Detecting and combating business fraud

detecting business fraud

Any business without robust systems can be vulnerable to fraud, either perpetrated by third-party criminals, suppliers, clients or even internally, by employees.

It has been calculated that the typical organization loses 5% of its annual revenue each year due to employee fraud.

As with cybercrime, which we have covered in previous blogs, prevention is preferable to dealing with the consequences, and will help avoid unnecessary loss of cash and write down of profits.

This means monitoring, having clear policies and processes for handling money but also checking they are being followed.

Signs of possible business fraud

Business fraud comes under three main headings, asset misappropriation, corruption and financial fraud.

Watch for unusual behaviour, such as people calling in sick frequently, becoming defensive or irritable. Be alert to complaints from clients or customers relating to a specific employee.

In bank reconciliations, deposits or cheques not included in the reconciliation could be indicative of theft. Other symptoms include credits, write offs, phoney customers, cancelled and refunded till receipts with no documented proof of the reason, also duplicate payments, excessive expenses claims and altered time sheets. The big giveaway here is inadequate accounting systems, inadequate records and a lack of reconciliation that all help conceal fraud.

Another giveaway may be in the stock inventory where the available stock does not match with records. The big giveaway here is inadequate stock control, poor record keeping and a lack of stock checks.

Minimising the opportunity for business fraud

Top of the list is to ensure that there is robust record keeping for all transactions, whether it be transactions with customers and clients, ordering of stock and materials or book keeping.  There should be a clearly-explained reporting system for employees to use if they identify a possible problem.

Keeping records alone is not enough, however.  Regular independent checks to identifying any discrepancies is essential for monitoring the accuracy of reports as well as identifying inappropriate activity.

Make sure that you know your employees so you can detect changes in attitude and behaviour and that they are aware of the business’ policy on fraud prevention and the penalties for anyone caught.

Similarly, if a business is approached by a new client with a potential large order, it is wise to check their credentials with a credit reference agency or, if it is another business, with one of the many services that vet business clients.  It is also helpful to make any new order conditional on payment of a deposit, which can be anywhere from 10% to 50%, and setting up a system of staged payments.

Finally, if fraud appears to be systematic there are outside experts, such as Certified Fraud Examiners (CFE), Certified Public Accountants (CPA) and CPAs who are Certified in Financial Forensics (CFF) who can be hired to investigate.

Prevention of fraud costs far less than the consequences which in some cases can cause a business to become insolvent.

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