And there’s an obvious reason why this is the most common area of fraud. Employees know your systems and controls, and know what they can get away with.
As much as this pains me as an accountant, looking back at the businesses I’ve worked with over the last 15 years I can think of around 20 who have suffered fraud at the hands of their own book keeper or accountant. And we’re not talking about abuse of petty cash here, but full scale frauds totalling tens of thousands of pounds.
In fact I remember at one of our finance workshops, almost half of the business owners in the room had the unfortunate experience of one of their employees stealing from them.
These are just a few of the things I’ve personally seen happen in businesses:
- An accountant in a £10m business couldn’t handle creditor pressure so was forging cheques to pay them. He didn’t actually defraud the company but left the business dangerously short of cash.
- In a large retail PLC. I saw payroll fraud where a payroll clerk had set up dummy employees and was paying herself an extra salary every month – I still remember the police turning up and her hiding in the toilets!
- A company accountant who controlled the purchase ledger and bank without supervision had set up dummy suppliers payable to themselves and embezzled tens of thousands of pounds.
This is a really tricky area in a small business. You’re a small closely knit team, you all trust each other, and frankly there just isn’t the time or resources to put in place the full blown controls that a larger company would take for granted.
The most common area for fraud is naturally the finance department as they have direct access to your cash.
These are the most common areas for employee fraud:
- False or exaggerated expenses and travel claims
- Using a business credit card for personal expenses
- Creating dummy employees, customers and suppliers to pay themselves
- Taking cash and changing the records to disguise the theft
- Colluding with suppliers for personal benefit
- Stealing actual cash, stock or other company property
Things to look out for
- People acting out of character
- A sudden and unexplained change in lifestyle or spending habits
- Staff who never take time off – this might be because they’re worried about being found out by someone covering their work.
- Staff members who won’t follow procedures
- Staff who are in a lot of debt and have personal cashflow problems.
Steps you can take
- If you have a sole finance person make sure you sign of the payroll, the suppliers for payment. Make sure you know your staff and suppliers
- This is the most important one – don’t let any one person have unfettered access to your bank account.Always set up a dual authorisation process where one person can set up the payments, but someone else has to authorise them.If you’re still using cheques then make sure that someone different signs them.
- If you have stock, make sure you do stock checks and calculate your gross margins regularly – missing stock will show up here
- Make your staff aware of your controls, checks and procedures – often just knowing that you do check things can be enough to put someone off even trying.
We find that when business improves and everyone gets busier, often controls and procedures get side-lined just to get the work done. This is a classic danger point, so try to make sure you don’t sacrifice your controls as your business grows.
Over the next few weeks and months we’ll be exploring the other main areas of business fraud in small companies
Hi Serena, this is an important area of risk that most business owners neglect to think about (very much the “it won’t happen to me” approach). Crime insurance is very much an area that all businesses should consider as this has some cross over to fraudulent loss of funds from your bank account through other means such as hacking. Take all the sensible steps above and then consider insuring against the risk.
hi Richard – thanks for the comment, very good advice. As I understand it most generic insurance policies don’t provide adequate cover for Cyber crime