It is recognised that the typical organisation loses 5% of revenue each year to fraud. The Association of Certified Fraud Examiners (ACFE) undertook a Global Fraud Study in 2012, which founded this estimation.
Small businesses are more vulnerable to employee fraud than large businesses, as they do not have strong internal controls and tend to trust their employees. Small business owners typically focus on the core business and do not have the time, the skill set or the inclination to oversee the bookkeeping function. As a result the trusted bookkeeper is often handed the keys to the proverbial kingdom.
Business owners are often shocked to discover that the person they trusted implicitly could perpetrate a crime against the business. Whilst internal controls contribute significantly to fraud prevention, its detection is far more likely to be by a whistle blower or by sheer luck.
We were involved in an investigation recently where the owners of a small business were notified by an anonymous letter, stating that their bookkeeper had been stealing from them for years. Despite initial disbelief the owners felt compelled to review the company records, it soon became apparent that the embezzlement had been going on for several years and involved hundreds of thousands of dollars.
The majority of employee embezzlement schemes start out small and go undetected, however once confidence is gained the frequency and the amounts increase. Some of the more common methods include reimbursement of personal expenses, creation and payment of invoices to a fictitious company set up by the employee, and alteration or duplication of authorised payments. In many of the cases we find frustration in the lack of sophistication associated with the embezzlement and the ease in which it could have been prevented. When these schemes involve a bookkeeper or someone responsible for the accounting function their tracks are often covered in the accounting system. At minimum, the audit trail function should be turned on in accounting software and administration rights should not be granted to the person processing transactions.
The recovery rate of embezzled funds is low with the money often having been spent on maintaining lavish lifestyles, as evidenced in the recent Queensland Health case involving a self-proclaimed Tahitian Prince. Also common are gambling or drug addictions. It is critical that whenever evidence of a potential embezzlement surfaces a full investigation should be conducted because the fraud is often more extensive than it initially appears.
The impact on small business of employee fraud can be severe including lack of cash flow, having to scale back operations and possible redundancies. Small businesses seeking to minimise the risk of fraud need to ensure staff are aware that the business has a zero tolerance policy towards dishonest conduct, and ensure that there is a mechanism in place for staff who suspect fraud to report it without retribution. It is very rare to have a case where at least one or two other staff did not suspect that the fraudster was up to no good. However, in the absence of any solid proof they remained silent. Ideally small business owners should review the books regularly and stay on top of company finances. Consideration should also be given to having an internal control review or systems audit conducted and at minimum take out insurance to mitigate losses in the event of a fraud. Don’t get caught in the trap that it wouldn’t happen to you.