Trust, but verify: fraud in small businesses

The purpose of this paper is to raise awareness about internal fraud in small businesses among small business owners, managers, and consultants.

Recent statistics from international fraud surveys are presented, and the theory of why people commit fraud is described. The most common internal fraud schemes as identified in the international fraud surveys are explained, as well as some of the related red flags and preventative measures. Examples of actual internal frauds perpetrated in small businesses are discussed.

This paper summarizes pertinent facts that repeatedly show small businesses are most vulnerable to fraud and suffer a disproportionate median loss when compared to larger businesses. External audits by Certified Public Accountants cannot be relied upon to detect fraud. Owners, managers, and advisors are strongly encouraged to have knowledge of how fraud can affect their organizations in order to prevent or detect fraud and avoid the devastating effect it can have on the small business’s viability.

Fraud knowledge can help owners, managers, and advisors prevent small businesses from falling victim to fraud.

This paper addresses a critical issue to small businesses, but has so far been largely neglected in the literature. While large financial statement frauds receive widespread publicity, they are relatively uncommon compared to asset misappropriation fraud schemes suffered by small businesses.