Shield your Business from Fraud

15 November 2019

Dishonest action by employees was the most common type of internal fraud in 2018. Fraud can be characterised as rule-bending, but for businesses struggling to manage cashflow it can have catastrophic effects.

Common types of Employee Fraud

Inventory skimming – taking items from stock for resale or personal use. For example, a bartender taking a good bottle of spirits and replacing it with a bottle refilled with a cheaper brand or chalking it up as wastage.

Expenses fraud – claiming for taxi rides never taken using a handful of blank receipts provided by an obliging driver, or for meals never eaten by altering the date on an old restaurant bill.

Fake invoices – submitting invoices with the name of a supplier, or of a completely fabricated one, but with the fraudster’s or an accomplice’s own bank details.

Procurement – awarding contracts not on the basis of suitability or value for money, but to family members or business contacts in return for a cut.

Credit cards – buying personal items with the company card, such as fuel, food or, in extreme cases, luxury goods.

These schemes rely on the employee having the chance and the employer lacking suitable controls and oversight.

The good news is that, with some common sense and good practice, fraud can be tackled.

Good Practice to Reduce Fraud

‘Separation of duties’ is good practice - nobody should be in a position to raise a purchase order, sign off an invoice and authorise payment. At some point in that chain, somebody else ought to be involved, sense-checking the payment and scrutinising the details.
Nobody should be above being questioned or challenged. If something doesn’t look right, your staff need to feel confident asking the finance director or any other board member to provide the necessary paperwork.
Have a clear, easy whistle-blower policy - If you give your employees a defined route to blow the whistle on dishonest behaviour by their colleagues, many will.
Another important principle is the importance of documentation. This has become easier than ever in the age of cloud accounting and digital invoicing, but every expenses claim needs a receipt, every payment needs an invoice and the decision to award any contract should be documented.
Finally, careful and constant monitoring of cashflow, frequent account reconciliation and sound financial reporting will give you the best possible chance of spotting anything amiss.

Internal Controls

In the case of inventory fraud, a regular stocktake by an experienced manager or expert freelancer should probably detect patterns.

Expenses fraud can be trickier to detect but you can automate certain checks. For example, you might have your accounts system highlight duplicate payments or excessive rounding-up of tips, make it compulsory for expenses to have detailed and specific descriptions.

Fake invoices can be detected through separation of duties, but insist that all invoices include a postal address, a phone number, and details of any services supplied.

Consider automatically reviewing invoices over a certain threshold value, which is not only a way of detecting fraud but might also act as a deterrent.

Procurement fraud can be tackled through separation of duties - no individual should be able to award a contract without oversight of colleagues.

Threats from Outside

In 2019, cybercriminals target businesses in various ways with the aim to steal your bank details or infecting your business’s computers with spyware, malware or ransomware. Such criminals play on the anxieties of the operators of small businesses, sometimes in the form of emails that claim to be from HMRC, which look official and even appear to come from a government email address.

They may offer unexpected but tempting tax rebates, or suggest that your payment is overdue, or that your details need updating on the Government Gateway.

If you’re in any doubt, check the HMRC website for advice before clicking on any links or opening attachments. Or, get in touch with your Daly Park Accountant to check if your tax affairs are up-to-date or in arrears.

Some scams include fake invoices, dispatched to lots of businesses in the hope that a handful will be too busy and too careless to check before paying.