Small business--where fraud can and does occur.

While the headlines have been filled with news of financial scandals at giant corporations like Enron, Worldcom and Tyco, CPAs across the country know that fraud also can occur in a small business. "Recent events have served as a wake-up call to both CPAs and small businesses," says Dennis M. Echelbarger, former chair of the Michigan State CPA Society and president of Echelbarger, Himebaugh, Tatum & Co., based in Grand Rapids, Mich. "Companies see what's been going on in the marketplace and realize that without some kind of controls, it could happen to them."

Most small businesses, however, particularly in today's economy, have to be educated before they are willing to spend the resources necessary to implement effective fraud prevention controls. Small businesses also may tend to wait due to the so-called "expectation gap." Small business owners believe that any service a CPA firm provides, even preparing tax returns, automatically looks for fraud. Some firms are increasingly turning the expectation gap to their advantage by being early adopters of Statement on Auditing Standards No. 99, Consideration of Fraud in a Financial Statement Audit, which gives auditors significantly more guidance for detecting material fraud, and performing additional services to include the implementation of antifraud controls and policies.

Also serving as a catalyst to the implementation of fraud controls is an increasing awareness on the part of directors of their own liability. Board members are accepting substantial fiduciary responsibility, providing a considerable incentive to make certain proper fraud prevention controls are in place.

Most smaller businesses have common areas where there is much room for improvement in fraud prevention. Smaller companies, for example, often do not have enough personnel for the sufficient segregation of duties--a leading cause of fraud. When the person who signs the checks is the same one responsible for approving purchase orders and adding new personnel to the payroll system, the opportunity for abuse is readily apparent. A solution: Owners should at least spot check the sign-offs and let their accounting departments know they have done so. Owners who are too busy may consider having their firms go on-site and periodically make these reviews.

Many CPAs are also emphasizing to their clients the importance of implementing a company-wide written code of conduct that is clearly and concisely communicated to all personnel. Creating a leadership style and culture in which fraud is deemed unacceptable combined with proper controls is the most effective way to prevent fraud. To help companies implement antifraud measures, SAS No. 99 includes an exhibit that describes how to create a code of conduct, develop a company culture that has zero tolerance for fraud and design systems that reduce the risk of fraud (www.aicpa.org/antifraud/management/20.htm).

For more information on fraud prevention and deterrence, visit the AICPA's Antifraud Resource Center at www.aicpa.org/antifraud.