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You are reading: What Does Fraud Cost You?

May 20, 2024

What Does Fraud Cost You?

Daniel Berlind

From accounting, invoice, and payroll fraud to inventory theft, external phishing attacks, wire transfers, and money laundering, business fraud can occur once and cost an organization millions – or take place gradually over several years with the same result.

In fact, according to the Association of Certified Fraud Examiners (ACFE) 2022 Report to the Nations on Occupational Fraud and Abuse, “a typical fraud case lasts 12 months before detection and causes a median loss of $117,000.” Nearly half of all reported frauds in the study occurred in four departments: Operations, Accounting, Executive/Upper Management, and Sales.

As a business owner, losing any money can harm your growth and survival, so preventing fraud within your company is essential. Let’s take a look at the average cost of fraud, examining how it financially impacts concerned business owners and how to avoid it.

Average Cost of Fraud for Businesses

Here are some of the AFCE’s key figures and findings from the 2022 report:

  • Organizations lose 5% of revenue to fraud each year
  • A typical fraud case causes a loss of $8,300 per month and lasts 12 months before detection
  • 42% of frauds were detected by tips, and more than half of all tips came from employees

In addition, the report revealed that small businesses rank highest in fraud frequency at 42% compared to large companies, government organizations, and non-profits. The most significant contributing factor? A lack of internal controls.

Types of Costs That Fraud Causes for Businesses

Fraud can start internally or externally from employees, customers, or suppliers. It most frequently occurs with operations, accounting, sales, and upper management employees. The industries with the most reports of corporate fraud include real estate, wholesale trade, transportation and warehousing, construction, and utilities.

Interestingly, owners/executives committed only 23% of frauds, but they caused the largest losses, according to the AFCE’s report. And 85% of fraudsters displayed behavioral red flags of fraud. As part of the study results, experts discovered that nearly half of fraud cases occurred due to a lack of internal controls or if someone overrode existing controls.

As you can imagine, the impact of fraud on a business, no matter the size, can be detrimental, leading to massive financial losses, possible legal ramifications, and a drop in employee morale and trust.

Even worse, the consequences aren’t solely financial. For instance, your business can also suffer significant reputational damage. Ultimately, all these factors can severely jeopardize the survival of your business.

How Much Do Companies Spend on Fraud Prevention?

On average, mid-sized companies spend 11% of their annual revenue on fraud prevention, while small businesses spend about 6%. Research shows that larger businesses that earn $50 million annually spend significant amounts on fraud prevention, with the global average estimated at 10%. Many spend at least $5 million annually to fight against fraud.

How Fraud Affects Small, Medium, and Large Businesses

Unfortunately, no business is impervious to fraud. However, small businesses are particularly at higher risk. According to recent studies, small businesses experience fraud at a 42% higher frequency than large corporations. A significant loss and an extended period during which the fraud occurred can harm a small business. Think about it: a small company that repeatedly loses thousands of dollars for a year or more in many cases is not prepared to rebound and will either be forced to downsize or shut down permanently.

Tips to Prevent Fraud

There are several steps business owners can take to prevent fraud. Read below for some tips to get you started:

Internal Tips

Know your employees and supervise them effectively. Always check references and conduct background checks on prospective job candidates, especially those with access to financial records or cash. Be alert to potential risk factors, like financial troubles, drug abuse issues, or living beyond their means. Also, no one likes to be a micromanager, but overseeing your employees is crucial. Check in often to ensure they report hours and perform tasks appropriately.

Separate duties. If you only have one person in charge of handling your organization’s finances, it’s making it easier for fraud to go unnoticed. If possible, enlist the help of at least two employees to take care of your company’s accounting and bookkeeping tasks.
Train and create policies. Educate team members with full access to business finances on the risks of email compromise. Create a policy for any wire transfer requests that anyone sends by email.

Keep computers updated. Ensure laptops, desktops, tablets, and other mobile devices are updated with the latest software and antivirus programs – they can help detect malicious behavior, not only infected files.
Utilize multi-factor authentication. Multi-factor authentication systems send a code to your employees’ cell phones to ensure their accounts are safe. If a username and passphrase are compromised, a hacker can be stopped by the secret code sent to a mobile device.

Restrict access. Limit access to your accounting software to only the employees who need it to perform their jobs properly. Everyone in your company should have their own ID and password. And most importantly, passwords should be changed regularly.

External Tips

Know your business partners. Before developing a business relationship with another company or individual vendor, make sure you know the basics. Be sure to have their physical address, alternate contact methods, and individuals and references. Additional resources about background information can be found via the Better Business Bureau (BBB).

Just reach out. Require your staff to contact vendors and customers to verify any email requests for wire payments above a specific dollar amount. This strategy can prevent your company from inadvertently sending funds to fraudsters who’ve compromised email accounts at other industry partners you may conduct business with.

Real Estate and Document Fraud

As you can see, there are numerous kinds of fraud, but one of the most common is rental application fraud. One in eight (12%) rental applications contains some type of fraud. Unfortunately, according to recent statistics, eviction costs $7,685 after unpaid rent, legal fees, and other charges are considered.

Perhaps you’ve experienced it as a landlord or property manager. Have you ever received a rental application from a prospective renter and everything looks good to go at first glance – their credit score, employment history, and references all pass the test?

However, after the dust settles, you soon realize that the potential tenant has forged income documents, employment verification, or rental history to make it appear they are more financially stable than they really are. This type of fraud can lead to leasing properties to unqualified tenants who may fail to make timely rent payments or even cause property damage.

Don’t Let Fraud Get You Down

It’s important to understand that those willing to commit fraud do not discriminate. Realize that it can happen in large or small businesses – including the real estate space – and across numerous industries.

Fraud can result in significant financial loss, legal costs, and muddied reputations that can lead to the downfall of a company. Just use our calculator to figure out how much it’s costing you. By implementing the proper plans, you can dramatically reduce fraudulent activities from taking place or reduce losses if something has already occurred. The bottom line: the price of working proactively to prevent fraud is far less costly to a business than the cost of the fraud that gets committed.

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