The Association of Certified Fraud Examiners (“ACFE”) recently released its biennial Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse (“RTTN”).  I have avidly read this report for a number of years.  Sadly, my observations from period to period remain consistent, which tells me that we, as business advisors and entrepreneurs, are slow learners.  The RTTN’s statistics are especially sobering for small businesses (fewer than 100 employees).

For openers, 28% of frauds are perpetrated against small businesses.  I am surprised that this is not a higher number.  The median loss for small business victims is $200,000, which is roughly double the median loss for larger enterprises ($104,000).  Small businesses have fewer resources to prevent and detect fraud.  Logically, it follows that the primary cause for frauds against small businesses is a lack of internal controls.  I encounter this problem regularly.  Many small business owners cannot afford to hire enough people to adequately segregate duties and establish appropriate checks and balances.

One of the problems that small businesses face in preventing and detecting fraud is the selection of anti-fraud measures and controls.  The two most prevalent controls are (a) having a written code of conduct and (b) having an external audit.  I find (a) to be laughable because a perpetrator who has decided to commit fraud is not going to be deterred by a code of conduct.  Regrettably, relying on (b) is almost as ineffective.  Although business owners may expect their accountants to detect fraud, only 4% of frauds against small businesses are discovered by an external audit.  (Note – 80% of respondents in RTTN had external audits performed, which translates to a 5% effectiveness rate of auditors detecting fraud.  How much worse for businesses that expect an accountant providing income tax services to detect fraud).

As a business owner, there are several red flags that you should know.  Forty-one percent of fraudsters are living beyond their reasonable means.  This could mean luxury cars, large homes, or extravagant vacations.  According to the RTTN, twenty-nine percent of fraudsters were experiencing financial difficulties.  Fourteen percent were having family difficulties, including divorce.  Ten percent had addiction issues, primarily gambling, drugs, alcohol, and / or sex.  Business owners need to stay in touch with their employees and know how they live.

The next step for business owners is to engage a duly-credentialed professional to perform a fraud risk assessment.  Most fraud risks can be significantly reduced through the implementation of low-cost processes and controls.  This is a discussion that you need to have with your accountant and/or business advisor immediately.  Delay this conversation at your own peril.  Personally, I have seen retirement-age people get wiped out by trusted employees.  To explode one last myth – restitution, although ordered, is virtually never collected (see fraudsters living beyond their means).

So don’t delay, get a fraud risk assessment now.

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,, 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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