Sadly, it is not uncommon to hear about fraud affecting small and larger businesses alike. I have certainly heard a few stories over the years! And fraud doesn’t discriminate, it can happen anywhere, anytime, no matter how big or small your business is. For every minute fraud goes undiscovered, your business pays!
So what do we do about it? Here are a few things to think about which can go a long way to preventing or a least minimising business fraud:
Having a robust system of internal controls is critical for every business because they ensure the effectiveness and efficiency of operations, compliance with laws and regulations as well as safeguarding of assets. Internal controls play an integral role in the success of a business, while a lack of internal controls is more likely to create an environment for fraud or error to occur.
Segregation of Duties
As an example, no single employee should handle all or most aspects of inventory transaction authorisation, preparation and authorization of payment. The physical custodians of inventory should have no access to accounting records, such as stock records, cost accounting records or general ledger. By segregating duties, it becomes harder for dishonest actions to go undetected. For smaller businesses, sharing responsibilities between two or more people or having important tasks reviewed by co-workers can serve the same purpose.
Educate your employees
Implement a fraud awareness program to ensure employees understand the company’s commitment to protect its assets. This is a useful deterrent to possible fraudulent behaviour. Emphasise zero tolerance for fraudulent behaviour within the organisation.
Build a positive work environment
A business’s work environment should encourage employees to behave with integrity and the basis for that is a framework of well thought out and publicised policies and procedures. Creating a workplace which is run fairly in accordance with policy rather than on subjective and possibly arbitrary lines gives employees certainty and security and will encourage them to do their best for the firm.
Know your employees
Observe your employees’ behaviour. Personal circumstances often drive an employee to perpetrate fraud. Personal issues such as lack of job promotion, separation from their partner, family health issues, addictions like gambling, financial difficulties or living beyond their means.
Review monthly/periodic financials
Business owners should review financial reports on a monthly or periodic basis. Understand the details of your financial statements, looking for irregularities and significant variances. Do not brush over any irregularities without fully understanding what drives these variances.
Prevention is always better than detection, but too often we get tied up with the day to day tasks involved in running a business and don’t invest enough time to properly develop some of the concepts mentioned above.
Which is where your accountant could help.