Fraud Hits Small Businesses the Hardest

As any small-business owner knows, fraud, waste and abuse are hardly confined to major corporations.

Scandals featuring high-flying executives living lavish lifestyles can grab headlines - and in the case of Enron, scandal can even make it onto the big screen. Smaller-scale crimes, however, can also levy serious damage.

According to the Association of Certified Fraud Examiners, the most costly abuses occur in organizations with fewer than 100 employees. In its 2004 Report to the Nation on Occupational Fraud and Abuse, the association reports that the average organization loses about 6 percent of its total annual revenue to fraud and abuse committed by its own employees.

Take the case of Lorain National Bank in Ohio, where federal prosecutors have indicted a longtime accounting employee for allegedly taking more than $240,000, according to the Morning Journal newspaper of Lorain.

Apparently acting alone, Mary Scaff of Vermilion is accused of taking $159,888 in deposits, intended for a bank customer's account, and diverting them to her own use. She also allegedly took $83,000 that was supposed to be used to pay postal expenses. ''Instead of paying for postage with these cashier's checks, the defendant wrote her own Visa account number on each check and mailed them as payments on her own personal account,'' the indictment said.

In the case of the Sault Michigan Hockey Association, the former treasurer, Daniel C. Mugavero, funneled tens of thousands of dollars from the youth league into his own accounts. The state revoked his CPA license recently, more than two years after he was found guilty of embezzlement and tax evasion, according to the Evening News of Sault Ste. Marie, Mich.

“The damage that has been done in this case goes far, far beyond the monetary amounts," said Judge Charles W. Johnson in the 57th Circuit Court, during sentencing. He added, "This strikes at the heart and trust of people in a small community like this.”

One investigator has turned to fraud prevention for smaller companies after rooting our abuse in multimillion-dollar building projects, financial services firms and other high-profile companies.

Anthony Accetta, who runs a financial investigations and corporate governance consulting firm, is moving from New York to Denver to provide small and mid-size businesses with “common-sense advice on how to do things right,” the Denver Post reported.

“Doing things right,” should pay off. As the ACFE says in its Report to the Nation, small businesses suffer disproportionately large losses, with $98,000 being the median cost of fraud and abuse in its study. “Small businesses are less likely to survive such losses and should better protect themselves from fraud.”


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