Fraud Prevention in SME's

Fraud in Small and Medium size enterprises

Author Frank McGivney BA ACMA CGMA

Date: 14 April 2013

Every business owner should be aware of the risks that their business can face in relation to fraud by any party that is involved with the business. The biggest risk of been subject to fraud is the complacency that it will not happen to your firm. This complacency allows fraudsters to operate with ease. A lot of people start their business in good faith and it is easy for them to be unaware of all of the risks involved in running a business as they strive to build a fledging business idea into a success. Historically the following enterprises are most at risk:

(1)   Where the business owners are not aware of the dangers of fraud.

(2)   Where staff are not managed properly

(3)   Where members of staff have unresolved personal issues such as gambling problems, who suffer from alcoholism etc

(4)   Industries which have traditionally been subject to corruption

(5)   Industries which are in decline or which are subject to poor trading conditions.

(6)   Business where proper control and risk assessment systems are not implemented

Of course no matter what controls you put in place there is always a risk of someone committing a fraud on you.

There are three costs associated with fraud

(1) The cost of the fraud itself. This can add up to a significant amount. Take for instance an employee in a retail outlet who pockets Euro100 a week from the till every week. Even a small retail shop may have a turnover of over a million euro a year and so 100 a week out of a turnover of 19000 a week may seem nothing to the fraudster but it adds up to 5000 a year and given the low percentage profit on many retail outlets and the high rental costs this adds up to a high   percentage of the firms overall profit. If the overall profit margin is 15% then the gross profit of the business on a million is 150,000. If you take away rental costs of say 30000 a year and electricity costs of 12000 and staff wages of 50000 a year then the profit is down to 58000. Then take away rates and other expenses and the profit on a million euro turnover is soon down to 30,000 a year and then the 5000 of defrauded money can clearly be seen as a huge percentage of the firms profit

(2) The cost of discovering and quantifying the loss. Forensic accountants may have to hired or an investigator and these all add to the cost of the firm

(3) The cost of putting in place systems to prevent the fraud from reoccurring.

Internally to a firm there are two forms of fraud

(1)   employee fraud this is where an employee defrauds the firm of money

(2)   Financial statement fraud This is here a firm produces financial statements which reflect a better position than reality in order to influence external stakeholders. I will have a future article exploring this area.

Externally other parties can also commit fraud on a firm. This can be done by external contractors, customers and suppliers. This can include double billing for supplies or services. Supplying goods of a quality or value much lower than invoiced, looking for refunds on high value sales with fake sales invoices, etc. Some of the frauds from external parties rely on collusion with employees of the firm. Controls need to be put in place to prevent as much as possible of such collusion. One of the most fundamental controls is ensuring segregation of duties to ensure no one person is in full control of any area of a business on their own. Also managers should not be capable of overriding internal controls on their own

 Fraud prevention and detestation has a lot to do with the culture of the firm. An attitude that fraud is not acceptable and will be fully and firmly dealt with should permeate from the business owners down to every level of the firm. All employees should be aware that fraud is not acceptable and a whistleblowing policy should be established and implemented in a way that will protect the whistleblower.

While every one in an organisation can prevent and detect fraud there are specific people who should be utilised to minimise the risk of fraud been committed. Internal and external auditors should always perform there duties with an awareness of the need to detect and investigate any potential instance of fraud. Auditors can use various tools and analysis to highlight potential areas of risk. Often times analysis which shows skewed results are the pointers to fraud, Simple indications such as employees who never take holidays or staff who will not delegate responsibilities or duties are suspicious. In my experience when employees who go missing when you try to audit them or who can’t explain the operation of their jobs in clear terms are areas to investigate. Of course this can also just be due to factors such as incompetence or resistance to having their work assessed. While doing investigative work for one of the Irish semi-state bodies I found a lot of resistance from older employees as there seemed to be a culture of resistance to change in the company and really a resistance to management in general that I haven’t experienced to such a level in private industry. However I overcame this with proper communication of the objectives of the investigation which was purely commercial in nature. It did highlight areas of concern and lead to a lot of improvements beyond the core work I was contracted to work on.

On occasions where there is suspicion of a fraud then a specialist such as a forensic accountant may have to be used. The forensic accountant’s functions are to

(1)   Determine if a fraud has been committed by using various different techniques and methods of analysis

(2)   Determine the scope of the fraud and how much of a loss has been incurred

(3)   Determine who is responsible for the fraud. In larger firms there is often more than one employee involved and often times there are outside parties also involved

(4)   Determine how the fraud operated and then put in place controls that will prevent it been repeated.

As with everything in life the experience of someone committing a fraud against your firm can be used in a positive manner to learn lessons and to allow the business owner to improve the business. Often times during the forensic accountants work other information and data comes to light. This may relate to how tasks are perfumed and these can lead to more effective and efficient systems bee put in place, as in my example of the semi state body above.

If you feel you have been the subject of a fraud or you want to analysis the ability of your firm to detect or prevent fraud then you can contact Frank McGivney & Co. Ltd on 0469293891 or fmcgivney@live.com. I have experience of forensic analysis for any number of small firms. I have also experience of preparing fraud investigations for the High Court involving cases against among others the banks. I have also produced forensic reports for criminal cases which have been provided to the Criminal Assets Bureau. I also work extensively in forensic reports for divorce cases.