Fraud: a concomitant cause of small business failure.
Entrepreneurial Executive › Nbr. 6, January 2001
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Fraud: a concomitant cause of small business failure.
ABSTRACT
This paper presents evidence to support a new perspective: the majority of small businesses fail because of fraud. Fraud occurs in small firms at 100 times the rate for large firms, and the overwhelming majority of frauds are committed by honest employees who have a perceived need, recognize an opportunity, perceive the probability of detection as low, and have the ability to rationalize their behavior. The authors present a plan for dramatically reducing fraud; one which does not increase costs or rely upon accountants, and which can be implemented by any small business. The best deterrence is fear of social sanction: i.e., the loss of the respect of one's peers. The proposed plan creates a climate in which these sanctions will prevail. INTRODUCTION Small business failure is one of the most serious economic problems in the United States. If one had the solution to the problem, one would have the power to wipe out unemployment, revitalize downtown areas, eliminate trade deficits, and give the economy such a boost that it would carry the nation into the third millennium, all with a single wave of the magic wand. No one has such a solution, but that may be because no one is willing to recognize the cause. The study of small business failure has been so institutionalized, that the causes of failure have become cliches: managerial incompetence, undercapitalization, etc. These antecedents of failure are so endemic to the process of entrepreneurship that they appear to be insoluble. What if the traditional perspective is flawed? What if there is another factor which has gone unrecognized and which actually precipitates the majority of small business failures? What if this factor is not only vulnerable, but soluble? If so, then everything changes and small business failure is no longer a sad, but inevitable fact of entrepreneurial life; it is a plague which can be attacked, mitigated, perhaps even eliminated. This paper will present a new perspective of small business failure: the majority of small businesses fail because of fraud. The authors will examine the traditional perspective and present evidence to support their position. The paper will close with a plan for dramatically reducing fraud in a small business setting; a plan which does not drive up costs or rely upon accountants and auditors, and a plan which can be implemented by any small business owner. LITERATURE REVIEW...See the full content of this document
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