A number of years have passed since the headlines were filled with stories of Enron, WorldCom, and Bernie Madoff.  While the media has moved on from these sensational stories, fraud continues to be perpetrated with astounding frequency.  According to the Report to the Nations on Occupational Fraud and Abuse: 2018 Global Fraud Study as compiled by the Association of Certified Fraud Examiners, business enterprises lose 5% of their revenue to fraud schemes each year.  A loss of this magnitude approximates the net earnings for many small and medium-sized businesses.

Small enterprises (defined as less than 100 employees) are disproportionately vulnerable to occupational fraud.  Most small businesses lack the resources to design and implement adequate anti-fraud control systems.  These businesses generally do not have enough accounting and financial staff to effectively segregate incompatible responsibilities.  Furthermore, there is a lack of adequate management oversight as managers typically have higher priorities to monitor.

In general, occupational frauds share three common characteristics.  Fraud examiners refer to this as the Fraud Triangle.   These characteristics are:

  • Need – fraud perpetrators will have a real or perceived need that can be satisfied monetarily.
  • Opportunity – fraud perpetrators have access and opportunity to commit fraud with limited risk of detection.
  • Rationalization – fraud perpetrators have the ability to justify their criminal actions.

Most fraud schemes committed against small enterprises involve asset misappropriation.  These include theft of inventory and cash.  The cash can be stolen, checks can be tampered, or ghost employees created.  The average fraud loss for a small business is $200,000 and is incurred over a period of 18-24 months.

In many cases, the fraud perpetrator exhibits the following red flag behaviors:

  • Outliving one’s financial means including lavish vacations, luxury cars, and large houses.
  • Financial difficulties.
  • Control issues over work responsibilities, including refusal to take vacations.
  • Divorce or other family issues.
  • Addiction to alcohol, drugs, or gambling.

There are several misconceptions about occupational fraud.  These include the following:

  • The perpetrator is a serial criminal. Actually, 95% of fraud schemes are committed by first-time offenders.  Hence, background checks are not an effective safeguard.  Furthermore, there is not a profile of the typical fraudster.
  • Restitution will make the victim whole. Although often granted, restitution is rarely received in full.  The perpetrator has already used the money to support his or her standard of living and/or addictions.

As your CPAs, we care about you and your financial well-being. We don’t want to see you lose your life’s work to occupational fraud.  We can help you to establish cost-effective measures to prevent or detect fraud schemes.  Please contact us to schedule a fraud risk assessment.


Charles P. Rafferty, CPA, CFE, CVA, ABV, CFF

Charles P. Rafferty, CPA, CFE, CVA, ABV, CFF is a member with GranthamPoole PLLC and a recognized leader in the fields of business valuation, litigation services, and forensic accounting.  He has written, taught, and spoken extensively on these topics locally and nationally.  He has served on the Ethics Oversight Board of the National Association of Certified Valuators and Analysts (“NACVA”), as president of the Mississippi Chapter of NACVA, and as Chairman of the Business Valuation Committee of Mississippi Society of Certified Public Accountants.  Please contact Charley at crafferty@granthampoole.com, www.linkedin.com/in/charley-rafferty, or 601-499-2400. CPA license # R2608

***The above does not represent tax advice.  Each situation is fact-dependent, and you should seek the advice of a competent advisor. GranthamPoole PLLC is a provider of tax, accounting, advisory and strategic services, partnering with clients across a broad spectrum of industries and sizes.

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