Fraud - tips on how to spot and avoid it by Martin Crook, Partner, Adams Moore on 14-Sep-2012

Major corporate frauds and collapses hit the headlines from time to time and often these are high profile and the amounts involved quite spectacular.

With the current pressures we are now facing from the recession, difficulties in renewing finance, the challenge of achieving targets and even simply paying suppliers bills it becomes easy to see that the risk of fraud for all sizes of businesses has increased significantly. Here, Martin Crook, Partner at Adams Moore, outlines the fundamentals of fraud and how to spot it.

The issues associated with well-publicised frauds may seem far removed from your business, but the simple truth is that fraud can affect businesses of all sizes. Whether you employ a small team or a significant workforce, you should consider how you can increase your awareness of the factors that indicate fraud and what defences you can implement to minimise the risk within your business.

It couldn't happen here

It’s far too easy to believe that fraud is something that couldn’t happen within your business. However, while large businesses have the resources to implement effective systems of internal control to prevent fraud, SME’s quite often have to rely on a small team of people they trust.

A key difficulty faced by the small business is lack of resources, so quite often Individuals have to fulfil a number of roles, which can lead to increased opportunity and scope to commit fraud.

Make sure when recruiting that you check out references properly and ensure that any temporary staff are also vetted, particularly if they are to work in key areas. Ensure that you have a clear policy that fraud will not be tolerated within the organisation and ensure that this is communicated to all staff.

Employees taking advantage

Fraud impacts on profit and loss - whether expenses are overstated or income understated. Frauds could range from a few pounds of fiddled expenses to more significant frauds. These could include the setting up of fictitious suppliers and the production of bogus invoices, or an employee who approves purchases working in collusion with a supplier.

A position could also be abused in respect of business tenders requests. Here, there is a risk of 'kickbacks' where the individual(s) involved in the tender process accept bribes from potential suppliers. This could result in inefficient contracts being signed perhaps for goods of dubious quality.

The time taken to detect fraud can make all the difference to cash flow, as fraud drains a business of resources.

Suppliers taking advantage

Where a business has few or weak checking procedures, a supplier may recognise this and take advantage. For instance, fewer items may actually be delivered than those included on a delivery note, or invoices could include higher quantities or prices than those delivered and agreed.

Check both delivery notes and invoices thoroughly and follow up any discrepancies promptly. Wherever possible, don’t have only one person who is responsible for controlling an entire area of the business; especially in the accounting function but also applicable to ordering goods, stock control and despatch in a business where stocks include attractive consumer goods.

Winning the battle against fraud

While the most devious of fraudsters might go unnoticed for some time, many are ordinary individuals who see an opportunity. The frauds that they commit are quite simple in nature, but the implementation of simple checks within a business can make it much more difficult for a fraudster to take advantage.

Consider which areas of your organisation could be at risk, then plan and implement appropriate defences. Target the areas where most of your revenue comes from and where most of your costs lie. Develop some simple systems of internal control to defend these areas. Effective controls include:

• segregating duties;
• supervision and review;
• arithmetical checks;
• accounting comparisons;
• authorisation and approval;
• physical controls and counts.

Tips for other things to consider:

• Always retain a degree of control over the key accounting functions of your business. Don’t pre-sign blank cheques other than in exceptional circumstances and ensure that the corresponding invoices are presented with the cheques.
• Be on the lookout for unusual requests from staff involved in the accounting function.
• Watch out for employees who are overly protective of their role - they may have something to hide. Similarly watch out for disaffected employees, who might be bearing a grudge or those whose circumstances change for the worse or inexplicably for the better!
• Watch out for notable changes in cash flow when an employee is away from the office, on holiday for example. Similarly be aware of employees who never take their holiday. These could both be indicators of fraud, something we see when we look back retrospectively.
• Prepare budgets and monthly management accounts and compare these against your actual results so that you are aware of variances. Taking prompt investigative action where variances arise could make all the difference by closing the window of opportunity afforded to fraudsters.

For further information, please visit: www.adamsmoore.com/

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