Small & Medium Enterprises (SMEs) Beware! Fraud Could Be Knocking on Your Door

That’s right, in fact, fraud is so pervasive and so hidden in nature that your organization could be experiencing it as you read this. Your organization could be very well into an attack by an unscrupulous employee, supplier, or any other outside

party for which its identity is yet unknown. Perhaps you may have provided misplaced confidence into what purports to represent a hard-working employee on the surface without giving it additional thought of the possible consequences. But in order to understand fraud we must first try to find a reasonable definition to it.

It is no secret that fraud might have different definitions, depending on the author, the source, and the context in which it is used; however, all of these definitions have things in common. For instance, Tommie Singleton & other co-authors of the Fraud Auditing and Forensic Accounting handbook define fraud as a crime, which embraces all the multifarious means which human ingenuity can devise, which are resorted to by one individual, to get an advantage over another by false representations. It includes surprise, trick, cunning, and unfair ways by which another is cheated. (Emphasis added).

Fraud is generally defined in the law as An intentional misrepresentation of material existing fact made by one person to another with knowledge of its falsity and for the purpose of inducing the other person to act, and upon which the other person relies with resulting injury or damages. (Emphasis added).

The ACFE (Association of Certified Fraud Examiners) defines Occupational Fraud as The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets. (Emphasis added).

One can note that the definitions above contain similarities but also differences depending on the context for which the word fraud is used. I will define it in a more universal and simple manner as the following: Fraud is the use of a person’s position or surrounding circumstances to willfully deprive as well as to gain from others those assets which they are not rightfully entitled to by way of trickery, deceit, misplaced trust, and deception.

People have a misplaced belief that fraud normally occurs in the largest organizations. By organizations, we want to encompass private corporations, governments; and the so-called third-sector; not-for-profit entities. These beliefs might come from the erroneous premise that because they are big and complicated in structure fraud could be very well hidden. Although not entirely false, recent studies show that fraud in small organizations is becoming more prevalent than in their bigger counterparts, in part, due to the typical lack of anti-fraud related controls. The ACFE’s 2010 Report to the Nation on Occupational Fraud and Abuse (RTTN) informs that nearly 5 percent (%) of annual revenues are lost each year due to fraud. This means that the impact on organizations in which revenues averages between $10 to $25 million could very well be experiencing annual losses ranging from $500,000 to $1,250,000. The study also suggests that frauds lasted around 18 months before being detected.

Studies suggest that normally a great percent of fraud victim organizations had external audits in place at the time the scheme was being perpetrated. However, they also suggest that only around 5 percent (%) of the frauds were detected by way of external audits. This is extremely alarming, especially when the typical small and medium-sized client relies on auditors for this task. One has to understand that nearly 40 percent (%) of occupational fraud is first detected by way of an anonymous tip. This is the main reason why we stress the importance that SME’s (small and medium enterprises) establish some form of Hotline or whistleblower program. Hotlines provide a means for organization employees, external parties including suppliers to provide anonymous tips and information useful to begin fraud investigations by professionals in the field.

The ACFE’s 2010 RTTN indicates that 31 percent (%) of all occupational frauds are committed against small organizations (the highest rate of any category) with a median loss of $155,000.

Because of a lack of adequate controls to prevent and detect fraud on SME’s they tend to discover frauds by tip and internal audits at a smaller rate than their larger counterparts. A relatively large number of their frauds are uncovered by accident.

There is no doubt that your organization will end up losing more money due to fraud because of the time elapsed between the start of a fraud scheme and the actual detection by way of accident. Normally, detection by accident might suggest us that the scheme was becoming so big or out of control that the fraudster could no longer hide its nature; it is already too late.

Fraud investigation could be performed by an internal team of the victim organization or by external professionals who sometimes might include law enforcement personnel. However, these same professionals are also trained into methods of fraud prevention and deterrence which can help your organization in establishing the controls needed to help mitigate your risks.

At Falcon Sanchez & Associates, PSC we are proud and eager to help your organization mitigate the risks of fraud by helping you in your fraud risk assessment process in order to identify the needed controls that could better safeguard your assets and hard-earned revenue.

We will be discussing hotlines, fraud prevention methods, fraud schemes, and other topics in later articles. If you have any questions, comments, or concerns please feel free to contact us at or