Academic journal article Journal of Accountancy

Small Business, Big Losses: Audits and Hotlines Stack Up as the Best Crime Busters in a New ACFE Study

Academic journal article Journal of Accountancy

Small Business, Big Losses: Audits and Hotlines Stack Up as the Best Crime Busters in a New ACFE Study

Article excerpt

Occupational fraud has become--at least so far--the crime of the 21st century. It is a widespread phenomenon that affects practically every organization. The frauds in the 2004 Report to the Nation on Occupational Fraud and Abuse, from the Association of Certified Fraud Examiners, caused over $761 million in total losses, with a disproportionate percentage committed against small businesses--almost half of the frauds in the study took place in businesses with fewer than 100 employees. Not surprisingly such businesses are less likely to be audited or employ antifraud measures than the larger ones.

Several broad conclusions can be drawn from the 2004 report. First, though the losses have been stable over the years, the fact that in one year alone they are approaching $660 billion is cause for concern. Dishonest executives and employees are plying essentially the same schemes with the same results. Second, although large financial statement frauds receive the most attention, they are relatively uncommon compared to asset misappropriations and corruption. Third, small businesses remain the most vulnerable to occupational fraud because of three factors: They are the least likely to have an audit, a hotline or adequate internal controls. Fourth, audits--both internal and external--although excellent prevention devices are not the most effective means of detecting frauds. Fifth, hotlines and other reporting mechanisms are a vital part of any organization's prevention efforts but should go beyond employees to vendors and customers, too. Finally, occupational fraud cannot be eliminated but organizations that use both hotlines and auditors can greatly reduce these costly crimes.

Occupational fraud schemes can be as simple as pilferage of company supplies or as complex as sophisticated financial statement frauds. This article summarizes some of the key findings of certified fraud examiners (CFEs) in cases they investigated. Internal and external auditors and CPAs advising small business clients will learn of the most effective antifraud measures.


Determining the true cost of occupational fraud is an impossible task. Because fraud is a crime based on concealment, organizations often do not know when they are being victimized. Many frauds never are detected or are caught only after they have gone on for several years. Many of those are never reported or prosecuted. In fact, there is no agency or organization that is specifically charged with gathering comprehensive fraud-related information. All of these factors combine to make any estimate of the total cost of occupational fraud just that--an estimate.

The study asked CFEs to give their best estimate of the percentage of revenues a typical organization in the United States loses in a year as a result of occupational fraud. The median response was 6%, the same result obtained from previous studies. This is a staggering figure. If multiplied by the U.S. gross domestic product, which for 2004 will total over $11 trillion, it would translate into $660 billion in annual fraud losses (see exhibit 1, at right).


The victims of occupational fraud are the organizations that employ the fraud perpetrators and suffer losses as a result of these crimes. Exhibit 2, at right, shows the distribution of frauds in the ACFE survey, based on the type of organization that was victimized.

Approximately 46% of the occupational frauds in our study were committed in small businesses (defined as organizations with fewer than 100 employees). The impact of occupational fraud on small businesses was much greater than on larger companies (see exhibit 3, at right). Part of the reason for the larger losses is that small businesses are the least likely to be audited. As noted in the 2002 report, the audit appears to be a powerful deterrent to occupational fraud.


A major goal of the study was to gain a better understanding of how fraud is committed and the types of schemes that tend to produce the largest losses. …

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