What Small Business Fraud Really Looks Like

7/27/2016 - By Zachary Farrington

It’s one thing to read statistics about fraud, such as those from the Association of Certified Fraud Examiners (ACFE) stating that the median business loss due to occupational fraud is $140,000. But it’s another thing to read the stories of real-life businesses that have been victimized by fraud, such as this one:

A $12 million manufacturing company in New Jersey employed a bookkeeper for more than 30 years, during which time a close personal relationship developed between her and the owner of the company. So close, in fact, that the bookkeeper asked the owner to be her daughter’s godfather — and the owner walked his goddaughter down the aisle at her wedding.

Last year, the bookkeeper became ill and was forced to miss work for an extended period of time. While filling in, the owner’s daughter almost immediately detected suspicious bookkeeping activity in the form of extremely high utility payments. She called the utility company and discovered that the bookkeeper had been paying the utility bills for her son’s restaurant out of the manufacturing business’ operating funds.

As the owner dug deeper, the news got worse: The bookkeeper also funded remodeling and renovation expenses at her son’s restaurant with the manufacturing business’ money. Total fraud losses over five years topped half-a-million dollars.

This owner made one of the most common mistakes leading to fraud: He trusted his bookkeeper implicitly. There was no real management oversight of the business’ financial or accounting function. While the owner did sign the checks, he didn’t pay close attention to either how much they were for or to whom they were made out.

The takeaway:

As the owner, you must oversee your company’s financial functions. Even if you trust your bookkeeper and financial staff implicitly, you still need to stay on top of what they’re doing. This doesn’t indicate that you don’t trust them — rather, it shows them that you are diligent and conscientious about your company’s financial management.