January 10, 2013
Rob Sauer

Stop ButtonSmall business fraud is increasing nationally and small businesses here in Omaha are not immune.  The November conviction of a Plattsmouth convenience store manager who made off with more than $250,000 and the December indictment of a Village of Santee clerk for unauthorized check writing are two recent examples.   Even here in Omaha, small businesses and nonprofits are likely targets for fraud and embezzlement.

According to the Ponemon Institute’s 2012 Business Banking Trust Trends Study of small businesses (of which 80% of respondents had less than $20MM in revenues) , 74% of respondents say their businesses have experienced online banking fraud.  Of these incidents, 42% were perpetrated by employees and an additional 14% by vendors or suppliers.  Furthermore, only 16% of these cases resulted in the full recovery of assets.

Michele Edwards, who heads the fraud prevention and detection practice of PRGX, a Chicago-based audit, analytics and advisory services firm, contends that it could be happening to your business right now.  She states that studies have shown that it typically takes two years from the time fraudulent activity begins to the time someone notices that it’s happening.  Consequently, while some companies have already discovered fraud fueled by the recession, many more are likely to uncover problems in coming years. “I think there’s more fraud going on than anyone knows about,” she adds.

A common belief of many owners is that their CPA or their bank can protect them.  The reality is that while these entities provide valuable services and a level of protection they cannot be a business’s only line of defense.

So, what can you do today to protect your business? First and foremost, resolve to do something different.  Alarmingly, according to the Ponemon study, 49% of victims did not make any changes to their business practices or policies—even after being hit by fraud.  The protection of your business and your employees lies with you.  Here are three things you can do in 2013:


1. Make someone responsible for fraud prevention.

I have worked in business and financial management for over 18 years and can testify equivocally that the quickest way get result is to give one person the responsibility and then have them report to you and monitor their progress.

2. Mix things up!

At CFO Systems, we help many small and midsize businesses through periods of acceleration, deceleration or tough business cycles.  We know that small businesses are lean and have limited staff.  This often makes separating and sharing duties – a key fraud prevention policy – very difficult.  So instead, occasionally shake up the responsibilities, particularly in the risk areas of writing checks and handling payroll.  Have employees randomly switch task areas or have your sister or uncle come in to handle payroll or AP for one month.  Schedule a surprise third-party audit to review the areas. Just knowing that these things may happen can prevent someone from ever starting a scheme.  These may cost a little money and a little disruption, but as Benjamin Franklin once said, “An ounce of prevention is worth a pound of cure.”

3. Create a fraud hotline. 

According to the Ponemon study, 40% of the reported fraud cases were discovered by outside vendor or supplier contacts.   The Association of Certified Fraud Examiners recommends that organizations implement hotlines to receive tips from both internal and external sources.  The most effective allow anonymity and confidentiality.   In addition, employees should be encouraged to report suspicious activity without fear of reprisal.

Fraud can be devastating especially when it involves some of your most trusted and seasoned employees.   Hard economic times and easy access to cash can be a strong temptation to even the most ethical of employees.  These actions can protect your business and in many respects, protect your employees from, well, the devil inside.




Rob SauerRob Sauer has more than 15 years of financial experience specializing in the construction, manufacturing, healthcare and food service industries.  His hands-on, results-oriented approach leads clients to improve product costing and pricing, develop more accurate budgets, and enhance strategic planning.