Fighting Fraud

Fraud is expensive, and can ruin a business - Matthew Gardiner looks at the danger areas, examines the case of a trusted employee milking a small business of thousands, and outlines checking systems that can be put in place to protect a business.

All businesses, large and small, run the risk of losing both revenue and reputation through fraud perpetrated by people associated with the business. Fraud can be such a significant cost that it can threaten the very survival of a business.

Statistics suggest the average fraud now costs a business around $250,000, with the annual cost of fraud in Australia estimated at more than $3.5 million. Other statistics suggest smaller businesses bear the brunt of a disproportionately large dollar loss from fraud, when compared with larger business.

Because fraud is a hidden cost, it can be very hard for business owners and managers to identify it, and stop the losses occurring. Any analysis of business results becomes extremely difficult, and other, false reasons for the poor performance of a business may be found, leading to incorrect remedial action ultimately leading to other problems.

Most frauds fall within one of three categories: asset misappropriation, including disbursements, skimming and cash larceny; corruption, being the use of position to obtain an unfair benefit; and financial statement fraud, involving the fraudulent reporting of financial information.

Within this, some examples of fraud that small and medium businesses are vulnerable to include:

Electronic banking: Many businesses now take advantage of the efficiencies offered by electronic banking without making sure the correct systems are in place. For example, paying bills online rather than by cheque may be quicker, but it means there is little or no paper trail, and also that the security check of an authorised signatory is skipped. Anyone with access to your bank details and password could perpetrate fraud against your businesses.

Financial statements: The misreporting of financial results can be difficult to monitor and check, particularly for businesses with a complex accounting and reporting system. Business owners often prefer to leave such matters to those they’ve hired to look after them, but keeping an eye on this is important.

Regulation, such as the Sarbanes Oxley Act in the US, similar legislation in Canada, and our own CLERP 9 in Australia, has been developed to prevent this area of fraud.

Preventing Fraud

All businesses should have in place a risk management plan to prevent fraud, or at least minimise the risk of it taking place. The cost of investigating fraud once it is found, together with the losses that can’t be recovered, in most cases far outweighs the cost of a prevention system.

An important step is understanding the nature and extent of fraud, including how fraud can be perpetrated and how to identify it. By focusing on fraud risk, business owners and managers are able to better consider how exposed the business is to fraud. One benefit of this approach is that it stimulates a more ‘fraud aware’ culture across the organisation, letting employees know the organisation is aware of fraud and is taking steps to prevent it. Reducing opportunities, enhancing accountability, improving detection and deterrence, all help to fraud-proof the business.