Combatting Fraud in Your Business
A recent survey found that fraud increased with the size of the organization. Businesses with fewer than 100 employees were relatively unaffected by fraud, with only 15% experiencing any kind of fraudulent behavior. The figure among businesses with 500 - 1,000 employees however was a staggering 48%.
These figures would seem to indicate that smaller businesses are relatively safe from fraud, but the survey found that the average loss for smaller organizations often exceeded the loss of the larger ones. The reasons for this lie in some common mistakes made by small-to-medium-sized businesses (SMEs).
SMEs don't usually have a dedicated HR manager. This means that pre-employment screening is done haphazardly or not at all. References aren't investigated and statements of previous employment are taken as read. In 7% of major cases of internal fraud, the employees concerned had been dishonest with previous employers.
Research also indicates that one-third of all resumes 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 the replacement of time when the person was unemployed.
Naturally, few criminal convictions make it onto the job application, but putting the wrong person into a position of trust with access to company funds can lead to the closure of a business.
Writing in The CPA Manager, senior forensic accountant Thomas A. Buckhoff cites the case of "Paula", 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 the 46-year-old woman as the information-systems director.
Nearly two years later, the law firm discovered that "Paula", earning about $105,000 annually, had embezzled $2,035,232 by creating two fictitious suppliers. A belated background check revealed that she had neither of the two degrees that she clamed she had.
Another area of concern for SMEs is their accounting practices. It's typical for one person to manage the finances 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 payroll creates great potential for fraud. Yet this is just what happens in the majority of businesses with less than twenty employees.
A third area of concern for smaller businesses is organizational in nature. Internal systems are less formal than those in larger firms and often have no built-in safeguards. The survey found that poor or easily circumvented internal controls were the main contributors to enabling fraud, noting that they were a factor in 43% of all detected fraud cases.
Employers could and should do more to protect themselves. In the U.S. negligent hiring is a legal doctrine wherby an employer is responsible for the negligent or destructive actions of an employee when due diligence, such as conducting background checks, would have revealed the employee's propensity to commit such actions.
There are some basic fraud prevention rules that should apply in every business regardless of size.
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Every employee's background should be thoroughly checked before they are hired. This includes personal references as well as previous employers.
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Ensure that accounting work is never the responsibility of just one person. Have periodic counts of inventory and cash, and regularly reconcile bank records. Follow-up on anything suspicious immediately and don't accept excuses.
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Look for warning signs that something is not right. These include changes in cash flow patterns, inventory shrinkage, variations in accounting ratios and customer complaints.
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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.
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