Beware the inside job

Virginia Harrison | October 19, 2010

Smaller businesses face a much higher chance of employee fraud than large organisations. Forensic accountant Arnold Shields tells how companies can minimise the risk of an inside job.

The $20 million embezzlement by a former accountant of Clive Peeters which brought the electronics retailer to its knees sounded a fresh warning to management on fraud controls.

This high-profile case is backed up by a recent report which reveals smaller businesses face a disproportionate risk of occupational fraud.

A global investigation by the Association of Certified Fraud Examiners found small organisations are far more likely to be victims of employee fraud than big companies.

“These organizations are typically lacking in anti-fraud controls compared to their larger counterparts, which makes them particularly vulnerable to fraud.” the report states.

Billing, cheque tampering, corruption and skimming were the most common crimes against small businesses.

So what can be done to cut down the risk of an inside job?

Arnold Shields is a Director at forensic accounting firm Dolman Bateman, which conducts fraud assessments and investigations.

“One of the problems is people say it won’t happen to me. Doing a fraud risk assessment isn’t a major reorganisation of how they do their business, it’s just looking at a couple of risk areas.”

“We go in and analyse what’s the likelihood your business will be subject to employee fraud and suggest ways to change their internal systems and controls to prevent that.” Mr Shields said.

Mr Shields said the average fraud will run about 3 years and typical scams in mid-sized companies include creating fake employees and kickbacks to suppliers.

“Ghost employees are popular, having multiple people on the payroll who don’t exist and the pay is going to someone else.”

“They may put their own company in between a series of suppliers. So they are buying off one company, then they insert their own company in between those two, and buy off the other company for the profit margin.” Mr Shields said.

Fraud assessments are one way of identifying risks and instituting controls, and managing potential issues doesn’t require a big business budget.

“One of the main things in preventing employee fraud is a separation of duties. So the same person doesn’t open the mail, collect the cheques, bank the cheques and do the accounts receivable function. It’s a very simple way of putting in an internal control.” Mr Shields said.

SME’s often experience heightened fraud risk during a period of high growth.

“With rapidly increasing businesses people are doing multiple jobs. The pressure is on just to get the work done. In the movement between a small business and the next size up, when you employ extra people, it’s about actually having the systems in place that the bigger companies do. It quite often gets missed, it’s not something that people are aware that they need to do.” Mr Shields said.

But he warns management to take care when tightening up fraud controls, so as not to stimulate feelings of mistrust among staff.

“It can be just saying we’re having another set of accountants look through how we’re doing things, or we’re looking at a new computer system or having a review of how we do things. Anything other than saying ‘we’re having a fraud risk investigation.’” Mr Shields said.

TOP 3 TIPS TO AVOID OCCUPATIONAL FRAUD

Separation of duties