Fraud Is Alive And Well In Small Businesses

And, unfortunately, COVID-19 ushered in new risks for business owners

By Jessica Yohe, CPA, CFE, BPS audit team

In addition to supply chain issues, market volatility, and general uncertainty, the coronavirus pandemic has changed the way many companies are doing business. One major change has been the increased use and reliance on technology. While there has been a steep trend of technology intertwining with businesses over the last 20 years, the last year and a half has seen mandatory reliance due to lockdowns and other pandemic-related measures. This reliance on technology and change in traditional business practices brings both positive and negative consequences. More adaptability and work-from-home schedules have provided families with greater flexibility in their work and home lives. However, the general landscape for small businesses has now opened up a whole new world for fraudsters and their schemes.

One of the most common fraud schemes is embezzlement, defined formally as “theft or misappropriation of funds placed in one’s trust or belonging to one’s employer.” In other words, an employee taking company property. This includes, but is not limited to, company laptops and other technology given to complete the job, cash, inventory, etc. According to the Association of Certified Fraud Examiners’ 2020 Report to the Nations, asset misappropriation schemes that include embezzlement, such as fake vendor payments, padding expenses, and overbilling customers, are the most common schemes, coming in at approximately 86% of the 2,500 cases studied for the report.

How do we bridge the gap between the technological reliance the pandemic has forced and embezzlement schemes? As more people are working remotely, there are fewer people observing and monitoring day-to-day work than in a typical office setting. Simple tasks of dropping off a handwritten, formalized expense report on a boss’ desk for approval has become sending it in an informal email, receiving a quick reply, and having no proof of whether the boss truly reviewed each of the requested expense reimbursements (which may have previously been noted by some initial or mark). While this may seem like a big jump, schemes like these start small with the person perpetrating the fraud rationalizing why they should be committing such an act and go on to last an average of 18 months.

Small businesses have been impacted the most with lockdowns and restrictions, causing some to close their doors. This creates a type of pressure on not only the owners of small businesses, but the employees of those businesses when trying to provide for themselves and their families during such a trying time. The “pressure” stemming from the pandemic, the “opportunity” resulting from less monitoring in the expanded technological landscape, and the “rationalization” of why the fraudster deserves or needs company property are the three factors that are always present in fraud – known as the fraud triangle.

Knowing these three factors is the first step in assessing fraud risk within your business. While there may not be anything to assist with the rationalization factor, business owners can take comfort in the fact that there are ways to implement preventive and detective means to reduce fraud risk. One method relates to the opportunity factor by realizing processes must adapt to the newer business practices in monitoring job functions, reviewing work, authorizing payments, etc., so that one person doesn’t have sole access to a job function within the company. This may take the form of electronic check marks and signatures on expense reimbursements to show that another set of eyes has reviewed the request. Another method, while less formal, is checking in with your employees to see how their lives have changed over the last two years. While most companies and business owners don’t want to believe that fraud can happen within their business, preventive and detective measures can ease a business owner’s mind.