Fraud, how to spot it and stop it
From time to time corporate frauds and collapses hit the headlines, many of which were high profile cases and the amounts involved quite astronomical.
With the current pressures businesses are now facing from the recession, difficulties in obtaining finance, difficulties in meeting targets, even simply paying suppliers bills, it becomes easy to see why the risk of fraud for all sizes of businesses has increased significantly.
High profile fraud cases may seem far removed from your own business but the simple truth is that fraud can affect businesses of all sizes. Whether you employ a small team or a significant workforce, you can increase your awareness of the factors that indicate fraud. It also sets out the defenses that you can implement to minimize the risk within your business.
Could it happen to my business?
It is easy to think that fraud is something that ‘couldn’t or wouldn’t happen to your businesses. While larger businesses have the resources and finance to implement effective measures to prevent and detect fraud, smaller businesses are often faced to rely on a small team of employees that they trust as preventative measures.
A key difficulty faced by smaller businesses is the lack of options to segregate duties. Individuals have to fulfill a number of roles and this can lead to increased opportunity and scope to commit fraud, and for some, the temptation can be too great.
Areas where fraud can occur
While the precise nature of any fraud will be specific to the nature of the business and the opportunities afforded to a potential fraudster, there are a number of common areas where fraud can occur.
Employees abusing their position
Most fraud impacts on the profit and loss account, where either expense is exaggerated or income understated. Frauds here could range from a few pounds of fiddled expenses, where insufficient checks are done and no one checks supporting documentation, to more significant frauds. These could involve the setting up of fictitious suppliers and the production of false invoices to hide money being diverted away from the business.
Positions could also be abused where a business requests tenders. Here there is a risk of ‘kickbacks’ where the individuals involved in the tender process accept bribes or sweeteners from potential suppliers. This could result in inefficient contracts being signed perhaps for dubious quality goods.
The individual amounts involved in these types of fraud may not be large, so they may go unnoticed for some time. However as time progresses the amounts involved can become significant and potentially damaging to the businesses financial stability. As the fraud continues the fraudster’s confidence grows therefore the figures involved escalate as they become fueled by their own greed. Of course large scale frauds are more likely to be discovered and greed often plays a part in the identification and capture of fraudsters as they often make mistakes the larger the sum of money is.
Nevertheless the time taken to detect fraud is vital. It may make all the difference to cash flow as fraud drains a business of resources that it needs to grow and ultimately can have a detrimental effect on the businesses financial credibility.
Suppliers taking advantage
Where a business has few or weak checking procedures, a supplier may recognize this and take advantage of the fact. Fewer items may actually be delivered than those included on the delivery note or invoices may include higher quantities or prices than those delivered and agreed on at the time of ordering.
This highlights the importance of checking both delivery notes and invoices for quantities, prices and additional charges and following up any discrepancies promptly.
Other risk areas
Theft of confidential information such as client or customer lists could cause a business untold problems if these are stolen by disgruntled employees as this not only breeches the data protection act but also violates the trust in customers not to have private information shared.
Information could also be vulnerable to attack from outside. Advances in means that all businesses connected to the internet need to consider the risks associated with this such as computer hacking or phishing, techniques to steal or source personal information that could be sold or used later on. Fewer checks are done with records and accounts as these advancements in technology have led us to believe the computer is always right. Is it vital, however, that regular checks are conducted as this will highlight anomalies in the business records and systems that could indicate fraud.
Certain types of organization are at greater risk of fraud, for example those that are cash based can be more vulnerable due to the difficulties in implementing effective controls over cash. Businesses that are growing rapidly may also be more susceptible to fraud. When both company resources and directors personally are stretched to capacity, it is even more difficult to maintain an overview. Indicators of fraud may go unnoticed.
Ten step guide to preventing and detecting fraud
Given the wide range of fraud that could be committed within any business it is essential to consider the key for detecting and preventing fraud.
Make sure that you check out references properly and ensure that any temporary staffs are also vetted, particularly if they are to work in key areas as this will highlight any areas of concern with their work history.
Ensure that your business has a clear policy that fraud will not be tolerated within the organization ensuring that this is communicated to all staff.
Evaluate which areas of your organization could be considered vulnerable, then plan and implement appropriate measures to detect and prevent fraud. Target the areas where most of your revenue comes from and where most of your costs lie as this will be a target for potential fraudsters. Develop simple internal control to defend these areas such as;
Wherever possible ensure that no one person is responsible for controlling an entire area of the business. This in particular includes the accounting function but will also include other key areas such as stock levels, invoice checks and deliveries.
Ensure that you maintain a certain level of control over the key accounting functions of your business.
Monitor request from staff involved in the accounting function as any unusual requests may need to be investigated.
Watch out for employees who are overly protective of their role, they may have something to hide. Similarly watch out for disaffected employees, who might be bearing a grudge or those whose circumstances change for the worse.
Watch out for notable changes in cash flow when an employee is away from the office, on holiday for example. Similarly be aware of employees who never take their holiday. These could both be indicators of fraud.
Prepare budgets and monthly management accounts and compare these against your actual results so that you are aware of variances. Taking prompt investigative action where variances arise could make all the difference by closing the window of opportunity afforded to fraudsters.
Where a fraudster is caught, make sure that appropriate action is taken and learn from the experience.
How we can TMA Accountants help?
If you would like to discuss any of the issues discussed within this factsheet further or have areas of concern with your businesses finance please do contact us and we will work with you to find the answers you need.
This factsheet has been published by TMA Accountants for the information and benefit of clients. It provides only a brief overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice as detailed above. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
