With all the recent business fraud scandals, many small business
owners are wondering when they'll discover fraud within their
After all, according to the Association of Certified Fraud
Examiners' 2014 Report to the Nations, on average, 5% of an
organization's gross annual sales are lost to fraud. The report
also indicates that the average case of fraud occurs over a period
of at least 18 months before it is detected.
Small businesses are particularly susceptible to fraud for a
number of reasons:
1. The owner-manager is typically the driver of sales, out
promoting the business and working to create revenue, yet not
comfortable with the reporting requirements internally and
therefore not aware of how receivables and payables are being
2. The size of the organization restricts the ability to install
the necessary internal controls designed to prevent and detect
3. The owner is trusting.
To complicate matters, most fraud perpetrators are never
charged. Instead, these individuals simply move onto their next
Why Fraud Occurs
In an effort to assist the small business owner in recognizing
red flags, it's useful to understand two important
The first theory is that 20% of individuals are inherently
honest. That is, no matter what the situation, those employees will
not take advantage of an employer. A further 20% of individuals are
inherently DIS-honest; no matter what they face, these employees
are looking to work a deal for themselves to the detriment of the
company. That leaves 60% of employees who are honest or not,
depending on the situation. Not great odds when you consider then,
that 8 out of 10 employees are either stealing from the
organization or would steal, should the opportunity present
The second theory is that in order to commit fraud, there are
three elements prevalent amongst perpetrators prior to fraud being
1. Financial pressure – a need to generate additional
funds either to support a habit (shopping, gambling or drugs, for
example) or support an image (breadwinner).
2. Rationalization – the belief that the company or owner
'owes' the employee or that the company has so much, it
won't even notice, or that others do similar things so it's
ok to join in.
3. Opportunity – the ability (knowledge and or access) to
commit the fraud is present due to the experience level of the
employee, the lack of internal business experience of the owner /
manager, complacent management or weak internal controls.
According to American sociologist Donald Cressey, fraud will not
occur unless each of these components is present. Removing even one
of these factors can significantly thwart or mitigate losses.
How to Protect Your Business
Considering the theories outlined above, what are the basic
steps a small business owner should take to protect his or her
First, it's important to promote a strong sense of ethical
behaviour within the organization. Doing so will reduce the ability
of the employee to rationalize the misappropriation. This is a
simple as a consistent performance management process whereby
employees' work is reviewed and assessed regularly. It can also
be a more complex system whereby employees sign a corporate code of
ethics annually acknowledging the expectations. Keep in mind,
however, that no matter how strong the corporate governance is, an
employee can still rationalize the theft by tying the act to
'saving a loved one' or 'just borrowing the funds',
thereby avoiding the guilt associated with harm to the
It's also important to be aware of red flags that may
indicate financial pressure. These indicators can include, but are
not limited to: suddenly purchasing more material items, suddenly
carrying large amounts of cash, frequent calls from creditors,
irritable or moody behaviour, unnecessary overtime, arriving for
work early and staying late, the mention of medical problems, signs
of drug or gambling addictions, dissatisfaction at work. Generally
after an employee is caught stealing, the owner-manager looks back
and recognizes the signs, but it's important to be aware of the
signs before they lead to the fraud.
Finally, implementing a system of internal controls that help to
both prevent fraud from occurring in the first place and detect
fraud after it has taken place is a key step to undertake for all
small business owners. This element is the one the owner has the
most control over and yet developing a system of processes,
procedures and controls that deter employees from committing fraud
is usually overlooked due to a lack of understanding by the
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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