It’s a sad reality that businesses that are victims of fraud are more likely to struggle to survive, and unfortunately fraud is even more common during tougher economic times than when times are good.
Even small-scale fraud by a single employee can cost a business tens if not hundreds of thousands of dollars, which can easily be enough to tip a business into the red.
Statistics suggest that corporate fraud costs the Australian economy almost $6 billion a year, and that these costs have increased during the current difficult economic climate.
Moreover, up to 80 per cent of fraud is committed by staff, and 50 per cent by middle managers.
Retail and fashion businesses are particularly prone to suffering from fraud, as many are owned and managed by either entrepreneurs or creative people, whose main areas of expertise usually aren’t the business or financial management side of the business. Instead, they put their faith in the accountant, or the financial officer, and hope for the best.
In addition, retail businesses tend to employ casual staff which can make it more difficult to keep track of payments such as wages and superannuation.
As with most things, prevention is always better than cure, and all businesses should take steps to protect themselves from fraud.
Understanding the nature and extent of fraud is an important step in its prevention. Businesses should consider what kinds of fraud they might be subject to, and how to put in place systems that can identify or flag fraudulent activity.
At the same time, they should let employees know the organisation is keeping an eye on fraud and is taking steps to prevent it, which in itself acts as a deterrent. Reducing opportunities, enhancing accountability, improving detection and deterrence all help fraud-proof the business.
Categories of fraud
Generally speaking, there are three main categories of fraud:
- Asset misappropriation – including disbursements, skimming and cash larceny
- Corruption – the use of position to obtain an unfair benefit.
- Financial statement fraud – involves the fraudulent reporting of financial information.
One particular area of fraud has risen significantly in recent times – electronic banking, which includes payroll, supplier payments and transfers of funds between bank accounts.
Many ccompanies, including retailers, have found that electronic banking provides savings in both costs and time, and they are embracing this new technology enthusiastically. Unfortunately it is also evident that some companies are taking the efficiency gains from electronic banking without installing sensible safeguards.
It is essential for all companies that have transferred manual tasks to electronic banking to look at the controls that were traditionally in place and at ways of transferring them, or their equivalent, to the new system being introduced.
For example, most companies had sensible internal controls over “manual” cash payments such as cheques. These included two signatories on all cheques, paperwork required to support payment, and regular bank reconciliations.
Clearly, it makes sense for companies to have similar controls over their electronic banking systems.
These could include:
- Two company officers to approve all payments/transfers
- Security of passwords
- Bank reconciliations completed by staff not involved in the payment functions – with bank statements reviewed independently
- Security arrangements confirmed regularly with the bank
- Bank authorities of terminated employees removed as soon as they depart.
Fraud prevention
As mentioned, the best way to deal with fraud is to prevent it. The cost of investigating fraud once it is found, together with the losses that cannot be recovered, in most cases far outweighs the cost of a prevention system.
Major prevention initiatives include:
If an organisation recognises fraud as a business risk, and sets up risk management systems the same way they do for any other business risk, the level of fraud should decrease dramatically.
The culture in an organisation is a huge factor in fraud in an organisation.
A significant number of frauds are found as a result of a tip from someone in the organisation. Many frauds take place that are known about by people who aren’t involved, however they are not sure how to report the fraudulent activity, or indeed whether the activity is fraudulent or not. Organisations should set up a process for people to report fraud or suspected fraud, and have protection. By defining and communicating what fraud is, organisations can make their employees aware of what is acceptable behaviour.
Actions to take
For retail businesses, some specific steps to take to help reduce the likelihood of fraud include:
- Regularly reconcile profits to cash movement. If there are significantly higher cash movements to profits recorded, this is a good indicator that there may be a problem.
- Make sure payments are being received by suppliers. Invoices may be coming up as paid, but are the right suppliers receiving the funds?
- Check whether superannuation payments are going to the right place. Also, check that super payments are correct – it can be easy for a dishonest employee to overpay their super as a way of stealing from a company
- Review stock on a regular basis. Are there any unusual movements?
Simon James is a partner with accountants and business and financial advisers HLB Mann Judd Sydney. www.hlb.com.au