27 February 2013

The F Word

What’s the biggest threat to your business?

Cashflow? Online trading? Price cutting by competitors? What about fraud?

Your business is at risk of losing money due to fraud every day. Surveys by the National Fraud Authority and Kroll Advisory Solutions in 2012 showed that approximately two thirds of private sector businesses have been affected by fraud in the past year. Annual losses in the UK private sector were £46 billion, a figure representing almost 1.5% of the turnover of each of those companies.

The threat from within is significantly greater than that from external sources. The main types of fraud over recent years have been those involving employees, with approximately 50% of companies suffering losses resulting from theft of physical assets or information. The impact of information theft can be difficult to quantify but internal financial fraud has a direct hit on the bottom line.

Complacency is a serious issue when it comes to fraud. In the Kroll survey, a far smaller percentage of companies rated themselves as being at medium to high risk of fraud than were actually affected by fraud. It’s easy to rely on the knowledge that you can always claw back funds through the Courts if necessary. However, if those funds have been spent repaying debts or enjoying holidays and expensive restaurants, that reliance may be misplaced.

So, what to do about all this? Well, as always, prevention is the name of the game. Given the prevalence of employee fraud, ensuring you have thorough recruitment procedures and robust employment contracts is the first line of defence, with whistle blowing procedures following close behind. However, given that most fraudsters have been members of your workforce for many years, the best way to prevent fraud on a day to day basis is to ensure your internal controls are well designed and adhered to.

The key controls to focus on are in relation to:

• Cash handling and access to bank accounts

• Access to IT systems and information

• Approval of new supplier and customer relationships.

Which SMEs are most at risk?

Last year fraud was experience by

• 70% of businesses with turnover of £20-£40 million

• >35% of businesses with 50+ employees

Source: NFA survey

Profile of a 'typical fraudster'

• Male

• Mid thirties - mid fifties

• Relatively senior position

• Hard, dedicated worker

• Been with the company for over five years

• Works in finance, chief executives office or sales

source: KPMG report

If you would like to discuss internal controls or fraud and how to prevent it with a member of our team please contact Jeremy Gardner or Kate Hart.