Five Common Fraud Schemes in Small Businesses


The Association of Certified Fraud Examiners (ACFE)recently released its 2020 Report to the Nations and it contains some eye-opening information regarding fraud committed against businesses and other organizations, such as non-profits. The ACFE reviewed 2,504 fraud cases in 125 countries. The cases they identified caused losses in excess of $3.6 Billion. The average loss lies, on average, around $1,509,000. If you would like download the full report, which is well written and filled with very useful and easy to read infographics, you can get it here.


These are big numbers and, frankly, probably mean very little to most small business owners since the common misperception is that only big companies with lots of employees are the usual fraud victim.

Not true. The AFCE reports that in the cases they reviewed, 26% of the victim organizations were businesses that employed less than 100 employees and the median loss in those cases was $150,000.

Small businesses are extremely vulnerable to fraud for a number of reasons. First and foremost, they often lack the resources to implement internal checks and balances in their accounting systems. Usually in a small business, the employees performing the accounting duties are more than likely assigned other tasks as well and not solely dedicated to keeping the books and may not even be adequately trained to perform the function properly.

Successful small business owners must maintain a high degree of oversight and be on the lookout for scams and fraudulent practices that can adversely affect their bottom line. That said, here are five common schemes that can victimize small businesses.



Payroll Fraud

The ACFE reports that payroll fraud occurred in about nine percent in what they categorize as Asset Misappropriation frauds with a median loss around $62,000. Payroll fraud can be as simple as padding a timecard and as sophisticated as “ghost employees”. It is vital for small business owners to possess a strong working knowledge of the payroll system and also enforce accountability among bookkeepers and other employees responsible for payroll. As a business grows, payroll becomes more complex and requires even more oversight and continued training.

Cash Theft

Cash has a funny habit of disappearing in a small business and cash theft accounted for eight percent of Asset Misappropriation frauds reported by the ACFE. There are several ways an employee can walk away with a business’ cash and it is, unfortunately, fairly easy to do. Skimming (when an employee takes cash that hasn’t been reported yet), larceny (when an employee takes cash that has been reported) or fraudulent disbursement (when an employee releases funds that have not been authorized by the owner), the losses from cash theft accumulate over time and can be quite expensive. According to the ACFE, the median loss from cash theft is approximately $62,000.


Online Banking

The increased use of online banking and bill paying has also increased the chances that funds can be transferred to accounts that belong to a fraudster. Small business owners should regularly meet with all employees who have access to the business’ accounts and review all transactions.



False Invoicing

False invoicing is an increasingly popular fraud method. It often strikes when an employee creates false suppliers or when he pays a legitimate supplier and diverts the cash into an alternative account.



Invoice Email

This increasingly common scam involves fraudsters who pose as one of the business’ legitimate suppliers and instructs the business to change to existing payment arrangements. This fraud may not be detected right away and businesses often discover it when they receive complaints from suppliers that payments were not received. Regularly reviewing and validating accounts payable information can help guard against falling victim to this scheme.

These are just a few of the many fraud schemes to which a small business owner can fall victim. One valuable step every business owner can and should take is to conduct a fraud risk assessment of the business to review business processes and ensure proper measures are in place to increase efficiency while reducing their risk to fraud. It is well worth the time and effort to protect what you worked so hard to build.

If you would like assistance in conducting a fraud risk analysis of your organization, we are happy to help. Just reach out to us at contact@overwatchrisk.com or call us at (850) 629-9677.

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