Wednesday, November 10, 2010

Fraud hotspots in smaller businesses

Small and medium-sized businesses (SMEs) are particularly vulnerable to fraud in times of economic downturn; many lack the controls found in larger organisations and do not necessarily have the resources to combat certain types of fraud. This factsheet highlights some of the key areas of fraud risk.

Areas of fraud risk

All types and sizes of businesses are vulnerable to fraud. Smaller businesses can be susceptible to a very broad range of fraud risks and a small workforce can mean that it is difficult to segregate duties. Fraud can be committed by employees (sometimes called ‘internal fraud’ or ‘employee fraud’), third parties (such as suppliers and customers) and even by business owners themselves. Some of the most common fraud ‘hotspots’ are summarised below.


Card fraud: A fraudster pretends to be a legitimate customer and purchases goods using a stolen credit or debit card.

Non-deliveries: Customers falsely claim that goods dispatched from an online retailer have not been received.

Refunds: Customers steal goods from a retail outlet and then return the goods for a cash refund.


False or inflated supplier invoices:
Employees authorise payments for overpriced and/or non-existent goods or services and receive a ‘kickback’ (such as a cash payment) in return from the supplier. This is particularly noticeable in the property management sector where service charges are calculated on a cost plus percentage mark-up basis.

Fictitious refunds or returns:
Employees generate false refunds and either steal the cash value from the till or arrange for the amounts to be refunded directly to their personal credit card or bank account. Retailers are particularly susceptible to this type of fraud.

Ghost employees or contractors:
Fictitious employees and/or contractors are added to the business’ payroll and are paid wages and/or expenses.

Misappropriation of assets:
Employees help themselves to cash, stock, IT equipment such as laptops, and stationery or submit false expense claims.

Theft or supply of confidential information:
Employees steal confidential customer and/or client information and use it for fraudulent purposes.


False or inflated invoices: Suppliers invoice for more goods or services than were delivered or supplied, or invoice at a higher price than originally quoted. This may involve collusion with an employee to ensure that payments are authorised.

Long firm fraud: A business is set up with the purpose to defraud other legitimate businesses.

Property management: Over-charging by management companies using fictitious time records.

Other third parties

Corporate identity fraud:

A fraudster sets up a false company to trade or steals an organisation’s identity and/or financial information and uses it to purchase goods and services, obtain information or to access facilities in that organisation’s name.

Online banking fraud:

A fraudster gains access to the business’ online bank account and manipulates funds such as setting up standing order payments to his/her own bank account. Businesses that do not have adequate firewall protection are particularly vulnerable to this type of fraud.

Fraud warning signs

There are a number of warning signs that can indicate that fraud may be occurring within your business. These include:
• Changes in employee behaviour
• Changes in cash flow
• Stock shrinkage
• Customer complaints
• High turnover of staff
• Computer and network problems

Managing the risk of fraud

Your business can take a number of steps to reduce the risk of becoming a victim of fraud. The key elements of fraud risk management are:


• Establish an ethical business culture. Develop an anti-fraud policy that clearly sets out the minimum standards of
behaviour expected of employees (acceptance of gifts, use of assets, response to theft etc) and lead by example.
• Minimise the opportunities for fraud to occur within your business. Review your business activities; identify the areas most at risk to fraud and introduce controls to prevent it. These might include segregating finance duties, implementing authorisation thresholds, conducting reference checks on new employees and introducing IT systems access controls. Controls do not need to be complicated or expensive.


• Be aware of the indicators of fraud. Introduce procedures to detect the early warning signs that fraud is taking place. These might include educating staff to spot common frauds and scams, introducing a reporting hotline, conducting spot audits (of stock, sales and purchase ledgers etc) and reviewing profit and loss accounts on a regular basis.


• Make sure you are prepared to respond to a fraud being discovered within your business. Smaller businesses should consider a policy that independent professional advice will be sought at the outset of any fraud investigation. Larger organisations should include fraud as part of their disaster recovery plan. This should cover the investigation process (who, when and how), legal or ethical duties to report (to your shareholders, customers, bank, insurance company and/or regulator(s)) and public relations.
• It is important to remember that there are different standards of proof that need to be met according to the type of action you wish to take against the fraudster – disciplinary, regulatory, civil or criminal.


• Consider the need for fidelity or crime protection and/or directors’ and officers’ liability insurance.


• Business practices and activities change over time. Regularly review the systems, processes and controls you have in place to manage the risk of fraud to ensure that they remain current, relevant and appropriate for your business’ needs.

Indicators of fraud checklist

There are a number of behavioural and financial warning signs that can indicate that there may be a problem within your business. These should not be taken as definitive proof that there is a fraud; some employees will display one or more of these characteristics and be completely honest and trustworthy; others may display none but may be dishonest.

Employee behaviour:

• Increased levels of stress without a high workload
• Lifestyle not commensurate with salary
• Reluctant to take annual holidays
• Personal financial problems
• Tends to bend/break the rules
• Tends to be subject to complaints
• Works late or unusual hours
• Is unwilling to delegate
• Refuses promotion
• Cosy relationship with contractors and/or suppliers
• New staff resign quickly


• Cash only transactions
• Large variation in expenses between offices/outlets
• Poorly reconciled cash expenses
• Poorly reconciled customer accounts
• Customer complaints
• Rising costs with no explanation or that are not commensurate with an increase in revenue
• Large volume of refunds to customers
• Unusually large inventories

What to do if your business suffers a fraud

Three steps that you should take are:

1. Report the matter to the gardai and other relevant organisation immediately. Depending upon the type of fraud this could include your bank, insurance company, suppliers and/or customers.
2. Consider seeking specialist professional advice.
3. Reassess the way your organization conducts and manages its business to ensure it is adequately protected against this type of fraud occurring in future.

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