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.
Copyright 2005, RAN ONE Inc. All rights reserved. Reprinted with permission from www.ranone.com.