Fraud - don't lose your business like this!

There are some great ways to go broke, as I have recently posted, but probably none quite so spectacular as fraud, and it’s much more common than most people think. It can occur over a long period but it’s not until it’s too late that a business owner suddenly finds out that one of their trusted team has taken advantage of them and their hard earned profits.

Fraud can have a devastating effect on any business and it doesn’t have to be in the millions to seriously impact the business. Small and medium businesses are sometimes more vulnerable because they may not have the accounting infrastructure, and often rely on one or two trusted staff to manage the administration.

I’ve personally witnessed some examples of such cases.

Take a peak Queensland membership organisation that lost a significant chunk of annual income when the bookkeeper stole $350,000 to gamble online. She used credit cards and other accounts from the organisation and transferred funds to her own personal account and other recipients.

The covering up can be amazingly clever, falsifying records even to the extent of designing bank statements to present at Board meetings on a regular basis. Four workers were made redundant and the organisation’s activities were paralysed, and a significant number of members chose not to renew their membership.

Then there’s the case of the trusted in house financial controller having been over paying himself superannuation to different funds for over 4 years. Whilst the sums aren’t necessarily significant, the business has to deal not only with the financial impact but also the emotional toll such an event can have.

And it’s certainly not difficult for your own business associates to run their own enterprises on the side, using your accounts to supply material to completely foreign works, or supposedly scrapping incorrectly sized stock, when all the time it’s for their own customers!

Time sheet fraud is also very common and can be significant in amount.  Take the example of employees working away from home who fraudulently claimed on their timesheets for hours not worked. Not only can it expose your lack of systems and overcharging to customers, it can leave a gap in your labour force when those responsible are stood down, but even the business itself may be held responsible if it doesn’t have policies in place to prevent such a fraud!

 Some lessons learned:

Lesson 1 - ensure there is segregation of duties in financial transactions between the person who initiates the transaction, the person who records the transaction and the person who reconciles the bank statement.    Segregation can even involve another person ‘scrapping’ the materials, or taking the calls from suppliers chasing payment.

Lesson 2 - ensure the person opening the mail is not the same person who is handling the financial transactions of the business. Overdue account notices could be the first sign. If the business is not large enough to employ sufficient staff, open the mail yourself so that you know what is happening in your business.

Lesson 3 - have your accounts independently reviewed, regularly. Even the most cursory of reviews would have detected these fraudulent activities. The knowledge that it’s been checked generally stops any activity in any case.

Lesson 4 - only deal with original documents from original sources.  Don’t allow them to extend the fraud by using scanned copies of bank statements purportedly emailed by the bank. 

Lesson 5 - take notice of the “red flags”.  Is an employee of a small business earning a modest wage but driving a $300,000 Mercedes Benz.

Lesson 6 – have checks for out of office activities, ensure you job cost all activities, and measure against a budget.  

Lesson 7 – consider the use of GPS tracking of company cars, and implement an electronic time sheet system.

Lesson 8 – review and analyse performance trends in all areas of your business on a regular basis. Even if they don’t spot the issues directly, they generate discussion and often further analysis.

Employee fraud is about opportunity so consider taking steps to reduce this opportunity. Implement preventative controls to prevent fraud occurring in your business.  Even if the money may be recovered, the costs personally and financially can have a seriously negative impact on any business or ultimately contribute to it’s failure.