Skip links
Business Fraud - Katalyst Cloud and Business Services

Protect your business from fraud

What can Business Fraud mean to an SME

SME’s are very vulnerable when it comes to business fraud.  Small losses can result in crippling cash shortfalls as well as losses in productivity, stock, reputation and even the loss of the business itself.

With the high trust level given to staff in small teams, there are often few controls in place that give even basic protection. It seems the main driving factors to commit business fraud, are greed and addiction.

I was told a disturbing statistic:

  • 1 out of every 10 employees would never steal, not matter what
  • 8 out of 10 would take advantage of an opportunity if one arose – to varying degrees
  • 1 of 10 take anything that isn’t nailed down

The Fraud Triangle

The Fraud Triangle - Katalyst Cloud and Business Services

Pressure:  Gambling, drugs and other financial pressures are the main motivators for otherwise good staff taking the step towards committing business fraud.

Opportunity: Can your systems be manipulated in a way that’s not obvious? Do you have tight controls on stock and company resources? Are you making it too easy to take an advantage?

Rationalisation: Staff who would never steal a car, or shop lift, justify to themselves that stealing from work is ok.

Business Fraud - Katalyst Cloud and Business Services

“I’ll pay it back” – They might start with a little that they intend to pay back, but it soon escalates to being out of control. Overwhelming debt can drive people to make bad decisions.

“Everyone does it” – If prolific, you can get ‘group think’. Other staff take product home from work, so they might as well do it too.

“Why shouldn’t I take it?” – If staff perceive that the business owners are dishonest, then they use it as justification.

“They need to share it around” or “I work hard and they don’t pay me enough”. It’s easy to overlook business expenses and debt and assume that business owners have lots of money.

Early warning signs of business fraud

Your business is the main tell-tale sign – is it performing as well as it should? Are you able to benchmark your performance against others in your industry to see where you rank?

Staff who don’t/or won’t take time off

  • This can indicate they are ‘managing’ the information you see, if they take time off, they might be exposed. Maybe they paid themselves instead of a supplier, that supplier might phone looking for their payment, or, the supplier invoice might turn up in the mail-box with overdue notices stamped on it?

Excuses

  • You ask for up-to-date reports and there is always an excuse, why they aren’t ready or why the accounts don’t balance, or the information simply doesn’t make sense.
  • Your previously perfect staff member might have fallen on hard times, be going through a break-up or break-down and you might keep giving them leeway?  Do you find you are the one making excuses for their behaviour?  Are other staff trying to tell you something?

Lack of skill

  • It could be your staff member simply lacks the skill and they are going around in circles trying to cover up their inadequacies. Are they making the progress you expected? Are you getting the results you expected?  I heard once that if you have a great employee leave, it can take 6 month before cracks begin to show if the new hire is not up to par.

How to prevent business fraud

This is in no way an exhaustive list, but is a good place to start.

Bookkeeping

Banking and Cash

  • As the business owner, be the authoriser for all bank payments or at least set payment limits.
  • Be conscious of what you are paying – check the underlying bills and bank details frequently.
  • If you are using batch payments from Xero, the batch bypasses your bank payee library and uses the Xero contact bank details, with Xero you can restrict the ability for staff to edit bank details.
  • Cash… Split roles, the person taking the cash, shouldn’t be the one banking it.  What controls do you have in place to detect cash payments?

Fictitious supplier bills

  • Using Xero Files, you can run a paperless business, the source document can be attached to the bill. If you don’t recognise the supplier, review the invoice and investigate it.
  • Keep in mind, an invoice can be easily faked, and so can a website and email address that helps make it look real – if in doubt, phone your supplier.

Supplier bank details

  • Staff can swap out the supplier bank details with their own, so they get paid instead of the supplier – use the Xero Assurance Dashboard to look for suspicious activity.

Credit Notes

  • The oldest trick in the book is to sell something, credit it and pocket the cash, with Xero It is super easy to see what credit notes were created, when and by whom.

