A model for prevention and detection of criminal activity impacting small business.

Author:Bressler, Martin S.


According to the Federal Bureau of Investigation, the annual cost of business crime activity to the U.S. economy is $652 billion. Additional costs of litigation and security measures suggest the many forms of business crime significantly impact business. While FBI data does not separate small businesses from large corporations, it appears that small business ventures will be susceptible to criminal activity. In fact, the United States Chamber of Commerce reported that business ventures of less than $5 million in sales will be 35 times more likely victims of business crime than larger firms. In addition, 30 percent of small business failures resulted from internal crime and employee dishonesty (U.S. Chamber of Commerce, 1995).

This paper examines the extent of criminal activity affecting small business and nonprofit organizations and provides a three-stage model managers can use to prevent, detect, and remedy criminal activity.


Data suggests significant criminal activity in business ventures. Despite improvements in management and auditing procedures, Accounting Information Systems (AIS) software, and advanced computer technology, criminal activity continues to impact businesses at an alarming rate.

Computerization of small business ventures may actually contribute to increased criminal activity. According to the U.S. Small Business Administration, more than $100 million in losses annually can be contributed to computer fraud (U.S. Small Business Administration, 2000). In 1995, the United States Chamber of Commerce reported the impact of theft and other crimes on small businesses accounted for 30 percent of small business failures (Holt, 1993). In addition, these criminal activities cost consumers up to 15 percent of total pricing for goods and services (Holt, 1993). The University of Florida conducted a study in 1994 (Donnelly, 1994) and found 42.1 percent of inventory shrinkage could be directly attributed to employee theft and poor record-keeping and shoplifting accounting for an additional 32.4 percent.

Forensic accounting articles often focus on large corporations, rather than small business ventures as the financial impact tends to be greater. However, business ventures of all sizes can be potential targets for crimes including money laundering, intellectual property theft, and embezzlement. According to data from the Federal Bureau of Investigation during 1994-2002, the number of intellectual property theft cases increased 26 percent. Small business ventures are not immune to money laundering as monies may be channeled through the business from an employee or third party. FBI data indicates money laundering offenses will often be coupled with additional felonies such as embezzlement, fraud, or drug trafficking.

Fraud may affect other individuals and businesses in addition to the direct victim. For example, fraud resulting from substance abuse increases law enforcement costs. Other agencies and organizations may be affected as well, including costs associated with drug prevention and rehabilitation, crime prevention and court costs. Other businesses and insurance companies may also be affected as well.

Fraud and other criminal activity cannot be confined to the corporate world. Larimer (2006) finds that although businesses across the United States lose more than $652 billion to embezzlement and fraud every year, nonprofits and small businesses may actually lose the most. A 2006 report by the Association of Fraud Examiners reports that while the average loss for employee fraud amounted to $159,000 in 2005, the average loss for businesses with less than 100 employees is found to be actually higher--$190,000 (cited in Larimer, 2006).

Additional crimes under the fraud category include identity theft, collusion, corporate fraud, embezzlement, and use of tax haven countries for illegal activities. Some of these crimes may be more common to large corporations, however, due to increased knowledge and use of high technology, specialized auditor training should be initiated and in many cases staff auditors should be trained as forensic accountants (Manning, 2005; Ramaswamy, 2005). Tom Golden, PricewaterhouseCooper's Midwest investigation manager stated that the need for trained forensic accountants has increased significantly because of recent corporate scandals and media attention (Wells, 2003).

A 1996 study by the U.S. Small Business Administration of 400 small businesses in the six-state area of Michigan, Ohio, Indiana, Illinois, Wisconsin, and Minnesota found 13 percent of businesses experienced at least one crime within the last year. Perpetrators included customer theft, vandals, and burglaries, in addition to employee theft. Many crimes went unreported, and more than half of small businesses did not employ even one protective security measure such as outside lighting, alarm systems, or security cameras (The Small Business Research Summary ISSN 1076-8904).

News articles suggest that fraud activity results in an almost daily event (Gullapalli, 2004). Scandals at WorldCom and Enron devastated employees and investors who relied upon auditors and management (Off to jail, 2005; Schickel, 2005). The importance of auditors being trained to detect fraud methods and in accounting information systems can be noted in New York (Accounting Department Management Report, 2005).

Marten and Edwards (2005) developed the fraud triangle concept involving three elements including pressure or incentive to commit fraud, opportunity, and rationalization. Background and reference checks can be used to minimize the effects of incentive and rationalization while opportunity can be limited through other controls such as authorizations, key control, and surveillance cameras. Prevention can be money well-spent, as Kuratko et al (2000) found small businesses spending on average $7,805 on crime prevention. While this may seem like a significant amount of money, the average loss of $190,000 will be nearly 25 times the cost.


In a recent audit of HealthSouth Corporation, PriceWaterhouseCoopers found inaccurate revenue and expense reporting and improper accounting of business activities which...

To continue reading