Fraud poses a significant threat to businesses of all sizes, with estimates suggesting that it could be costing the UK economy over £30 billion annually. As a business owner, it’s crucial to be aware of the common types of employee fraud, how to spot them, and, most importantly, how to prevent them from occurring in the first place.
Understanding Employee Fraud
Employee fraud typically falls into two broad categories:
- Fraudulent Financial Reporting: Often committed by senior management, this involves manipulating financial statements to mislead business owners.
- Misappropriation of Assets: This type of fraud is more widespread and can occur at any level within an organisation. It involves employees stealing or misusing company resources in various ways.
Here are some common areas where fraud can occur and steps you can take to protect your business.
Personal and Company Cheques
Employees can engage in a variety of fraudulent activities using personal or company cheques. For example:
- Cheque to Cash Scheme: An employee writes a cheque payable to cash, charges it to an expense account, and then discards the cancelled cheque after reconciling the bank statement.
- Petty Cash Fraud: An employee takes money from petty cash and replaces it with a personal cheque, ensuring the cash box balances while the cheque remains undeposited.
Preventative Actions:
- Conduct thorough reviews of bank reconciliations.
- Scrutinise bank statements and cancelled cheques for unusual transactions.
- Have bank statements sent to your personal address for independent review.
Credit Control
The credit control department, responsible for debt collection, is another area susceptible to fraud. Common scams include:
- Lapping: An employee pockets payments from customers, using subsequent payments to cover up the theft.
- Credit Note Fraud: An employee issues unauthorised credit notes and pockets the cash.
- Invoice Alteration: An employee alters invoices to show a lower amount and keeps the difference.
Preventative Actions:
- Verify all credit notes and write-offs against supporting documentation.
- Compare current credit notes with those previously processed by the same employee.
Stock and Equipment
Theft of inventory and equipment is a common issue in many businesses. Employees may steal items for personal use or resale, leading to significant losses.
Preventative Actions:
- Install closed-circuit television (CCTV) or use fake cameras as a deterrent.
- Secure equipment with alarms and remove keys from unattended machinery.
- Ensure all storage areas are well-lit.
- Limit access points to your premises.
- Consider hiring an external security firm.
Purchasing and Payroll
Fraud in the purchasing and payroll departments can be especially damaging. For instance:
- Fake Supplier Scam: An employee creates a fictitious supplier and pays false invoices, pocketing the money.
- Ghost Employees: A payroll employee might create non-existent employees or fail to remove departed staff, collecting their wages.
Preventative Actions:
- Review invoices for signs of tampering.
- Look out for unusual pricing, amounts, or volumes in supplier invoices.
- Monitor payroll distribution, especially unclaimed cheques.
Implementing Internal Controls to Prevent Fraud
Implementing strong internal controls is one of the most effective ways to reduce fraud risk. However, each control measure comes with an administrative cost, so it’s important to weigh this against the potential financial impact of fraud.
Here are a few cost-effective measures you can implement immediately:
- Separation of Duties: Don’t allow one employee to handle all aspects of a transaction. Divide responsibilities such as placing orders, processing payments, and recording transactions among different employees.
- Purchase or Payment Authorisation: Set a threshold for purchase amounts that require approval from you or a trusted senior employee.
- Budget vs. Actual Expenditure Comparison: Regularly compare actual expenses against budgeted amounts to spot discrepancies, which could indicate unauthorised spending.
By focusing on these critical areas—cheques, credit control, stock and equipment, and purchasing and payroll—and by implementing robust internal controls, you can significantly reduce the risk of fraud in your business.
For expert guidance and support from experienced accountants and business advisers, contact ANY Accounting today.
