Fraud controls lacking at organizations with fewer than 100 employees

Fraud controls lacking at organizations with fewer than 100 employees

Small businesses are significantly more likely than their larger counterparts to neglect instituting basic antifraud controls that could save them from costly losses, a recent worldwide survey shows.

Organizations with fewer than 100 employees were significantly outpaced by larger organizations in every fraud control measured in the Association of Certified Fraud Examiners (ACFE) 2012 Report to the Nations on Occupational Fraud and Abuse, which was released in May. The ACFE’s global fraud study found:

Just 56% of organizations with fewer than 100 employees represented in the survey underwent external audits of their financial statements, compared with 91% of businesses with 100 or more employees.
Employees received fraud training at just 18.5% of small organizations in the survey, compared with almost six in 10 larger organizations.
Management certification of the financial statement occurred at 43% of small organizations in the survey, compared with 81% of larger ones.
Formal codes of conduct existed at just 50% of organizations with fewer than 100 employees in the survey, compared with 90% of organizations with 100 or more employees.
“The percentage of small organizations that have formal controls in place is just so dwarfed by the large organizations,” Andi McNeal, CPA, the ACFE’s director of research, said. “And we noticed a real opportunity for small organizations to invest in simple measures, even a code of conduct, which frankly shouldn’t cost more than a handful of hours of employees’ time.”


In the ACFE study, businesses with fewer than 100 employees often lacked formal controls and were shown to be three times more likely than their larger counterparts to discover instances of fraud by accident. Smaller businesses were almost twice as likely to discover fraud when notified by police and were not nearly as likely to uncover fraud through an internal audit.

In the online survey completed by 1,388 Certified Fraud Examiners (CFEs) in late 2011, the ACFE asked respondents to provide a detailed narrative of the largest occupational fraud case they had investigated and completed since January 2010. The results of these fraud cases were used to compile the survey and illustrate a point championed by internal control advocates.

Larry Rittenberg, CPA, the former chairman of the Committee of Sponsoring Organizations of the Treadway Commission (COSO), said small businesses need effective internal controls just as larger businesses do. He said small businesses start with great entrepreneurs who have good ideas and create useful products. The reason many of them fail, he said, is that they don’t develop financial discipline.

“Good internal control is good business,” said Rittenberg, an emeritus professor of accounting at the University of Wisconsin. “That’s why you have internal control. And there’s always the link. You’ve got risk. And controls are there to mitigate those risks. And some of them can be done at pretty low cost.”

McNeal said it’s more cost-effective, directly and indirectly, to invest in fraud prevention measures than to wait and spend the money on detection, investigation, and trying to recover losses a business might suffer. She said that, anecdotally, the ACFE repeatedly hears about small businesses being shuttered because of fraud by their employees.

A fraud that costs $100,000 can sink a small business, McNeal said, and frauds of that size are not unusual. The median loss caused by the occupational fraud cases in the ACFE survey was $140,000, and more than one-fifth of the cases caused losses of at least $1 million. The presence of antifraud controls correlated with significant decreases in the cost and duration of fraud, the survey found. Considerably lower losses and time to detection were reported at organizations that had implemented any of 16 common antifraud controls (see Exhibit 1 below).

Organizations with job rotation and mandatory vacation policies, for example, had a 63% reduction in the average duration of fraud before detection. Job rotation policies require employees to regularly switch duties, enabling co-workers to identify errors or unethical behavior. Mandatory vacation policies require employees to leave their positions long enough for a co-worker to fulfill their duties, which can lead to discovery of irregularities.

“If they invest in any kind of antifraud training program, it doesn’t have to cost a lot of money, but it can be an extremely effective fraud prevention tool and fraud detection tool,” McNeal said, “and if done properly it can save an organization lots of resources both in the short and the long run.”

The Report to the Nations says antifraud measures such as a code of conduct, employee training programs, and formal management review of controls and processes can be implemented at marginal costs in many small organizations and can significantly increase prevention and detection of fraud. The cost of instituting codes of conduct and management review of controls and processes can be essentially limited to the expense required for the labor to implement them.

A code of conduct is an inexpensive control that can help management set the bar for employee standards, McNeal said.

“This is one area where management can really send a signal that, ‘Hey, this is important to us. We want a culture of honesty and integrity. We want to make ethics a priority,’ ” she said.

“Just because they have your email address, don’t assume it’s somebody that knows you or it is a legitimate site,” he said. “And look really carefully, because the amount of phishing that goes on, using banks, airlines’ names, brokerage houses, is huge.”


Organizations with fewer than 100 employees significantly trail their larger counterparts in the implementation of formal antifraud controls, according to a worldwide survey by the Association of Certified Fraud Examiners (ACFE). Antifraud experts say formal controls can help small businesses prevent and detect instances of fraud that, left undiscovered, could lead to costly losses and possibly to bankruptcy.

Antifraud controls don’t have to be expensive. Experts say instituting a formal code of conduct, having management review processes and controls, and providing antifraud training to employees are cost-effective ways to help small businesses with limited resources prevent fraud.

Leverage technology. Much relevant information can be found on websites of regulatory bodies. Free and paid sites offer advice, articles, white papers, and other guidance.

Assign responsibility. Divide and conquer by assigning specific individuals the task of updating and maintaining institutional knowledge of new regulations, although everyone should be kept abreast of the general rules.

Be social. Attend conferences and presentations, or participate in webinars.

To help you recover lost or misappropriated assets, we can investigate suspected fraud, abnormalities, or irregularities by administering interviews, collecting and reviewing evidence and developing reports.

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Source: Journal of Accountancy