All businesses, no matter what size or industry, can be targets of fraud. Unfortunately, small businesses often have disproportionately large losses and are far less likely to recover from fraud. Generally, small business owners employ friends, family members and other people they trust. Remember: Trust is a feeling, not an internal control.
According to the Association of Certified Fraud Examiners’ (ACFE) 2014 Report to the Nations, about 5 percent of an organisation’s gross annual sales are lost to fraud. The median loss suffered by organisations with fewer than 100 employees was $200,000, and approximately 25 percent of occupational fraud cases cost more than $1 million.
There are usually three factors present that might cause an employee to succumb to commit fraud. They are often referred to as the Fraud Triangle – opportunity, motivation and rationalisation.
Is the perception that the person will not be caught. Sadly, the most trusted people in your business are the ones who have the opportunity to steal. Inadequate separation of duties, the absence of mandatory vacations, an organisation constantly in crisis mode and rapid turnover of employees are all examples of when opportunities exist to commit fraud.
Is the second ingredient that must exist before someone commits fraud. People with financial problems as well as those with drug, alcohol, gambling or marital problems are more likely to steal.
Is the mental process that justifies the illegal act. For example, if an employee feels unappreciated or underpaid he or she may rationalize why it’s all right to take from the business. If they think they are doing all the work and the business owner is keeping all of the profit, stealing is a way for the employee to even the score.
To break the fraud triangle, review your company’s financial statements and account activity each month. By looking at the flow of transactions through your business accounts you should be able to identify any unusual activities. In addition, be aware of the potential fraud indicators, including lack of written corporate policies and procedures; disorganized operations (bookkeeping, purchasing, receiving); inadequate separation of duties and absence of mandatory vacations; and unexplained differences between physical and perpetual inventory records.
In addition, below is a list of considerations that will help you prevent and reduce fraud in your business.
Look for red flags
Discuss common behaviour traits of employees who commit fraud, including living beyond their means, unnecessary long hours, signs of drug or gambling addictions and close associations with vendors or customers. Conduct ongoing training to reinforce anti-fraud policies. Encourage employees to speak up when they see something that isn’t right in the workplace. It’s also a good idea to set up a Tip Line so employees can report potential employee fraud anonymously. According to ACFE, tips are “consistently and by far” the most common detection method.
Surprise reviews of records, bookkeeping, policies, inventory etc. can help reduce the potential loss from fraud. It’s also important to make sure that no single employee is solely responsible for any one function in your business. Take the time to document employee responsibilities and understand how accounting functions flow in your organisation.
Do your homework
Conduct pre-employment background checks, especially for individuals that will be involved in finance and accounting and those that will be handling cash. Bonding (employee dishonesty) insurance is also an investment that is generally worth making to protect your organisation in the event of employee theft.
Monitor data and shred information
Monitoring company data helps keep track of content and changes to business files. Develop a comprehensive document and data management policy to keep confidential information organized, compliant and secure. Be sure that documents are identified, labelled and securely stored until they are no longer needed. In addition, develop a document and data destruction policy to prevent any compromises of client or employee information.
The best defence against fraud is a good offense.
Consider a fraud deterrence study conducted by an experienced professional to evaluate your internal controls and help identify potential problems before they impact your bottom line. Remember the most cost-effective way to deal with fraud is to prevent it.