Employee fraud – a BIG issue for small business

Posted on

The average small business owner is very good at the service or trade they provide their customers.  It is what they know.  Often their skills at running their business and understanding their finances is not as well developed.

Doing the books is often the part of being in business they dislike most.  They therefore decide to get an office person in to assist them or find a contract bookkeeper to come in part time.  This could be the fatal move for a business if the owners are not very aware of the risks involved.  It needs to be a well-managed delegation of tasks, not an abdication of responsibility.

Small business, and also some not so small businesses, need to understand that they are far more vulnerable to fraud risks than larger organisations.  A recent survey by the Association of Certified Fraud Examiners (ACFE) recently released the results for the Asia Pacific region of its 2018 Report to the Nations on occupational fraud.  The results are very stark and should be a big wake up call to small businesses.

The graphic below shows that businesses with under 100 employees have twice to four times the median loss of larger businesses with the exception of the super large businesses with over 10,000 employees.

But can any small business afford to lose $400,000?  It might be just a minor decimal point in a super-corporate but it will be a major and probably game changing event for a small business.  We need to examine why is the median loss so large for smaller businesses, and what can be done to mitigate this significant risk.

Larger businesses tend to have better internal control structures in place.  This reduces the chances for a fraud as there are more checks and balances making fraud more difficult.  There will be usually better accounting reporting with more sophisticated budget analysis and resources to investigate why things are not as expected meaning if there is a fraud it often is found sooner limiting the losses.

Smaller businesses have limited segregation of duties in the financial area.  There is often one person, or at best a small team of people in the financial services area so each team member has more ability to undertake transactions, or to cover up any fraudulent activity.  In the “Mum and Dad” businesses, the finance team is often just one office person who raises invoices, pays the accounts, handles the bank accounts, enters the transactions into the computer, does the payroll, and the GST returns.  They send materials off to the external accountant once a year who prepares the annual financial accounts a few months later, possibly without any visits to the business itself.

Small business owners need to take control personally of some of the key finance and personnel tasks in their business.  I will now set out my top six controls that small businesses and borrow from the big corporates.  These will not only reduce your fraud risks but will probably improve your bottom line.

Firstly, they need to take responsibility for the hiring of office staff.  They need to check references carefully, get authorisation from the employee and undertake police and background checks.  If someone won’t consent to a background check then they have something to hide.  Always check with current and past employers.  If they won’t answer due to privacy, then at least ask a simple question.  It is “If the candidate was to approach you and you had a job vacancy, would you re-employ that person? Yes or no?”.  This does not give away any personal information as you are asking the past employer what they would do.  Also verify carefully any gaps in the employment history to ensure that the candidate has not conveniently left out an employer.  That is a common way of covering up a less than perfect piece of history.

Secondly, never give to office staff direct access to your bank accounts, or the ability to load or change details for payees online in your accounting system or internet banking.  Have all bank statements sent to you directly and take the time to carefully review them at least monthly and ask questions and check items against statements from suppliers.  Be inquisitive.

Thirdly, when it comes time to make payments prepared by your accounts team ensure that you see all the supporting paperwork.  Check that the goods were received, that the purchase makes sense, that any materials were recharged correctly to jobs, that the previous month’s payment was shown on the statement, that the bank account on the invoices is the same as the bank account you are paying.  Never ever be rushed by urgent payments, and if you don’t have time to review the payments fully, then don’t authorise them on internet banking.  Schedule time in your diary and ensure office staff deliver on time.

Fourthly, take time once a quarter to think about each and everyone of your staff.  Does everything about them add up?  Discreetly enquire further if they appear to be living above their income levels, have new cars, expensive holidays, have pressure in their personal lives, are overdue for a holiday break, or appear stressed and flustered.  These may be a warning sign of a fraud or at the very least an OSH issue.

Fifthly, when an employee goes on leave, make sure someone else does their job while they are away.  This will give an insight into what they have been doing and will also ensure the employee has had a holiday rather than a work deferral!

Finally, get your external Chartered Accountant to come into the business after every GST return period to have a good look at the GST return, the accounts and transactions, any trends they see emerging and to assist you with better running your business.  It is best to have a GST period of not more than two monthly so doing the GST return is a regular thing. This regular interaction with your external accountant keeps the business accounts accurate and up to date with regular feedback to correct wider business performance issues.  It will make the year end process quicker and easier.  This investment will pay for itself in improved returns if you have the right Chartered Accountant on board.




About McGlinn Consulting Group Limited

Graeme McGlinn is the director of McGlinn Consulting Group Limited.  Graeme is a Chartered Director, Chartered Accountant and Certified Fraud Examiner at McGlinn Consulting Group Limited. He has over 35 years’ experience in accounting, auditing, governance, litigation support and risk identification and management in New Zealand and overseas. He can be contacted via his website www.mcglinnconsulting.com or by email at graeme@mcglinnconsulting.com

Leave a Reply

Your email address will not be published. Required fields are marked *