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How do you avoid fraud in your business?

March 24, 2016

An employee ‘borrows’ $100 from petty cash…FRAUD. You ‘witness’ the signing of a document two days after it has been signed…FRAUD. An employee asks for money in exchange for lying about a service or keeping silent about a transgression…FRAUD. You had a slow month and recorded that revenue was higher than reality…FRAUD.

Fraud conducted within a business is the largest source of concern for Australian organisations. According to a 2013 KPMG report, 75% of major frauds are carried out by insiders. The more startling statistic is that 91% of these perpetrators are first time offenders, making it difficult to determine a pattern of behaviour or character.

If any of the fraud examples listed above seem surprising, you are not alone. Many acts of fraud are committed by people who simply aren’t aware that the practice is criminal. That’s right, a conviction for a fraud-related offence carries a maximum sentence of 10 years imprisonment. There are currently over 200 people serving custodial sentences for such in NSW alone (BOCSAR, 2015).

What is it?

The term ‘occupational fraud’ covers most fraudulent or dishonest activity occurring in the workplace and can otherwise be known as ‘employee fraud’. It will usually fall within one of three categories:

  • Asset misappropriation (taking cash, products);

  • Corruption (bribery, extortion); or

  • Financial statement fraud (falsifying financial records)

Asset misappropriation is by far the most common form of fraudulent activity in a business setting, yet the latter, financial statement fraud, is the most costly. If an employee uses deception to dishonestly obtain property or a financial benefit, or the inverse (causes you financial disadvantage) they may be acting within the statutory definition of fraud.

Why does it occur?

If there were a comprehensive answer to this question, occupational fraud would cease to exist. But alas, since Eve took a bite from that apple and Pandora opened her box, humanity has been entirely fallible.

That said, commentators have elucidated a number of key reasons why employees engage in fraudulent activity and how they rationalise such conduct:

  • “The boss won’t notice it missing anyway” – this can be symptomatic of a disconnect between management and employees. In this instance the worker does not feel ownership or respect for their environment and superiors.

  • Entitlement – if an employee feels that he/she is owed more than they receive, this attitude may internally justify the fraudulent act.

  • Financial and family pressures – when house repayments and bills tack up it can be tempting to relieve the burden by pilfering from a readily available source.

  • Addiction – gambling and drug addictions can cause ordinarily reliable people to act of character to satisfy their compulsion.

  • Greed/Lifestyle – the ‘get-rich-quick’ or ‘keeping-up-with-the-joneses’ mentality may appear trivial, yet the trappings of success, whether warranted or not, can stimulate the desire for financial gain, regardless of the process.

How can it be prevented?

There are many managerial tools that can be implemented to restrict the opportunity for fraudulent activity to take place. Far from ruling with an iron fist, most can be flawlessly integrated into day-to-day running of a business, independent of its size.

  • Relationship building – get to know your employees and understand their motivations, strengths, concerns and yes, at least a little bit about their personal life. Not only will this humanise interactions, it will create trust and reliability. Humanity craves interpersonal connection and in the workplace, empathy and consideration can go a long way (and save the pain).

  • Employee Contentment – an employee who feels involved and respected as a member of the team is less likely to harbour resentment and discontent. By creating a positive and collaborative atmosphere, offering incentives to reach business targets and fostering the development of staff, they may be less likely to bite the hand that feeds them.

  • Policy Awareness – don’t let fraud be a silent killer! Develop a company policy regarding fraud and its disclosure. Ensure that this is not just accessible to staff, but explain its importance. This can be achieved as a seminar in a workplace training day or as part of the initial recruitment process.

  • Accountability – it is likely that you already have a process available for lodging incidents of discrimination, so it’s not too much of a stretch to develop a similar procedure for fraud complaints and reporting. Tip-offs by other employees are the most common source of fraud detection. Developing an environment where fraud is unacceptable and staff feel comfortable exposing risk is yet another positive prevention tool.

  • Internal controls – as a procedural, precautionary measure this is most important. Limiting opportunities for employees to commit fraud can be as straight-forward as enforcing leave, segregating duties, double-signing of cheques and transactional documents, rotating roles and conducting regular audits, both internal and external.

In some cases, despite your best efforts, fraud may still occur within your business. To ensure that it will not fundamentally affect your bottom line, investing in a fidelity or employee dishonesty insurance policy may help to offset any loss incurred. Attempting to recover the proceeds of fraud otherwise is fraught with difficulty. KPMG noted that only 57% of companies surveyed in 2012 were able to recover even a partial amount of the fraudulent proceeds.

In summary, when addressing the prospect of occupation fraud in your business it is beneficial to:

  1. Understand why it may occur

  2. Identify key risks indicators

  3. Prevent opportunities for fraudulent activity

  4. Prepare for the worst case scenario

These considerations are best addressed when initially starting your business operations to avoid an unfortunate culture developing, where fraud is rampant and difficult to change.


This information is of a general nature only and does not constitute professional advice. You must seek professional advice in relation to your particular circumstances before acting.

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