Here are examples of fraud within the owner managed business sector and some simple measures to protect against it.
Fraud most often hits the headlines when the people involved have a high profile; where the issues raised are complex; or when the amounts involved are huge.
Owner-managed business (OMBs) will rarely be involved in this type of fraud. However, frauds that do occur in OMBs are normally fairly simple and opportunistic and, whilst the amounts involved may not be on a headline-making scale, they are often significant enough to cause the business serious financial hardship, and even failure. I was once instructed in a case that involved a bookkeeper who had recorded herself (under a false identity) as a supplier to the business for whom she worked.
She submitted invoices, which — as part of her job — she checked herself. She then paid herself mainly with cheques signed in advance by the directors. When pre-signed cheques were not available, she simply presented a cheque to the directors without the payee line completed, claiming she would have to find out the correct name. She later completed the cheques with her own name.
The fraud was only discovered when the directors noticed a marked increase in costs and ordered an investigation. By then, the business was running at a loss and had a substantial bank overdraft.
In another case, a bookkeeper saw the opportunity to misappropriate cash received from customers. Although the business received cash and cheques, he only banked the cheques and kept the cash.
To avoid detection, he recorded all amounts received from customers, including cash receipts, in the books but manually amended the total to the amount of cheques banked — omitting any cash amounts from the total. If a second person had been involved in the process or the business’s financial affairs had been carefully monitored, the fraud would have easily been detected. However, the bookkeeper was in full control of the accounting function and was able to continue the fraud for over a year.
In each case, the fraud was discovered by chance. There are a number of ways to protect against fraud. Here are a few simple suggestions:
- It is comparatively easy for a fraud to be committed where just one person is responsible for the entire accounting function or a substantial part of it. Segregation of duties between staff reduces the chance of fraud, as long as the parties do not collude.
- Management should always retain a degree of control, which could be exercised in the signing of cheques or passing of invoices for payment. Effective control can be maintained by insisting that invoices are always presented in support of cheques being raised.
- Signed cheques are a licence to print money. Blank cheques and cheques without the payee name completed should only be signed on exceptional occasions.
- Most business owners instinctively know what the cash position of the firm and its profit levels should be. Acting quickly when the results do not tally with expectations could result in the early discovery of fraud.
- Watch out for unusual requests from the person in charge of the accounting function.
- If an employee is unusually protective of certain tasks, they may have something to hide. For example, is there a reason why your company accountant always insists on doing the banking himself rather than delegating it?
- A marked change in cashflow or profit levels during an employee’s holiday can indicate a fraud. Similarly, a member of staff who never takes a holiday may be trying to cover an on-going fraud.
SOURCENOTE: Adapted from an article by Peter Hodges, a partner at leading Lancashire accountancy firm Jackson Stephen.