A bottle of red…, a bottle of white…

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Billy Joel in his song Italian Restaurant sums up a piece of fraud prevention advice I regularly give to small business owners:

A bottle of white, a bottle of red
Perhaps a bottle of rose instead…

Fraud prevention theory works on an understanding of the fraud triangle:

1. Opportunity – systems and procedures need to provide the chance for fraud to occur. Small businesses often provide more opportunity than large businesses due to weaker systems.
2. Incentive – The fraudster needs to have an incentive to commit a fraud
3. Rationalisation – The fraudster needs to be able to rationalise that the fraud isn’t really a fraud

Opportunity – this is all about taking time out from your business on a regular basis to reflect on your possible exposures to fraud by your employees.

The newspapers regularly have cases of people that have been convicted of fraud, and all too often it is small businesses and not for profits that get hit. These are businesses that can ill afford the losses and yet fraud predominately occurs in smaller organisations with under 100 employees.

The reasons are simple. These organisations simply don’t have the resources to set up sophisticated accounting and control systems to make fraud more difficult or to increase the chances of early fraud detection. Often the organisation only has a handful of management and administration staff and proper segregation of duties is simply not possible as everyone needs to do everything.

This is where the time out by the owners (or equivalent) with bottle of wine comes into play. If you don’t have the resources to have robust systems, you must be extra alert to understand where your risks are and reflect regularly on the facts that are in front of you.

With the first glass of wine, undertake a self-assessment of fraud risk in your business. Consider, with suitable creative juices flowing through your glass, where and how would you steal from your business if you were an employee? Where is your business most exposed to fraud? Where is the opportunity?

• Is it loss of product?
• Is it fake or double payments via internet banking?
• Is it stealing cash or doing jobs without paperwork?
• Is it false or inflated expenses claims?
• Is it staff processing credits for goods and services that are not authorised?

This simple process will make you instantly more alert to the possibility of fraud in your business and that is a key step to immediately reducing your fraud risk. Better still it costs nothing, save a glass of wine.

This brings us to the second glass of wine. Reflect on each employee as you consider possible incentives or motivations they may have to commit a fraud. To do this you must understand each of your employees and their personal circumstances.

Often the first mistake employers make is when they employ staff. Most fraudsters have never been convicted before, or if they have been convicted, they may have changed names, or the details may have been supressed by the Courts.

It is vital you carefully check references and work history gaps independently of the job applicant before you employ. There may be outstanding issues not yet in the public arena given the time it takes for the legal system to operate. With privacy rules, often this checking can be difficult but ask one simple question of all past employers to get around privacy matters and personal information.

“If the person approached you for a job and you had a vacancy would you employ them again?”

There is no personal information requested but the answer could just be gold. A simple yes or no suffices without elaboration.

It is vital you know all your staff and their personal circumstances. Most people are inherently honest. Fraudsters are no different so often they turn to fraud because they have unusual financial or personal pressures placed in front of them.

Financial and personal pressures can come in many forms. Spousal redundancy, gambling or addictions issues, keeping up with the Jones’s, family issues, earthquake or fire damaged houses, matrimonial separation, children needing extra medical, educational or sporting assistance. The list goes on.

Usually, on reflection, most organisations that have been subject to a fraud realise that there were tell-tale signs from the fraudster leading up to the discovery of the fraud.
How did they afford that new car? How come they had all those holidays? Why do we see them down at the TAB or pokies so often? You need to be tuned into such questions and quietly seek answers.

Take your glass of wine and sit with a list of all your employees. Spend time thinking about their personal circumstances and what you know? Does everything make sense? Are explanations like “we got an inheritance” making sense? For example, if they got an inheritance, did they have time off for a funeral recently?

Consider the role of each employee and what fraud would be possible by that person given their job role?

Listen to the comments of other staff members and questions they might innocently ask like “How can you afford that new car?” Listen to tips and oblique references a staff member might make about another staff member. They might be trying to tip you off without bluntly saying there is an issue.

If, when going through the staff list, you become concerned, don’t act immediately. There will often be a rational reason to answer your concerns. However, keep a close eye on the person’s behaviour and activities in your business to see if there are any further signs of concern. If there are, get quality advice from your lawyer, or a forensic accountant like me, before doing anything that might tip them off as to your concerns.

This can be the hardest part as human nature is to act but, if they are committing a fraud, they may try and cover it up. You need to preserve any evidence for the experts. Failure to act correctly will almost certainly result in an expensive personal grievance to settle at best so you must act carefully on advice.

Lastly, I turn briefly to rationalisation. Fraudsters usually rationalise their fraud behaviour to make it alright in their own mind. I won’t dwell on this aspect, as for the business owner, it is by now too late. The crime has been committed and the loss incurred.

The fraudster might think they are only borrowing it and that they will repay the money. They may take goods because they were only going in the waste bin anyway. Perhaps the goods had been charged to the job so no one will miss it and the extra paperwork would be a hassle. Often, they conclude they are underpaid me for what they are doing. They can afford it, they are making heaps. Finally, it’s OK for the boss so why not me?

This final point may be the most important fraud prevention tip. As the boss, set the standard and ensure your own behaviour and accountability is beyond question. Your staff will take their lead from your actions.

Graeme is a Certified Fraud Examiner and forensic accountant at McGlinn Consulting Group Limited. He has over 35 years’ experience in accounting, auditing and litigation support in New Zealand and overseas. He can be contacted via his website www.mcglinnconsulting.com or by email at graeme@mcglinnconsulting.com

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