Don't lose out to fraud

Don't lose out to fraud

Fraud

SMEs are particularly vulnerable to fraud. While most SME owners probably take a somewhat paternal view of their employees and tend to place a lot of trust in them, statistics suggest that that trust is all too often misplaced.

What's more, the impact of even a small loss can be extremely damaging to an SME. Cash flow is interrupted, productivity slows while the mess is sorted and the reputation of the business can even be effected.

Small businesses can make themselves a lot more fraud proof by implementing a few simple and inexpensive procedures.

Hire carefully

It's people who defraud businesses, so the first step in avoiding fraud is to hire people least likely to be tempted. Typically, in SMEs pre-employment screening is rare and haphazard. References aren't investigated and statements of previous employment are taken as read. It's small wonder that in many cases of internal fraud the employee concerned had been dishonest with previous employers but their past misdeeds went undetected.

Writing in "The CPA Manager", senior forensic accountant Thomas A. Buckhoff cites the case of "Paula Ross" (not her real name) who claimed on her resume that she possessed a bachelor's degree in management information systems and an MBA. Based on these qualifications a regional law firm hired her as their information systems director.

Nearly two years later the law firm discovered that Ross had embezzled US$2,035,232 by creating two fictitious suppliers. A belated background check revealed that Ross had neither of the two degrees that she claimed she had received. Knowing that would have been an early warning sign that this was a risky hire at the least.

Research indicates that one-third of all CV's used to gain employment contain false or misleading information. It can be anything from academic degrees that don't exist to the fabrication of a previous period of employment to replace a time when the person was unemployed. While a pre-employment check is no guarantee that an applicant is all they claim to be, it is a good first line of defence.

Develop procedures based on separation of duties and use internal controls

A primary area of concern for SMEs should be their accounts setup. It's usual for one person to manage the accounts of a business with little or no separation of duties. Having just one person to maintain the books, do the banking, count the cash and manage payrolls (not uncommon in a small business) creates the opportunity for fraud.

Procedures for such common, but fraud vulnerable, areas of operations such as handling cash, purchasing and goods receipt are generally less formal than in larger firms and often have no inbuilt safeguards. Poor or easily circumvented internal controls are the main contributor to enabling fraud in SMEs.

Ensure that accounting work is never the responsibility of just one person

Do periodic counts of stock and cash and regularly reconcile bank records. Follow up anything suspicious immediately and don't accept excuses.

Your accountant can offer a raft of information on reliable internal control procedures used by SMEs.

Watch for red flags

Look for warning signs that something's not right. These include changes in cash flow patterns, stock shrinkage, variations in accounting ratios and customer complaints.

Finally, watch for employees living beyond their means, avoiding holidays and never delegating any of their work. They could have something to hide and it could be costing you money.

Fraud can't be ruled out completely by internal control practices but the harder you make it for employees to cover their tracks the less likely anyone will be tempted to try out the system.

For more information contact your RAN ONE business professionals at
Academy of Business Excellence Limited