Xero

  • The ‘statement’ balance on the Xero Dashboard should equal your online banking balance from last night.
  • There are ways to confirm that a genuine bank feed has been used, or if a manual import or entry was done.
  • On the Dashboard, click on Manage, click Reconciliation Report – there shouldn’t be any transactions showing that are in a closed GST period, or any balance errors at the bottom of the report.
  • Go to Settings, General Settings, Financial Settings to set period and year end lock dates, this prevents standard or below users entering or altering ‘closed’ periods.  These dates should be locked when running GST by default.
  • In Xero, in your invoices and bills area, click search and then tick the box for Include Deleted and Voided – this can be interesting.

Fraud in the form of lack of skill or focus

  • Debtors control is a huge issue if not given the right priority. It should be number one in your bookkeepers mind.  Have regular meetings or discussion with your bookkeeper to find out how your debtors are looking, who hasn’t paid, why and what is being done about it. Make sure they are following up late payers promptly.
  • Paying for unproductive staff is as troublesome as theft. As Lisa Mackay from HRtoolkit says – “10 minutes wasted a day = 40 hours lost in a year”.
  • One issue we uncovered for a client was that their accounts person wasn’t aware that the payroll system used time and their job system used decimal, so staff were being paid for 0.5 of an hour / 30 minutes, but the clients were being charged 0.3 of an hour / 18 minutes.  For our client this took place over 12 years and we estimated it cost them around 1.2 million over this time.  Watch decimal vs minutes, ensure your team are conscious of the difference and are trained appropriately

Payroll

  • Ghost Employees – do you know everyone on your team?  Small businesses might not suffer this one too often, but once you start growing and stepping back a little, it can be hard to keep track – check payroll records against employment and induction records.
  • Check timesheet software against your payroll data, including leave requests versus your timesheets.
  • Can your job management software and payroll software be controlled by different staff members – therefore splitting roles and adding a layer of protection.

Inventory

Sales Rep’s Stock

  • How often do you check the inventory in reps cars?  Stock should be charged to a Rep’s account, like any other client. When stock is returned, it is credited. If stock is not accounted for in a random stock take, then they should be charged for it personally.

Warehouse Stock

  • Do you have regular stock takes and who controls them?
  • Do you have motion detector cameras in place?

Company Resources

  • Staff use of motor vehicles should be managed – this can have accounting and tax implications if not managed correctly.
  • Can your staff member be taking jobs on the sly and using your companies resources to complete them? Maybe working weekends or after hours to service your clients with your gear, and keeping the money?
  • Do you have a policy in place for managing company equipment like tablet and laptops?  Who pays for damage?

Suppliers

Back Handers and Kick Backs

  • Do any of your team have particularly close relationships with suppliers – are they getting back handers, or goods supplied to them for free, that should be a benefit to the business or owners, or that are ultimately paying for?
  • Check invoices randomly, where is the stock/who was the consultant and what job did it go on. Was it on-charged?

How would you, rip yourself off? It’s kind of like trying to break into your own house. Yes, that rickety deck chair leaning against the house will give you the foot hold required to get in through the bathroom window…

Real Life Examples

All real examples I’ve come across while runnig Katalyst – names are changed.

A great example of a fraudster is Stephen Versalko from ASB. He was quiet, hard working and certainly not considered as a threat. The total he got was $18 million; all he got was six years. On a small business level, you have all sorts of people with drug habits and gambling problems; it starts with small amounts and quickly gets out of control.

Mike and Jenny ran a small business and Jenny managed the accounts.  She got cancer, they asked their family friend, Sue, to cover while Jenny got better. They didn’t realise that Sue had a gambling problem and had taken around $50k out of the business over a number of months. She had never set out to steal, but her gambling had gotten out of hand.

Sally ran her own business and an existing acquaintance, Joe, offered to invest some funds.  The only condition was that Sally had to use Joe’s accountant.  Joe and his accountant invented loan documents, saying the Sally owed them money, not to mention all sorts of other dodgy dealings, the business couldn’t be saved and the Sally had bankruptcy served. Also, the accountant phoned Sally’s bank and said she was no longer capable of decision-making and so the bank refused to deal with Sally when she finally phoned to find out what was happening.

Bob, the owner, was told by many of his staff that they were concerned with the accounts person, Jean. Bob kept making excuses for Jean, she had a breakup and her ex-partner was
abusive. Ultimately she took $78k from the business account. Jean was lovely, but she also had a P addiction.

 

If you would like to tighten up your bookkeeping, contact us to discuss.

Glennis Stuckey, Director.