the authorities. Believe me, nothing gets your message across better than an arrest for this type of activity.

And the last thing you want to do within your organization is praise honesty. So, for whoever uncovered the embezzlement, it’s the ‘See Something, Say Something’ procedure. Praise them for being a good steward of the company’s assets.

And what about prevention?

There are three main ways we can prevent these types of embezzlement and fraud activities:

Perform background checks on employees and thorough reference checks.

Institute a system of checks and balances within your company, including segregation of duties as it relates to cash and banking items.

Create internal policies that protect company property, especially computers and computer use, to minimize phishing schemes and cyber-attacks through things like email attachments.

As we’ve seen, embezzlement and fraud are painfully common within small businesses. But there are steps you can take to avoid falling victim to these activities. And of course, the old saying applies: trust, but verify.

If you’re looking for more ways to keep embezzlement and fraud from becoming issues in your own company, or just want some help making your operations and financial management more secure, get in touch and let’s make it happen.