Safeguarding against an inside job

By John Mason

 

Last month I apparently won the Nigerian lottery. I’ll never know for sure because I didn’t send the down payment required to secure my winnings, but I’m pretty confident I haven’t passed up on a lifetime of relaxation and financial freedom.

Such scams are now a part of everyday life and the internet has made it easier for people to target their victims from around the globe. Indeed, we are all so busy guarding against the most obtuse and well-publicised frauds from afar that it is sometimes easy to forget the dangers lying closer to home.

This is especially true in a business context and recent industry figures show that internal management fraud accounted for almost half of the rising fraudulent activity suffered by UK firms in the first half of this year.

The challenge for senior management is, therefore, to create an environment in which few opportunities are thrown up for fraudsters and in which effective controls and safeguards exist to prevent them being taken.

One of the simplest ways to do this is to segregate the responsibilities that each member of staff has. An obvious example would be preventing purchase ledger staff also raising cheques for payment.

For smaller firms such a departmentalised approach is often impossible. However that does not mean robust processes cannot be put in place when it comes to creating new suppliers, signing off company cheques and generating electronic payments.

It is also important to monitor how bonuses are generated and try to prevent potential abuses of any weaknesses in the system.

Can, for example, sales staff log down fictitious sales to hit targets and then once their bonus has been paid put through credit notes to level the ledger? Are sales being made to clients that don’t exist or who have perhaps never actually ordered the goods in question?

A business may have run successfully for many years, but that does not mean there has not been some fraudulent leakage along the way. Assessing the business processes in place and giving them a nip and a tuck where necessary will stop firms suffering at the hands of fraudsters and raise the stakes for any employees thinking of helping themselves to a little extra.

In today’s demanding commercial environment it is incredibly difficult for senior management to stay on top of everything and certainly this is the case when small businesses are working flat out to meet orders and generate new sales.

However by being alive to the possibility that fraud may exist and taking a moment to tighten business practices where possible, firms can take huge steps in helping to protect themselves.

The unfortunate truth is that it is often those that seem beyond reproach that have taken advantage of their employer. People not taking their full holiday allowances and regularly working long hours may be dedicated company servants, but they may also have something they do not wish others to uncover.

The point here is not to create paranoia in the workplace, but rather to remind management to be realistic about the possibilities and seek to create an environment in which people can go about their business without suspicion, because of the way the business is run.

One of the classic ways of defrauding businesses over the years has been to fiddle expenses. The very tone of the phrase suggests something that is not deemed as overtly serious, although a new culture has spread through the private sector on the back of legislative changes.

Under the Proceeds of Crime Act 2002, business owners putting personal expenses through the company and not declaring them as benefits in kind can find themselves the subject of a money laundering enquiry, while accountants and auditors have a duty to report any activity it would be reasonable to have suspicions over.

For employees who inflate their expenses, this remains one of the easiest and fastest ways to secure dismissal in a world where it has become increasingly difficult to be sacked from a full time position.

Given this new focus on the expenses paid out to employees and those put through the business by owners, anecdotal evidence would suggest that this is the one area of business fraud that is actually falling.

The irony is that the very people who have brought this legislation to the private sector have allowed such a scandal in their own backyard. I have no problem with MP’s expenses per se, although I might argue that some of the rules should be updated. I do care, however, that people in the public sector, MP’s or otherwise, should suffer the same consequences as private sector workers – if you break the rules and are guilty of fraud you are dismissed. No debate.

Across the board, fraud is something that businesses and individuals in all sectors need to be keenly aware of. However, when assessing the threats senior management should remember that many will come from within. 

John Mason is a partner at French Duncan, Chartered Accountants