Fraud and how to spot it – ten step guide

Increasing your awareness of potential fraud indicators is crucial for any business. At AHACCOUNTANTS, we can help you assess areas of your Nottingham-based business that may be particularly vulnerable to fraud and implement effective defenses to minimize risk.

Major corporate frauds and collapses often make headlines, showcasing staggering amounts of money lost. In today’s challenging economic climate, the risks of fraud have significantly increased for businesses of all sizes. Factors such as difficulty in securing financing, pressure to meet targets, and managing supplier payments can create an environment ripe for fraud.

Why It Matters

Many small and medium-sized businesses believe they are immune to fraud, but this misconception can lead to severe consequences. Unlike larger corporations with robust internal controls, smaller businesses often rely on a small, trusted team. Unfortunately, many fraudsters are those you might consider your most trustworthy employees.

A common issue for smaller enterprises is the inability to segregate duties effectively, which increases opportunities for fraudulent activities.

Common Areas Where Fraud Can Occur

1. Employee Misconduct:

• Fraud often manifests in inflated expenses or understated income. This could range from minor expense claims to significant schemes, such as creating fictitious suppliers and processing bogus invoices.

2. Supplier Abuse:

• Weak controls can allow suppliers to take advantage of a business, leading to discrepancies between delivered goods and invoices, resulting in overpayments.

3. Information Theft:

• Theft of confidential information, such as customer lists or intellectual property, can severely damage a business. Such breaches can occur internally or through external attacks.

4. Cash-Based Vulnerabilities:

• Cash-intensive businesses are particularly susceptible to fraud due to challenges in maintaining effective controls.

Real-World Examples

• J F Bogus & Sons: A trusted bookkeeper submitted false invoices, leading to significant financial discrepancies that were only discovered during year-end reviews.
• Sporting Life: A sports equipment company noticed discrepancies in stock counts, which were eventually traced back to cleaning staff stealing inventory.
• Sid’s Disappearance: A manufacturing company’s director found unexplained leftover payslips, leading to the discovery that a trusted financial controller had been creating fictitious employees and pocketing their wages.

Ten-Step Guide to Preventing and Detecting Fraud

To minimize the risk of fraud in your organization, consider the following steps:

1. Hire Wisely: Conduct thorough background checks on all employees, especially in key roles, and vet temporary staff.
2. Communicate Policies: Clearly state that fraud will not be tolerated and ensure all staff are aware of this policy.
3. Identify Risk Areas: Assess your business for potential fraud risks, particularly in areas where revenue and costs are highest. Implement internal controls such as:

1. • Segregation of duties
   • Supervision and review
   • Arithmetical checks
   • Accounting comparisons
   • Authorization and approval processes
   • Physical controls and counts

4. Segregate Responsibilities: Avoid assigning one person complete control over critical business functions, especially in accounting, purchasing, and stock management.
5. Maintain Control Over Financial Functions: Avoid pre-signing blank cheques and ensure invoices are reviewed before payments are made.
6. Monitor Employee Behavior: Be alert to unusual requests or behaviors from employees, especially those involved in accounting.
7. Watch for Changes: Keep an eye on cash flow variations, especially when employees take leave or do not take their allotted holidays. These can be indicators of fraudulent activity.
8. Regular Financial Reviews: Prepare budgets and monthly management accounts to compare against actual results, enabling quick identification of variances.
9. Respond to Fraud: If fraud is detected, take appropriate action and ensure that lessons are learned to prevent recurrence.
10. Implement Simple Checks: Routine checks can deter fraudsters. For example, preventing a £100 weekly fraud saves your business £5,000 over a year, translating to £25,000 in turnover needed to replace lost profit.

Conclusion

While fraudsters may be cunning, many are ordinary individuals who seize opportunities. Implementing straightforward checks can significantly reduce the likelihood of fraud, protecting your business’s resources and reputation. If you’re in the Nottingham area and would like to discuss how to strengthen your fraud prevention measures, AHACCOUNTANTS is here to help.