No business is immune to fraud, even ones with only a handful of employees.

In fact, small businesses are many times more susceptible to internal fraud than their larger brethren mainly because they don’t have the controls in place that the larger companies do.  While fraud can take on different forms, one thing is for sure, if it goes undetected if can cost a small business owner a lot of money.

 According to the Association of Certified Fraud Examiners’ 2012 Report to The Nations on Occupational Fraud and Abuse the median loss caused by occupational fraud cases was $140,000, although more than one-fifth of the cases caused losses of $1 million or more. Even more frightening, fraud lasted a median of 18 months before it was detected.

“Sometimes it’s very devastating,” says Dana Basney, managing director of due diligence and forensic services at CBIZ MHM, the business consulting company.  “Because the average fraud in a business under 100 employees is larger than a company with over 1,000 employees’, small businesses tend to have disproportionately large embezzlement losses.” 

Small business owners don’t have to become victims of internal fraud. Setting up internal controls and providing a way for fraud to be reported may be all it takes to prevent a business owner from this type of loss. 

“Most embezzlement crimes are perceived opportunity. People perceive an opportunity and they perceive they won’t get caught,” says Basney.

In order to prevent that opportunity, Basney says business owners should have a separation of duties. For instance the person that is in charge of the cash at the company shouldn’t be the one doing the accounts receivable.  What’s more, the owner of the business should get all the bank statements unopened directly from the bank and review them all. Basney says it’s important for the business owner to ask the person in charge of the company’s financials at least five questions when reviewing the bank statements.  

“The reason you review it and ask questions is you want to make sure something isn’t wrong and you want the people to know you review it,” says Basney. “The questions aren’t significant. It’s the mere fact that you are asking that will create anxiety and people will confess.”  Since fraud is all about a perceived opportunity, if you signal that you are on top of your financials even if someone else is taking care of the books it could prevent it from happening in the first place.  

Fraud may not be easy to detect and can go unnoticed for months if not years, unless there is a reporting system in place. According to the Association of Certified Fraud Examiners occupational fraud is more likely to be detected by a tip than by any other method. What’s more, most of tips come from employees within the company. Because of that, fraud experts say it’s important to have a way for employees to anonymously report tips, whether it’s a telephone hotline or a suggestions box. Having an open door policy with employees can go a long way in helping detect fraud.

The tone of the small business owner, top employees and management may also play a role in whether or not employees steal. According to Basney, if the owner steals from the cash draw, cheats on his or her taxes or is more than willing to engage in bad behavior it gives people a rationalization for stealing. “If you have management that strictly enforces the rules and behaves ethically it’s much harder for the potential embezzler to rationalize it,” says Basney.

While it’s easy to make assumptions about people and who is more likely to commit a criminal act, in the case of occupational fraud it’s usually the last person you would think of. The ACFE’s report found that most fraudsters are first-time offenders, with 87% never before charged or convicted of a fraud related offense and 84% having never been punished or fired because of fraud offense.  The study also found that the majority of all fraud was committed by employees working in accounting, operations, sales, executive/upper management, and customer service and purchasing.

“If I go in to do a fraud investigation the guy with tattoos all over his body, who drives up on a Harley and reportedly sells drugs after work will immediately be taken off the list. He will be the last guy I will investigate,” says Basney. “If I see in the corner a nice, sweet grandmother with pictures of her grandkids all over the place, she is where I would start. The most likely to steal is the nicest person in the office.”