The Risk of Fraud in Small Businesses

Posted by Aaron J. Harshman, JD, CFE, on August 24, 2015

Small businesses are both disproportionately victimized by fraud and notably under-protected by anti-fraud controls, a combination that makes them significantly vulnerable… While resources available for fraud prevention and detection measures are limited in many small companies, several anti-fraud controls…can be enacted with little direct financial outlay and thus provide a cost-effective investment for protecting these organizations from fraud.

Report to the Nations on Occupational Fraud and Abuse 2014, Association of Certified Fraud Examiners

Fraud and asset misappropriation takes place at all levels of business.  According to the 2014 Report to the Nations on Occupational Fraud and Abuse, businesses under 100 employees were the victims of 28.8% of all incidences of fraud, making it the most victimized group of any size of business.

However, owners of small businesses can protect themselves and their assets.  Through a few common-sense steps businesses can take long-strides to ensuring their ability to thrive despite the sometimes forgotten risk of employee misconduct.

Identify assets and risks (or assets and risks).

There are many types of risk in a business and many different ways to think about what constitutes risk.  Business owners constantly battle with the unknown and unpredictable; many find themselves worrying about knowing what to worry about.  For employee theft or fraud in the work-place, your risks are highest wherever you have an unmonitored employee with access to a valuable, unprotected asset.

What constitutes an asset?  This could be your company’s money or property, but it could also be your client’s money or property. More broadly, an asset is anything the business wants to protect for the interest of the business.  Personal identifying information of other employees, client lists, specialized computer programs, work product—all of these are considered assets.  Even your business’ reputation can be cashed in by a fleecing employee.

Why would an asset go unmonitored? Perhaps the employee is be unmonitored because you do not have the resources to supervise how he or she works, or because they have a great deal of flexibility, or because their owner or manager is simply not interested in supervising their behavior.  See the case of Patricia Sherman, former teller of the now inactive Obelisk Federal Credit Union of New Albany, Indiana.  She allegedly gambled away much of the seven million dollars of Credit Union money over four years.;

Whatever the reason for the lack of supervision, this creates greater possibility for risk.  “Good” and “trusted” employees statistically tend to take more property from small businesses when they steal from the company.

Practice and enforce sound practices to protect assets and relationships

What sound practices your business should implement will depend on your type of business, number of employees, and who your clients are.  A list of the seemingly endless sources for good and mandatory requirements on the small-business owner is closer to the length of Game of Thrones as opposed to Of Mice and Men and, therefore, beyond the scope of this article.  However, it should be said that any business owner should know and be deliberate about protecting the things important to his or her customers and employees.

The first step of protecting is knowing who has access to the information:

  1. Where is your physical documentation kept during business hours?
  2. Who can find and access the ‘confidential’ files on the network?
  3. Does everyone know Milton’s passwords except for Milton?
  4. Do the doors still have the same locks as 10 years ago?

After the owner audits and knows who can actually access the information he or she can fix the problem, which may mean changing rotating passwords, new keys for drawers, or new systems altogether.

The most valuable audits are the ones that prevent future problems.  Test your business and find the holes before a fraudster finds them for you.


When you find a problem, you need to assess whether it is a paper cut, a head wound, or something between the two.  Paper cut-problems can be dealt with simply; stop the problem and let it heal.  But when you have a head wound-problem, you need to gather as much information as you can and consider consultation with others who have dealt with the same.

A typical example of a head wound-problem is an embezzling employee.  There are several reasons to be strategic when deciding how to proceed.  First, you may want to properly document the incident so that you can cleanly terminate the employee without creating any claims against your business.  Second, you may want to obtain additional evidence against the employee so you can locate the funds and successfully take legal action against the employee.  Finally, an expert may be able to investigate and mediate the situation if it is unclear whether or not the employee is truly stealing or determine if other parties may be involved.

Be careful how you approach your employees if you believe they are misappropriating assets.

You may accidentally expose yourself to a workplace misconduct claim, a claim of defamation, or other civil liability for accusing your employee without sufficient proof or documentation.

The best way to create sound risk protection is to listen to your employees.  While it is impossible to prevent all cases of asset misappropriation, most long-term cases are tied to an employee feeling they are unfairly deprived or mistreated. By engaging and listening to employees, you can not only mitigate the chance of someone taking from your business, you can also identify warning signs that someone will take from your business.  Using the rules of ‘Big’ and ‘No’ you can identify certain risk factors for employees to begin taking assets from your business: Big life-changes, Big expenses, Big purchases, Big medical bills, No vacations, No savings, No other assets.  None of these factors means that an employee is stealing, but they are warnings of which small businesses should remain aware.  Warning signs can be subtle, but a trained and careful ear can help protect your business.

**Reiling Teder & Schrier, LLC is an Indiana Limited Liability Company. The information contained in this website has been prepared by Reiling Teder & Schrier, LLC for informational purposes only, and is not legal advice. The information on this website should not be relied upon to make any decision, legal or otherwise. If you have any specific questions or inquiries regarding any of the information contained in this website, you should consult with an attorney licensed in your state. The information contained in this website pertains only to matters of Indiana law and the laws of other states may be completely different from the laws of the State of Indiana.