EBES 10th Conference, İstanbul, Turkey, 23 - 25 May 2013, pp.1-10
Fraud can be described as any intentional deceit meant to deprive another person or party of their property or their rights. As a society we are informed about frauds mainly by the large business’ liquidation process. As a result of such liquidation process many investors, employees, creditors, owners; briefly, the economy suffers damage. Not only large organizations but also small ones are under the risk of suffering from fraud. The risk for small business is even higher than large ones because, small businesses often have less ability to absorb potential losses incurred due to fraud. Research demonstrates that there is significant negative correlation between organizational size and amount of losses due to fraud. This poses a serious problem for the economy since small businesses play a very important role in employment and value creation. The main reasons of occupational fraud for small business stem from inadequate internal control structure. Usually the number of employees prohibits effective application of separation of duties, leading to a single employee taking more responsibilities than he/she should. While such an employee usually appears as trustworthy and owns all authorization, he/she also becomes the most dangerous one. Combined with lack of auditing obligations, code of ethics and expensive fraud prevention techniques make this type of small businesses very vulnerable to fraud. Despite these factors, owners of small businesses tend to underestimate the occurrence of any fraudulent activity in their work place. Some of the fraudulent activities that may occur in the small business are skimming, larceny, billing schemes, payroll schemes, check tampering schemes, expense reimbursement schemes, misuse and theft of inventory and other assets, corruption and financial statement fraud. The most common red flags of such frauds are cash flow problems, personnel living beyond their means, and conflicts with auditors. Prevention of these frauds mainly depends on creating the right controls. The basic of these controls depend on the selection on the right employee, creating a code of conduct and regularly informing the personnel about this code and setting up policies and procedures that help to deter fraud. This paper examines the occupational fraud from the perspective of small business, red flags about such activities, and possible prevention methods.