How to Protect Your Small Business from Potential Fraud

February 20, 2020 Categories: Business, Business Start-ups, Fraud

It’s thought that fraud costs the UK a staggering £190 billion every year.

Businesses pick up £140 billion of that huge tab, and a 2019 report compiled by anti-fraud body, Cifas, revealed two of the primary reasons why:

  • dishonest staff action intended to “obtain a benefit by theft or deception” (46%); and
  • theft of cash from a customer (22%).

Fraud is rule-bending at its worst, and it can have a catastrophic impact for the businesses that are impacted.

What types of fraud should I be aware of?

Fraud is entirely different from theft, because it relies on deception.

While a thief might use violence or the threat of violence to steal something from his victim, a fraudster will trick that person into handing it over.

This makes fraud tricky to identify, but it pays to be aware of the following common types of fraud.

  • Taking items from stock and using them for personal use or resale, known as inventory skimming.
  • Claiming for taxi rides, hotels stays, or meals that never happened by forging invoices or obtaining blank receipts from obliging service providers, known as expenses fraud.
  • Submitting completely fabricated invoices that contain the fraudster’s own account details, known as fake invoicing.
  • Awarding contracts to friends or family or other contacts in return for a cut and not based on suitability or value for money, known as procurement fraud.
  • Buying personal items with a company credit card, known as credit card fraud.

The above types of fraud are often hard to spot at first and it can take months, if not years, to bring the fraudster to justice.

Thankfully, there are a few simple things your small business can do to reduce the risk of fraud taking place.

Avoid separation of duties

This can be tricky in particularly small firms, but it’s generally best practice to ensure that multiple people are involved in business-critical tasks.

For instance, it shouldn’t be one person’s job to procure a supplier, raise purchase orders, and authorise final payments. At some stage, someone else should get involved to sense check everything.

The same goes with your business culture. No one should feel they’re above being questioned or challenged about a certain way of working or decision making.

Give people the confidence to challenge

If something doesn’t look right, staff should feel empowered to challenge whatever it is that’s bothering them.

This demands an open-door policy at all levels of the business. For instance, if you’re the finance director, you shouldn’t feel aggrieved if a junior member of the accounts team asks for paperwork relating to a specific contractor agreement.

There will occasionally be awkward questions asked at awkward times, but the more everyone acts responsibly and transparently, the less frequent those occasions will be.

Remember the importance of documentation

Thanks to cloud accounting and file storage, processing receipts, invoices, and payments has never been easier.

Despite this, it’s easy to let things slip. After all, does it really matter if that one expense claim isn’t logged or if that particular work mileage is ignored?

It does! Every payment should have an invoice and every expense claim needs a corresponding receipt – there shouldn’t be any exceptions.

Monitor cash flow consistently and thoroughly

Cash really is king, no matter the size of your business, which is why keeping tabs on cash flow should be a weekly (ideally daily) task.

Accounts reconciliation should be undertaken frequently in order to spot anything that might be amiss. Thanks to cloud accounting, this particular task is easier than ever.

The same goes for financial reporting; the closer you monitor your balance sheet and the ins and outs of your accounts, the more likely you are to spot inconsistencies or potential cases of fraud.

Get a handle on internal controls

The Cifas report revealed that over half of employee fraudulent activity is picked up by internal controls and auditing.

Depending on your type of business, there are plenty of ways to get a handle on your internal controls:

  • run regular stocktakes with an experienced manager or third-party expert to check for suspicious patterns;
  • automate expense checking to highlight duplicate payments (would two lunches in one month really cost exactly £7.84 each?);
  • flag round payments within expenses (often an indicator of excessive tip rounding);
  • make it compulsory for expenses to include detailed descriptions and reasoning;
  • review invoices that cross a certain threshold;
  • look for instances of the same supplier consistently winning new work; and
  • scrutinise your credit card statements or move instead to an expenses system.

Just remember to mitigate the risk of fraud systematically and with a healthy dose of common sense. Things aren’t always as they seem, which means a desire to raise concerns and talk about them like adults is vital.

What about external threats?

This is a topic in its own right (and one we’ll doubtless cover in future blogs), but every business is susceptible to cybercrime in the digital age.

It’s thought that UK firms were hit by cyber-attacks once every single minute during 2019, and the methods are becoming increasingly sophisticated.

Fraudsters have even taken to mimicking HMRC by sending unsuspecting small businesses emails that look official and which appear to originate from a government address.

However, just like any form of cybercrime, if it looks too good to be true, it probably is. Therefore, the best course of action to mitigate external attacks is to be suspicious of anything you’re not expecting to receive. Don’t open attachments, and always call the supplier, company, or body in question to ensure the email is genuine.

If you’re concerned about fraud and its potential impact on your business, get in touch with Chandlers for more advice.