Fraud in Business – 5 ways you can manage your risk

The pressure of today’s cost of living can be a major incentive for employees to consider fraudulent activities that will allow them to create an additional income stream for themselves with no particular cost, albeit with significant risk.

Micro businesses are somewhat protected from fraudulent activity due to the small number of personnel involved and the fact that the business owner is usually responsible for most functions of the operation. That is not to say that micro businesses are exempt from this risk.

The larger and more complex the business, the greater the exposure to the risk of fraud. This is mainly due to the fact that there are so many transactions being processed in the business that any minor irregularity can be overlooked and often is.

As it would be difficult to eliminate the risk of fraud (and error) occurring in a business, the next best option is to reduce that risk to an acceptable measure and have measures in place that will mitigate the risk. Here are some steps to take to help you prevent fraud in business.

Segregation of duties

Fraud within business is usually perpetrated by only one person in isolation, probably due to the criminal nature of this activity. Many times fraud will be carried out over an extended period of time and the amounts involved may be individually small, but can accumulate to significant amounts.

Having suitable separation of duties within the business will help to reduce the risk of fraud as employees will then be required to collude with one another to engage in such activities. Obviously the risk of getting discovered becomes greater with more personnel involved.

To illustrate the importance of segregation of duties, consider the accounts receivable process, particularly where there are cash receipts. The person responsible for invoicing customers should not be the same person that receives the payment for these invoices and the person receiving the payments should not be the same as the person able to maintain the accounts receivable ledger, make journals or re-classifications of customer balances.

If there is a lack of segregation above, the person receiving payments for invoices has the opportunity to misappropriate the cash and subsequently reallocate the outstanding amount, apply credit notes or delete customer invoices so that there are no outstanding balances showing in debtors.

As a measure to reduce the risk of such misappropriation of funds, a business might consider having the person who receives the funds, create a receipt for the customer and pass the receipt and funds to another staff member who is responsible for entering the data against the customer ledger balance.

Monthly financial review

A regular review of financial data will highlight trends in the operating results and will also highlight any significant irregularities in the results. Part of the monthly closing process for any business should be the proper reconciliation of account balances such as bank, debtors and creditors against their statements.

A typical analysis of the financial results for a month compared with the same period in the previous year or the prior month in the same financial year will indicate variances that should be investigated. These investigations can be explained by variances to trading volumes due to seasonality or economic climate, but should be carried out in sufficient detail that any irregularities are clearly described so that management is aware of the specific reasons for the variance.

The performance and review of reconciliations can highlight fraud where a supplier may indicate that they have not been paid, yet the accounting records reflect that they have – certainly cause for further follow-up, preferably by someone separate from that function within the business.

Where possible, a regular review should also be conducted for the Employee Masterfile to check that there are no ghost employees on file as this is another popular area for fraud.

Reviewing the master files for debtors and creditors is not always so possible and so there is likely to remain a risk of fraud, however periodic reviews of the banking details within the Masterfile data are useful to be sure that there are no bank accounts existing that match with other suppliers or with employees.

Annual leave

Those dedicated employees that are always present for duty may not always be your most loyal employees. Once an employee has started to engage in fraudulent activities, they may be motivated to take control of the activities within their area of responsibility and ensure that through impeccable attendance, nobody else will be required to perform any of their tasks.

It is only when there is an unexpected event that forces these personnel to take leave that the irregularities that they are hiding become apparent. The figures suddenly don’t add up and any supplier or customer queries being followed up by other personnel lead to the incomplete transaction history from the fraudulent transactions.

Job rotation and a regular leave policy are good measures that will help in deterring fraud in your business.

Whistle blower policy

Whistle blower policies are put in place to educate employees about fraud and what they can do if they suspect there is fraud happening within the workplace. A key element of the whistle blower policy is confidentiality – most employees will fear reprisal if they are found to be a whistle blower and so will be discouraged from making any allegations.

The smaller the organisation, the more difficult it will be for the business owner to implement controls such as a whistle-blower system because the employees will have such a close working relationship and it may be easy to identify the whistle blower.

Adequate insurance

For those businesses that are prepared to take the risk of a fraud occurring within their business, they should at least consider carrying insurance cover that will be applicable for recovering lost profits in the event of a fraud. In the case of large-scale fraud, the employee may not always have the capacity to reimburse the company for funds taken.