mBox Blog

8 Tips to Guard Against SME Business Fraud

Thursday, October 08, 2015

The word ‘fraud’ can sound terribly ominous, and is often something people tend to associate with big corporations, or government and financial institutions. But fraud can and does occur in businesses of all sizes and types in Australia and around the globe.

We take a look at some fraud facts, and outline eight steps you can take to reduce the risk of fraud occurring in your enterprise.

What is fraud?

Essentially, fraud is an act of deceit to gain something you are not entitled to. It differs from other types of criminal activity such as burglary in that it usually occurs in an environment where the perpetrator is trusted and provided with considerable responsibility.

The 2014 Global Fraud Study

Findings from the 2014 Global Fraud Study by the Association of Certified Fraud Examiners (ACFE) indicate that although fraud rates are generally lower in small businesses, the losses tend to be proportionally higher than for larger enterprises.

  • The median business loss in 2014 from fraud was $US145,000, with 22% of businesses examined losing over $1 million.
  • The longer fraud is left undetected, the worse it usually gets. For example, losses at the six-month mark are often likely to have increased by up to 20-fold after five years.
  • The most common form of fraud in business is asset misappropriation. An example of this might be claiming for expenses not actually incurred.

Fraud facts from KPMG

  • 9% of smaller businesses with under 100 employees and 31% of business with between 101 and 500 employees suffered fraud losses in 2012. This rose to 46% for enterprises with 501 to 1,000 employees.
  • 47% of fraud occurred due to poor internal controls within the business.
  • 75% of fraud occurred from within the business, which was 40% more than in 2010.
  • The most common motivators are personal or financial pressures, and the desire to maintain a particular standard of lifestyle.

Another area to consider is that of online credit card use for receiving payments for goods. According to the Australian Institute of Criminology (AIC) where stolen cards are used in an online transaction the trader often ends up with the liability, as financial institutions are generally unwilling to wear the loss where no card has been physically presented.

SMEs may be particularly vulnerable to fraud, as there can be a tendency in some cases to employ people on trust without doing proper background checks and to have inadequate internal controls.

This situation can also increase the temptation for someone who may not have set out to commit fraud, but who is under financial pressure and finds it’s a bit too easy to practice small amounts of deception unnoticed. 

Tips for fraud risk reduction

  1. Do background checks on prospective employees – for example verbal references and / or police checks.
  2. Rigorous internal controls, for example segregation of duties around cash transactions, dual authorisers or signatures for cheque or online payments, use of strong passwords (preferably changed regularly, especially for online banking), regular bank and credit card reconciliations to pick up irregularities or missing transactions. Business owners should also have at least an idea of their cash flow and how much should be in the bank and not just leave it all to their staff.
  3. Monitoring and awareness – such as noting if a manager or employee is behaving secretively, or is coming to work in a vehicle or in clothing that would normally not be affordable on their salary.
  4. Restricting access for employees – such as to certain computer programs like cloud accounting and online file storage, or to parts of the premises.
  5. Shredding of sensitive documents – this helps to prevent ID theft. In this case you could save the document in secure online storage before shredding if necessary.
  6. Security around online receipts from customers – this may include authorising credit cards prior to processing, or switching to PayPal or direct deposit rather than credit card.
  7. Documentation – such as a fraud policy which includes procedures for detection and reporting, and a code of conduct for all employees to sign.
  8. Reporting procedures – such as a tip-off phone line for people to report suspicious behaviour.

It’s also important to promote and encourage an ethical culture in the organisation, and to ensure that employees are appropriately compensated and well-treated. The effects of fraud are not only monetary; it can also lead to loss of trust, low morale and a poor credit rating, so make sure to guard against fraud in your enterprise.

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