BGBC Partners: Fraud can happen anywhere without prevention measures

July 4, 2012
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Indiana Lawyer Commentary

By Howard I Gross, Steven W. Reed and Casey L. Higgs

A typical organization loses 5 percent of its annual revenue to fraud.

When a business owner or adviser ponders this finding from the Association of Certified Fraud Examiners’ (ACFE) 2012 Report to the Nations, one has to consider their own susceptibility to fraud. Initially, you convince yourself that you have a low risk for fraud because you operate a small business, employ trusted people (and know what they are doing) or the business has been operating for years. You believe “it can’t happen to me.”

You are wrong.

Small businesses historically have suffered disproportionately larger losses due to fraud than larger organizations. According to the 2012 ACFE report, the smallest organizations suffered the largest median losses. Further, nearly half of the victim organizations do not recover any of the fraud losses.

Billing and check tampering are the most common fraud schemes reported by the entities. A single individual in a smaller entity, such as the bookkeeper, many times performs the check writing and cash collection processes. Within larger entities, these duties are segregated, with a formal approval and authorization process in place. Small organizations typically lack the appropriate anti-fraud measures which leaves them especially vulnerable.

The likelihood of successful fraud prevention and detection at smaller organizations is relatively low due to:

The organization’s accounting firm performs a compilation or review and not a financial statement audit;

The belief that a fraud risk-management program is costly to implement;

The belief that a substantial increase in resources is necessary to deploy proper internal controls; and

Employees are family and/or close friends and there exists a relationship of trust.

An organization that receives a compilation or review and not an audit of the financial statements does not reap the benefits of having its operational processes and internal controls analyzed by auditors. Auditing standards require auditors to consider the risk of fraud when planning and performing audits, but this is not required in a compilation or review. While audits are beneficial for assessing internal controls, the ACFE report stresses that external audits should not be relied upon as a business’s primary fraud-detection method. In the survey, audits only detected 3 percent of the frauds and ranked poorly in limiting losses.

Small businesses can implement cost- effective control measures such as:

Employee education and fraud awareness

Simple segregation of duties

Job rotation and mandatory vacation

A company code of conduct

Tip hotline

Management review

According to the ACFE report, hotlines are consistently the most effective fraud-detection method, but only 15 percent of small businesses have a hotline in place. Enacting hotlines, as well as all of the other inexpensive anti-fraud measures discussed above, can help business owners prevent fraud.

The belief that more resources are required to develop and implement proper internal control procedures also is misleading. An organization does not necessarily need to hire additional resources. A shift in roles, fraud training, and a proper segregation of duties can occur in organizations as small as three employees.

Lastly, businesses often employ family members and close friends, and there exists a relationship of trust. These businesses generally have very few controls in place, if any at all, because they rely on and trust those individuals. We recently encountered a fraud of this kind. A veteran employee of a small professional practice who was a longtime family friend allegedly misappropriated more than $100,000 in cash receipts over the course of four years. This particular employee was trusted by the owners and the perpetrator’s duties were not questioned nor were there proper controls in place to prevent or detect the ongoing fraud. Further, this person, like 87 percent of all perpetrators, was a first-time offender with a clean employment history.

The presence of anti-fraud controls significantly decreases the cost and duration of fraud schemes. According the ACFE report, organizations that had implemented any of the most common anti-fraud controls experienced lower losses and a shorter time to detection than organizations without controls.

Fraud can happen, especially in small businesses. The risk of fraud affecting your client increases without proper anti-fraud measures and controls. The first step of successful fraud prevention and detection is to acknowledge and be aware that fraud can occur. A seasoned forensic team can assist in evaluating your situation before it is too late.•


Howard I Gross, CPA/ABV/CFF, CFP; Steven W. Reed, CPA/ABV; and Casey L. Higgs, CPA/CFF, CFE, CVA are with BGBC Partners, LLP – Litigation, Forensic and Business Valuation. Contact BGBC at 317-633-4700 or visit The opinions expressed are those of the authors.


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  1. I have an open CHINS case I failed a urine screen I have since got clean completed IOP classes now in after care passed home inspection my x sister in law has my children I still don't even have unsupervised when I have been clean for over 4 months my x sister wants to keep the lids for good n has my case working with her I just discovered n have proof that at one of my hearing dcs case worker stated in court to the judge that a screen was dirty which caused me not to have unsupervised this was at the beginning two weeks after my initial screen I thought the weed could have still been in my system was upset because they were suppose to check levels n see if it was going down since this was only a few weeks after initial instead they said dirty I recently requested all of my screens from redwood because I take prescriptions that will show up n I was having my doctor look at levels to verify that matched what I was prescripted because dcs case worker accused me of abuseing when I got my screens I found out that screen I took that dcs case worker stated in court to judge that caused me to not get granted unsupervised was actually negative what can I do about this this is a serious issue saying a parent failed a screen in court to judge when they didn't please advise

  2. I have a degree at law, recent MS in regulatory studies. Licensed in KS, admitted b4 S& 7th circuit, but not to Indiana bar due to political correctness. Blacklisted, nearly unemployable due to hostile state action. Big Idea: Headwinds can overcome, esp for those not within the contours of the bell curve, the Lego Movie happiness set forth above. That said, even without the blacklisting for holding ideas unacceptable to the Glorious State, I think the idea presented above that a law degree open many vistas other than being a galley slave to elitist lawyers is pretty much laughable. (Did the law professors of Indiana pay for this to be published?)

  3. Paul Hartman of Burbank, Oh who is helping Sister Fuller with this Con Artist Kevin Bart McCarthy scares Sister Joseph Therese, Patricia Ann Fuller very much that McCarthy will try and hurt Patricia Ann Fuller and Paul Hartman of Burbank, Oh or any member of his family. Sister is very, very scared, (YES, I AM) This McCarthy guy is a real, real CON MAN and crook. I try to totall flatter Kevin Bart McCARTHY to keep him from hurting my best friends in this world which are Carolyn Rose and Paul Hartman. I Live in total fear of this man Kevin Bart McCarthy and try to praise him as a good man to keep us ALL from his bad deeds. This man could easy have some one cause us a very bad disability. You have to PRAISAE in order TO PROTECT yourself. He lies and makes up stories about people and then tries to steal if THEY OWN THRU THE COURTS A SPECIAL DEVOTION TO PROTECT, EX> Our Lady of America DEVOTION. EVERYONE who reads this, PLEASE BE CAREFUL of Kevin Bart McCarthy of Indianapolis, IN My Phone No. IS 419-435-3838.

  4. Joe, you might want to do some reading on the fate of Hoosier whistleblowers before you get your expectations raised up.

  5. I had a hospital and dcs caseworker falsify reports that my child was born with drugs in her system. I filed a complaint with the Indiana department of health....and they found that the hospital falsified drug screens in their investigation. Then I filed a complaint with human health services in Washington DC...dcs drug Testing is unregulated and is indicating false positives...they are currently being investigated by human health services. Then I located an attorney and signed contracts one month ago to sue dcs and Anderson community hospital. Once the suit is filed I am taking out a loan against the suit and paying a law firm to file a writ of mandamus challenging the courts jurisdiction to invoke chins case against me. I also forwarded evidence to a u.s. senator who contacted hhs to push an investigation faster. Once the lawsuit is filed local news stations will be running coverage on the situation. Easy day....people will be losing their jobs soon...and judge pancol...who has attempted to cover up what has happened will also be in trouble. The drug testing is a kids for cash and federal funding situation.