We often hear more about fraud at large companies because of the hefty price tags involved and the large number of investors who may be affected. But the sad fact is that when small businesses experience a fraudulent event, they may be hit much harder and have more difficulty absorbing the losses. Innocent employees may lose their jobs, personal investments may be lost, and creditors may be wary of helping out the victimized business in the future. And smaller companies are more likely to experience a fraud than large ones.

In the past two years, nearly 30 percent of reported organizational fraud cases occurred at companies with fewer than 100 employees, and 24 percent of cases occurred at companies with between 100 and 999 employees, according to the Association of Fraud Examiners (ACFE) 2014 Report to the Nations.

And from a loss-to-revenue standpoint, their impact hurt more. Organizations with fewer than 100 employees had a median loss of $154,000, while those with 100-999 employees had a median loss of $130,000. The victim organizations with over 10,000 employees made up just 20 percent of the reported cases, experiencing a median loss of $160,000. (Keep in mind while all those median losses are at the six-figure level, one-fifth of all reported cases involved losses of over $1 million.)

The problem for many of these companies is they didn’t realize that fraud could be instigated by their most trusted employees.

A common thread
Smaller companies may underestimate their risk, thinking “it can’t happen to me.” And yet small organizations are disproportionately harmed by fraud losses, often due to employee misconduct, a lack of internal controls and segregation of duties.

And what kind of fraud is most prevalent? The fraud schemes most common in small businesses include corruption (33%), billing fraud (29%) and check tampering (22%). Embezzlement happens, particularly in organizations with inadequate controls or segregation of duties.

Awareness can reduce the risk
There are inexpensive and tangible actions that even the smallest of companies can take to reduce the risk of fraud:

  • Implement a code of conduct, and have employees acknowledge their compliance annually.
  • Perform supervisory or management reviews, particularly of complex, unusual or non-standard transactions.
  • Segregate duties that involve payments (e.g., adding vendors and employees to systems vs. paying them).
  • Separate cash handling, including bank deposits from bank reconciliation activities.
  • Hold employees accountable for the completeness and accuracy of financial statements (e.g., certification).
  • Provide a whistleblower hotline, keeping these points in mind:
    • While 68% of companies with over 100 employees have fraud hotlines, they are found only in 18% of companies with fewer than 100 employees, yet these simple tools reportedly reduced the median duration of fraud from 24 months to 12 months!
    • Posters improve hotline awareness within a company, and when the hotline can be accessed through the company extranet, customers and vendors have a vehicle to report potential fraud if necessary.
    • Educate employees on how best to raise flags and report suspicious activities.

The fact is that resource-strapped companies can prioritize activities that are proven to effectively reduce the risk and duration of frauds. For example, consider the feasibility of the following:

  • Fraud risk assessment: Identify your company’s fraud risks and brainstorm how a fraud might occur within company boundaries. If an insider wanted to do something inappropriate, would anyone take notice? Does the company have adequate controls to mitigate these potential risks? A formal fraud risk assessment tailored specifically to your company might be just what the doctor ordered and may help your organization avoid becoming the next victim.
  • Fraud training: Do employees know the warning signs of fraud? Teaching them the basics about fraud risks, red flags and the procedures for reporting suspicious activities may empower your team members to speak up or raise a concern.
  • Regular and surprise audits: Consider asking an internal auditor to conduct an occasional deeper dive audit in areas of potential risk. Should this include financial, cash handling processes, inventory or related party transactions?

It has been reported that companies lose 5% of their revenues to fraud. You don’t want your company to be the next one victimized or to be known for ineffective controls and management.

Alisanne Gilmore-Allen is a recent addition to the RoseRyan dream team. She is a Certified Fraud Examiner as well as a Certified Internal Auditor, Certified Information Systems Auditor, and she has a Certification in Risk Management Assurance. Alisanne spent over seven years helping Big 4 clients with enterprise risk management, and she has consulted for and headed the internal audit departments at Bay Area technology companies.

While large valuation acquisitions of entire companies (for example, Facebook acquiring WhatsApp for $19 billion) grab the headlines, the majority of the acquisitions are for just a division or segment of a business, and they have much smaller price tags and light media coverage.

Some of those deals are notable. Earlier this year, Nokia, which was once the dominant mobile handset maker in the world, sold its handset division to Microsoft for $7.5 billion. But most of them fall under the radar, justifiably. Each month in Silicon Valley, hundreds of high tech and biotech companies are making business and market decisions about when to sell off or close operations of a segment of their business. Reporting on these divested businesses is a time-consuming task that results in information that is often of little value to investors and can actually be confusing.

In response, the Financial Accounting Standards Board (FASB) recently updated guidance to strike a balance between the materiality of a discontinued operation and the details that companies need to provide about it. This revised standard (Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity) is expected to result in fewer disposals being presented as discontinued operations. To qualify as a discontinued operation, a component or group of components must represent a “strategic shift” that has (or will have) a major effect on an entity’s operations and financial results. These can include the following:

  1. A major line of business
  2. A major geographical area
  3. A major equity method investment
  4. Other major parts of the entity

The guidance is to be applied prospectively to all new disposals of components and new classifications as held for sale beginning in 2015 for most entities, with early adoption allowed in 2014.

In the regular course of business, companies frequently evaluate how all their brands and segments align with their strategic plan. They may find some acquisitions that did not pan out, or segments or product lines that are being deemphasized or no longer fit with the strategy of the company. Closing or selling off such a division lets the company mitigate losses or accumulate additional capital that can be invested in its core businesses.

The same logic happens at your favorite neighborhood restaurant. Customers’ food preferences shift over time and items disappear off the menu when seasonal specials or improved offerings are available. Why keep an item on the menu that hardly anyone buys? Restaurant owners know they have to constantly improve operational efficiency and decrease their food costs associated with waste.

When companies in any industry give a contemplative eye to their own menu choices, so to speak, they may see how a paring down could lead to improved operations, lowered expenses, and greater efficiencies. The FASB’s new guidance uses the same definition for a component of an entity as before. That is, a component comprises operations and cash flows that can be clearly distinguished—operationally and for financial reporting purposes—from the rest of the entity. However, the new guidance requires that, in order to be reported, a disposal of a component represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. This is a key distinction.

What this means is the new guidance provides a lighter financial-reporting burden when small divestitures occur. This is a rare “phew” finance teams rarely feel after seeing new accounting guidance.  Another significant improvement in the new guidance is the timing of disclosure—just because a company has continuing involvement with a disposed component doesn’t mean it has to put off reporting it as a discontinued operation. This change could result in easier negotiations for the company that is in the process of divesting a piece of its business but has a need to assist in the transition (for example, if the acquiring company still needs a manufacturing facility for a period of time).

Of course, companies should be mindful that new disclosures are required for disposals that don’t meet the new definition of a discontinued operation if they are material. And companies still have to give thoughtful consideration to what the FASB means by “strategic shift.” Does the company’s board view the disposal as indicative of an overhaul? Would giving it the heave-ho signify a big change in the direction for the company and be something investors would really want to know about? Would the marketplace care? Those are some key questions to ask. While the answers are going to vary from company to company, how any one company interprets the guidance should be consistent and well documented.

With the new guidance, companies can properly manage their business by shedding previously acquired companies and fine-tuning their operations without the clutter of reporting these activities if they are not material to their operations.

Steve Jackson, a member of the RoseRyan dream team, has expertise in the areas of revenue recognition, SOX, systems implementation, budgeting, financial analysis, and process improvements, among others. He has worked at public accounting firms and corporate finance departments for over 30 years.