We have heard much about fraud relating to business in recent years. In the early 2000s, the news was filled with scandals involving various types of fraud. The mere mention of Enron or Worldcom is now virtually synonymous with the word "fraud." Although these scandals involved very large, publicly traded companies, fraud occurs most often in smaller businesses.
According to the Association of Certified Fraud Examiners (ACFE), the fraud losses incurred in the smallest companies are 100 times greater than those incurred by the largest companies. According to the ACFE's "2006 Report to the Nation on Occupational Fraud and Abuse," "The median [fraud] loss suffered by organizations with fewer than 100 employees was $190,000 per scheme...higher than the median loss in even the largest organizations. Small businesses continue to suffer disproportionate fraud losses."
I have never seen the frequency of detected fraud and embezzlement as great as it is at this time in the business community. It's tough to know exactly why fraud frequency has increased. It may be due to tougher economic times or specific personal circumstances causing more people to steal. Whatever the case, this abundance of fraud-related activity has only shone a brighter light on the issue.
Let's first understand the definitions of fraud and embezzlement. Fraud can be defined as "a deception made for personal gain," while embezzlement is "the act of dishonestly appropriating goods, usually money, by one to whom they have been entrusted."
Being too trusting is one of the key reasons fraud occurs, and why it is more frequent and severe in the small business environment. In a smaller business office, employees are often entrusted with more responsibility and greater authority because the financial resources do not exist to spread the responsibility and authority by hiring more people. This situation leads to the classic "lack of segregation of duties," which is a critical internal control concept. This scenario is inherent in small businesses, thus making small business owners highly susceptible to fraud and, more specifically, embezzlement as a result.
Also, this trust is often earned over many years. It seems that in many fraud cases, the person committing the fraud has been working for the owners for ten years or longer. In these relationships where trust and authority are given far more than they should be because the comfort is so great with the familiar individual, any and all guards are let down. It is an unfortunate observation that these most trusted individuals are, in many cases, the ones who are stealing frequently and in large amounts over long periods of time.
In my career, I have uncovered fraud and seen its effects both financially and emotionally on the principles of the business. The cost to small business is greater than the hard dollar cost of the monies misappropriated. The distraction to the business, its employees, owners and others involved with the business is costly in terms of lost productivity as well as the cost to replace a once trusted and valued employee. There is also the cost of recruitment and training of a new person and, in many cases, the cost of aggregating information to provide to authorities for prosecution. In many of these instances, the perpetrator is not prosecuted.
Here are some reasons why prosecution is not pursued.
- Remaining loyalty to the individual due to what used to be a strong relationship
- Not wanting to hurt the person beyond the loss of their job
- Embarrassment in being the victim of such a crime
I would suggest that one has a duty to prosecute in certain scenarios. When you are involved in a situation where there are multiple shareholders, you have a fiduciary responsibility to prosecute and file related reports in an attempt to recover corporate assets. In many situations, the embezzlement occurs in a company owned by one individual, and in those cases, the decision comes down to a personal choice,
