RSS feedsFor almost 20 years, KPMG has been tracking major fraud cases reaching the UK courts. Its findings for 2006 showed that 277 cases, totalling £837m, went before the courts. While the majority of these cases related to big business, small and medium-sized entities and owner managed businesses were also affected.
While SMEs and OMBs may not face the broad range of threats faced by big business, most frauds perpetrated against businesses don’t depend on size. Ghost employees, bogus invoicing, accounts manipulation, counterfeiting and identity theft can strike any organisation. And advances in technology, the internet and e-business have provided new opportunities for fraudsters.
SMEs and OMBs are at equal risk from both internal and external threats. External threats include customers or suppliers and organised crime. Internal threats include employees and management. Internally committed frauds usually impact on the profitability of the business by either concealing costs or else inflating revenues.
The threat within
Frauds against SMEs are often committed by the owner managers or majority shareholders. In a survey of around 100 fraud cases, it was found that long-serving, male managers were the most likely people to commit company fraud. Directors and senior managers committed almost two-thirds of the frauds surveyed and, generally, were four times more likely to steal than employees. This is usually because managers have the opportunity to abuse or override controls and often have access to a company’s most valuable assets.
Any discussion of why people commit fraud invariably refers to the Fraud Triangle. This describes the three conditions needed to allow a fraud to occur: opportunity, motive and rationalisation.
The opportunity is usually provided if a company has poor controls or often, in the case of management fraud, a situation whereby controls are simply over-ridden.
SMEs and OMBs often struggle to operate and maintain good controls. The effective segregation of duties can be difficult to achieve if the finance department only consists of a few individuals.
Culture also plays an important part in providing an opportunity for fraud. A business run by an autocratic manager does not lend itself to the open or questioning environment that is needed to deter fraud. On the other hand, managers in more open businesses may have a better feel for what is happening around them and across the entire business.
Fraudsters are invariably driven either by financial or personal pressures. Within the business this may be a pressure to perform to a certain standard, or meet unrealistic forecasts or budgets, or simply to keep a job.
On a personal level it may be lifestyle, marriage or divorce problems, an addiction, or the inability to deal with personal debt.
Finally, fraudsters need to rationalise and justify their actions.
Owner-managers are just as likely to try to do this as directors and managers of
SMEs
An open and honest culture both deters fraud and also encourages it to be
reported. Often colleagues suspect fraud or misconduct, but are reluctant to
report it. Creating an environment in which concerns can be raised is vital:
research suggests that only one-in-four frauds are detected by audit or
management review, while one-in-three are discovered by a whistleblower.
Prevention better than cure
Smaller businesses usually struggle to survive the impact of fraud, yet prevention is often low on the list of priorities for SMEs.
By conducting regular fraud risk assessments, businesses can ensure they identify and understand the fraud threats they face and ensure that existing controls match those threats.
The objective for every SME and OMB should be to establish an anti-fraud culture. A clear fraud policy statement endorsed by the highest levels within the business should make clear that everybody has a responsibility for the prevention and detection of fraud.
Such a policy should be highly visible both within and outside the organisation. Ideally, employee contracts should set out the expectations of what is acceptable and what is not.
Finally, don’t let fraudsters in the front door. The recruitment process must ensure that all CVs are thoroughly vetted and all references and qualifications checked. Recent research in the UK showed that more than 75% of CVs contain irregularities.
Tim Scott-Smith is a senior manager in KPMG Forensic
More tips on avoiding fraud at www.kpmg.co.uk/services/f
