PROTECTING YOUR BUSINESS FROM FRAUD

Written on the 30 September 2015 by Stephen Greene

PROTECTING YOUR BUSINESS FROM FRAUD

EVERY year in Australia, instances of fraud cost businesses hundreds of thousands of dollars, and these are only the ones we know about.

Fraud doesn't just happen on the scale of fake Tahitian princes and scandals akin to the Queensland Health debacle. Fraud can often occur in much smaller cases which may be minor in isolation, but have a surprisingly large impact on your business' finances if left unresolved over time.

Small and medium sized enterprises (SMEs) are sometimes more vulnerable than other types of businesses, as it takes significantly more revenue to recover the effect of fraud on net income than the cost of the fraud itself. For example, if a company with a variable profit margin of 40 per cent suffers a fraud loss of $400,000, extra revenue of $1 million would need to be generated just to achieve the aggregate profit that would have been earned in the absence of fraud.

The best way to protect your business is to mitigate the ways in which you expose your business to risk. The following paragraphs detail some of the most common types of fraud business owners should be aware of, and how they can protect themselves from being vulnerable.

Using Company credit cards for personal expenditure

The use of company credit cards for personal expenditure is particularly difficult to detect if appropriate controls aren't observed. In many businesses, cards are paid by direct debit and sometimes without review. If they are reviewed, it may be by an employee less senior than the card holder who is unwilling to contest certain expenditure items with their superiors. Some steps to negate the risk of credit card fraud include implementing a robust review process which reconciles items back to a valid invoice or receipt, devising an enforceable company credit card policy and ensuring senior management is responsible for the review and ultimate approval of expenditure.

Misappropriating Stock

Misappropriation of stock can occur when businesses fail to employ strong stock controls, allowing employees to take inventory without detection. It is especially common in industries with relatively high volume, low individual value inventory, such as clothing and other retail stock. To combat this, businesses may perform regular stock counts, invest in security controls such as CCTV, and take an active stance in the investigation of any discrepancies between inventory systems and actual stock counts.

Cash and bank controls

Typically smaller businesses allow for only one bank signatory to release bank funds - in most cases the in-house accountant - who may also be responsible for the majority of other finance functions too. The opportunity therefore arises for the misappropriation of funds without fear of review. It is prudent for businesses to ensure segregation of duties between the reconciliation of accounting ledgers and the payment of expenditure and wages, and to ensure all bank accounts require two separate authorisations preferably at senior management level or above.

Payroll

Payroll issues arise in SMEs largely due to a lack of control. Preparers of payroll may have full autonomy to change employee bank details, create new employees or amend their own pay making it relatively easy to put through falsified payroll payments. Businesses wishing to lessen the risk of payroll fraud should endeavour to ensure any changes to employee details are subject to a secondary review, and that senior management are responsible for reviewing both pay runs and pay variance reports, with an eye to identifying any large or unusual movements. 

The costs of not implementing a fraud management plan are severe; especially to SMEs, some of whom may not be able to recover from the fallout of a fraudulent event at all.

Being aware of vulnerabilities and putting plans in place to lessen the level of exposure to risk is one of the best things you can do for your business.

 


Author: Stephen Greene
About: Stephen Greene is the Audit Manager at MGI South Queensland and has experience in audit and assurance both here in Australia and across Europe. Stephen has worked with a range of businesses to assist them to improve their audit procedures, specialising in implementing processes to detect and deter fraud.

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