Protecting Your Business Against Fraud

“The intentional deception for personal gain” makes it all sound a bit obvious, but how do you know there aren’t fraudulent activities taking place within your business? There are many types of fraud and unfortunately, some are very hard to detect until it is too late, but there are procedures you can put in place to mitigate that risk. This blog post will look into the most common types of fraud and offer recommendations to improve your accounting function in order to protect your business from being a victim.

Cash Misappropriation

Many small businesses are either cash based, or a significant portion of their trade is conducted in cash and this presents the most common type of fraud: cash going missing. Although this is in fact tax deductible, it is not something many business owners look kindly upon! An individual who gets away with stealing from petty cash once, may try again, and small amounts are very hard to trace. If there are differences every month, try altering the system by adding in an extra control – put someone else in charge or introduce an authorisation policy.

False Accounting

Purchase Ledger

Fictitious purchase invoices to connected parties is a common type of fraud. A purchase ledger clerk or someone in an equivalent position may raise invoices, often for immaterial amounts in relation to the trade to an acquaintance’s company. A procedure to put in place that would reduce this risk could be to require at least three quotes for new types of purchases that are not bought from existing suppliers. Another possibility would be to utilise a purchase order matching facility within your accounts software – many of the packages offer this as an add-on. This automatically matches purchase invoices and the subsequent payments to initial purchase orders made. Reports can be run off to show invoices raised that did not have a corresponding order which would highlight any possibilities of fraud.

Sales Ledger

For sales companies that offer incentives for meeting targets, there is a risk that employees may exaggerate the number of sales they make in order to increase their bonus. Adding in a control step where a more senior member of staff has to authorise the generation of sales invoices could help to reduce this risk. Another solution would be to review the dates of transactions: high activity near period ends could suggest something isn’t quite right when coupled with sales credits being raised soon after the period end.

Stock Misappropriation

Businesses with expensive raw materials and finished goods are always a target of opportunist employees. Small amounts are very hard to trace, so an employee could feasibly get away with stealing inventory to resell personally for a long period of time. Monitoring yield percentages in your manufacturing process would be a good way of identifying theft of raw materials. Monitoring levels of stock wastage and setting targets (with incentives) for reduced wastage would insert a “peer police force”, whereby colleagues would look out for theft from the company as it would directly affect their incentive. This would be a subconscious effect on employee behaviour, you would be seen to be offering an incentive for more efficient production whilst protecting the business from fraud simultaneously.

Expense Claim Falsification

Sometimes employees may try to claim more on expenses than they actually spent, exaggerate the mileage they have done in the month or entertain family and friends at the company’s expense. More than likely there will already be a control in place whereby a manager or suchlike approves junior members of staff’s claims. A way around this would be to require invoices for each expense and use standard mileage distances for regular journeys. Also, (publicised) random checks would persuade staff to act honestly.

Online Fraud

There are many types of online fraud that are targeting small businesses and are becoming increasingly harder to detect. Account takeover, phishing and identity theft are all realistic threats to the business world, and when you are having a busy day, it is easy to be tricked into clicking a link in an email. A current example of this is an email from a fraudster pretending to be ‘HMRC’ informing you that you are due a tax refund, with a link to follow to provide your bank details so that they can transfer the money to you. Under no circumstances would HMRC contact you via email, or indeed by telephone, to do this and by providing your bank details you will find that the ‘refund’ is actually a way of fraudsters obtaining your details to take money from your account.

Aside from being extra cautious and regularly reminding your staff of the risks involved, there are limited options available as your staff are the ‘last line of defence’. It is important that they understand the importance of staying vigilant when operating online. Common sense is key – questions you should be asking yourself is what does this person actually want and is it normal for them to be asking for it?

All of the above recommendations regarding employees would be made easier through instilling a strong set of values in the hiring process – an effective recruitment technique goes a long way when looking to hire a good, honest workforce.

If you have any questions or if you would like to speak to us about your fraud risks in more detail, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our team.

This article originally appeared on the blog of our member firm, MHA Moore & Smalley.