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WHY STARTUPS ARE MORE VULNERABLE TO FRAUD?

Home > WHY STARTUPS ARE MORE VULNERABLE TO FRAUD?

WHY STARTUPS ARE MORE VULNERABLE TO FRAUD? - BACKGROUND VERIFICATION FOR STARTUPS

Today's business pages are filled with news about fraud and embezzlement. Businesses with fewer than 100 employees were the targets of nearly 50 percent of the frauds. Small businesses or startups experience fraud losses at a rate 200 times that of the largest businesses, with more than 50 percent of frauds involving losses of less than $100,000, according to a 2002 survey from the Association of Certified Fraud Examiners. In fact, 75% of fraud is not detected or reported and costs the average business 0.5 percent to 2 percent of its gross revenue

A new study by the Harvard Business Review (HBR) shows that startups are uniquely susceptible to fraud. The HBR study pretended sales calls from associates to purchasers and sellers, and when participants were told that their counterpart was working for a startup, they tended to engage in more deception during the call. Two-thirds of the faux buyers and almost three in four sellers opted to deceive who they believed to be a startup, compared to just half who thought they were dealing with a mature firm or were given no information about their counterparts. So why would the sales associates endeavor to take advantage of the startup?

  1. Probably due to the fact that the startup would have less experienced employees. "In other words, participants used the newness of the counterpart's employer as a proxy for the counterpart's experience - and adapted their behavior accordingly," according to HBR.
  2. "Compared to more mature firms, the pool of potential business partners is considerably smaller for startups," according to researchers. "Thus, many cannot afford to turn down offers even when they are not fully convinced of the veracity of their partner's statements and promises."
  3. They are particularly vulnerable because they are much less likely to make fraud prevention or cybersecurity a priority.
  4. They lack basic accounting controls, tend to have a high level of trust within the small organization and are less likely to be audited.
  5. They very less frequently have adequate internal controls, hotlines, or outside audits
  6. Startup employees need to draft processes and responsibilities from scratch. This means that they face strong pressures and tempting incentives to deceive.

Common fraud schemes include:

  1. Asset theft including improper payments, skimming, theft of merchandise, and payroll padding

  2. Forgery

  3. Embezzlement

  4. Fraud

  5. Fund misappropriation

  6. Selling vital information to rivals/competitors

  7. Theft & pilferage

  8. Commission from vendors, suppliers, or sellers on behalf of the company in lieu of substandard or cheap products

 

 

 

 

Related sources:-

Small Businesses More Susceptible to Fraud

Startups Are More Vulnerable to Fraud. Here’s Why

Also, Read -

How background checks will mitigate the employer’s or business owner’s risk? 

Important TIPS to shield your business from employee’s deceptive nature

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