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Why Small & Medium-Size Enterprises Lose More from
Fraud
A survey found that in the two years ended March, 2004 businesses in
Australia and New Zealand lost more than $456 million to fraud.
Some
45% of respondents to the survey had experienced at least one fraud
during the survey’s two-year period and the average loss through fraud
was over $2 million per organization. The reasons for the losses are
replicated in businesses around the world.
The survey found that fraud
increased with the size of the organization. Businesses with
fewer than 100 employees were relatively unaffected by fraud with only
15% experiencing any kind of fraudulent behavior. The figure among
businesses with 500 to 1,000 employees however was a staggering 48%.
These figures would seem to indicate that SMEs are relatively safe from
fraud, but the survey found that the
average loss for smaller organizations often exceeded the average loss
of the larger ones. The reasons for this lie in some common mistakes
made by small businesses.
SMEs don’t usually have a
dedicated HR manager. This means that pre-employment screening is done
haphazardly or not at all. References aren’t investigated and statements
of previous employment are taken as read. It’s small wonder that in 7%
of major cases of internal fraud the employees concerned had been
dishonest with previous employers but their past misdeeds went
undetected.
The research indicates that one-third of all resumes used to gain employment
contains false or misleading information. It can be anything from
academic degrees that don’t exist to the fabrication of a previous
period of employment to replace a time when the person was unemployed.
Naturally, few criminal convictions make it onto the job application,
but putting the wrong person into a position of trust with access to
company funds can lead to the closure of the enterprise.
Writing in The CPA Manager, senior forensic accountant Thomas A.
Buckhoff cites the case of “Paula Ross” (not her real name) who claimed
on her resume that she possessed a bachelor’s degree in management
information systems and an MBA. Based on these qualifications, a
regional law firm hired the 46-year-old Ross as the information-systems
director.
Nearly two years later, the law firm discovered that Ross, earning about
$105,000 annually, had embezzled $2,035,232 by creating two fictitious
suppliers. A belated background check revealed that Ross had neither of
the two degrees that she clamed she had received.
Another area of concern for SMEs
is their accounts setup. It’s usual for one person to manage the
accounts of a business with little or no separation of duties. Having
just one person to maintain the books, do the banking, count the cash
and manage payrolls creates great potential for fraud. Yet this is just
what happens in the majority of businesses with fewer than twenty
employees.
A third area of concern for SMEs is organizational in nature. Internal
systems are less formal than those in larger firms and often have no
inbuilt safeguards. The survey in Australia and New Zealand found that
poor or easily circumvented internal controls are the main contributors
to enabling fraud, noting that they were a factor in 43% of all fraud
cases detected.
The problem of employee fraud is far more widespread than most business
owners realize. A survey by the British Chambers of Commerce found that
58% of participating firms reported being victims of crime and
businesses were twice as likely as individuals to be victims. The cost
to British business is estimated to be £19 billion per year.
Employers could and should do more to protect themselves. Under certain
circumstances negligent employers can even be held liable for their
employees’ criminal actions.
In the U.S. negligent hiring is a legal doctrine whereby an employer is
responsible for the negligent or destructive actions of an employee when
due diligence—such as conducting background checks—would have revealed
the employee’s propensity to commit such actions.
There are some basic fraud prevention rules that should apply in every
business regardless of size. The first is that every employee’s
background should be thoroughly checked before they are appointed. This
includes personal referees as well as previous employers.
Ensure that accounting work is never the responsibility of just one
person. Have periodic counts of stock and cash, and regularly reconcile
bank records. Follow-up anything suspicious immediately and don’t accept
excuses.
Look for warning signs that
something’s not right. These include changes in cash flow patterns,
stock shrinkage, variations in accounting ratios and customer
complaints.
Finally, watch for employees
living beyond their means, avoiding holidays and never delegating any of
their work. They could have something to hide and it could be costing
you money.
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