Preventing fraud in this economic slowdown

• Tips to small business owners According to the Association of Certified Fraud Examiners’ (ACFE) report, organisations lose an estimated 8 percent of annual revenues to fraud. And the news is even worse for small businesses, because most of them do not have a fraud specialist to keep an eye on the business. We are already in the middle of a major economic slowdown and this produces heightened fraud environments in many organisations.

• Tips to small business owners

According to the Association of Certified Fraud Examiners’ (ACFE) report, organisations lose an estimated 8 percent of annual revenues to fraud. And the news is even worse for small businesses, because most of them do not have a fraud specialist to keep an eye on the business. We are already in the middle of a major economic slowdown and this produces heightened fraud environments in many organisations.

All businesses, no matter the industry or size, can be targets of fraud.

However, small businesses tend to have disproportionately large losses from asset misappropriation, and are far less likely to recover from fraud. Small businesses often employ friends, family members, and other “trusted individuals”, and rely on personal trust rather than systematic internal controls to protect them from fraud.

This doesn’t mean you should not trust I am only saying “trust” but verify.

Trust, without internal controls and checks and balances, is a recipe for employee theft. Often, the very traits that invoke management to rely on a trusted employee without checking his or her work make fraud possible. Remember, you can’t steal from people who don’t trust you.  

There are, however, some simple steps business can take to identify upfront and effectively manage potentially costly fraud losses. But first, managers and business owners should pay attention to the following employee traits, they are common indicators found in fraudulent situations:
Employees who go to extremes in their consideration of their fellow co-workers

They like to be involved in everyone’s personal business, and they like to be everybody’s friend. Their involvement and consideration foster a great sense of trust in order to create the opportunity for fraud.
Employees who work excessively and refuse assistance
These employees work longer hours, and refuse to take time off.

As a result, they tend to singularly handle several duties, causing their employers to place all of their reliance on these employees. This undermines a system of segregation of duties which helps protect employers from fraud.
Employees who work excessively and still produce poor accounting records

Because the records are allowed to be poor, signs that fraud is occurring are easily overlooked.  

Managers or supervisors with dominant or controlling personalities who refuse to delegate work or take time off
In one of the cases I was investigating, I asked the staff whether they had suspected any fraudulent activities by the top management, they were concerned why the commissioner would keep all the contract files in his office not even his secretary was allowed to have access to these files, one of the assistant commissioners told me “he rocks all the contract files in his office whenever he is on vacation”.

These individuals do not delegate responsibility in order to hide and continue their fraudulent activities. 

Many of the traits above are found in conscientious and reputable employees. All too often, however, these traits assist the employee in committing and concealing fraud by eliminating or circumventing internal controls and checks and balances.
Steps business can take to identify upfront and effectively prevent potentially costly fraud losses are:
Perform background checks on all employees

Do not solely rely on a trusted individual’s recommendation, but obtain information about the potential employee from an independent third party. One of the most basic steps in preventing employee fraud is not to hire employees who have stolen previously.

Before hiring anyone, you should conduct a background check to find out as much as you can about the employee’s previous experience with employers and law enforcement. 

Amazingly, very few employers actually call the references a candidate provides. Most operate under the theory that someone wouldn’t provide a bad reference. However, many times people will list important sounding individuals as references with the hope that you won’t call.

And, people often assume, incorrectly, that a former supervisor or co-worker will provide a good reference.
Employee Education

Every company should have some mechanism whereby to educate managers, executives, and employees about fraud.

This can be done as a part of employee orientation, or it can be accomplished through memoranda, training programs and other intra-company communication methods.

The goal is to make others within the company your eyes and ears.

Any education efforts should be positive and non-accusatory. It should be emphasized that illegal conduct in any form eventually costs everyone in the company through lost profits, adverse publicity, decreased morale, and productivity.
Be proactive

Establish some method of internal controls. Adopt a code of ethics for your management and employees. Set a tone at the top that your company will not tolerate any unethical behaviour.

When that guidance is in place, create a fraud policy, which might include, for example, a general requirement that all employees comply with all laws and regulations, as well as explicit guidance regarding such issues as holding pricing discussions with competitors and maintaining accurate books and records.
Create a culture that emphasizes segregation of duties and internal controls

As an example, never give access to both cash deposits and accounts receivable records to the same employee.
Call in an expert

Have a Fraud Specialist perform periodic reviews of internal controls through a periodic fraud risk assessment to identify any opportunities that fraudsters may exploit.

An annual fraud health check-up of your organization lets people know that somebody is watching and can thus prevent as well as detect fraud before it’s too late.
Set up a fraud hotline, and encourage employees to use it if they suspect fraud

A fraud hotline is the simplest, cheapest, and most effective way to detect fraud based on studies of how fraud is detected. Employee tips result in the detection of fraud more than any other method.
Insist that employees take time off and cross train employees so that they can review each other’s work
 Some frauds are detected during sickness or unexpected absences of the perpetrator, because they require continuous, manual intervention.

This will minimize management’s reliance on a single individual.

In the above case the commissioner was giving contracts to his Sister’s company and they would re-contract  to other interested contractors, he said “If someone  had coupled a two week vacation with four weeks of rotation to another job function, my fraud  would have been impossible to cover up.” His fraud lasted for three years.
Carry adequate employee-theft insurance

Many larger organizations carry insurance policies against fraud. These policies, sometimes called Fidelity bonds, indemnify the holder against employees who dishonestly (1) commit fraud for personal benefit, or (2) cause the insured to sustain a loss.

Everything from routine theft and embezzlement to commercial bribery and stock fraud is covered.
The burden is on the insured, though, to show that an act of fraud caused the losses claimed.

Companies can’t be reimbursed for unexplained inventory losses or pilfered cash accounts without a suspect.
Physically secure the business premises and assets

Restrict afterhour’s access and allow access to high risk areas only to individuals who require it as part of their job. A simple, inexpensive, physical security device, such as a video surveillance system, or a lock with limited access, can be very effective in preventing fraud.

If alarms and video surveillance are used, have these systems checked on a regular basis to ensure they are functioning properly.  

Perform periodic inventories

High value items should be inventoried on a more frequent basis. Investigate unusual shortages to tell employees that management is diligent about protecting its assets. 

Review computer security for proper administrative and access rights

Access should be limited to job functions, and include offsite back-ups in case of emergencies. Computer access should be limited to have and maintain an appropriate division of duties.
Create a written fraud policy, as suggested by the Institute of Fraud Prevention and Investigations
These policies should be reviewed with all employees. Employee theft, fraud, and embezzlement are always going to be a concern for your business.

Nothing you can do will completely eliminate the possibility that your business could become a victim of fraud. Following these simple tips, however, can go a long way toward preventing fraud, and encouraging its early detection before it destroys your business.

The author is lecturer at Makerere University Business School (MUBS)


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