Fraud – Is your business at risk?

Apr 2, 2020 | Accounting, Business, Fraud, Small businesses

Fraud is a significant risk for businesses of all sizes and sectors. It’s not just something you hear in the news about a large corporation – it could be happening right under your nose in your small family business. You wouldn’t expect it, but fraud also happens in such organisations as schools or charities. Essentially anyone that is in a position of trust and responsibility could be involved in fraud, including your close long-serving colleagues, personal friends or even relatives. 

This makes it extremely difficult to detect fraud in your business and it usually takes significant loss over several years to actually notice it. However by that time it could be too late and your company may already be at risk of insolvency. This article will cover the main types of fraud in business as well as ways to prevent it.

Common types of fraud

There are hundreds of types of fraud that may occur in your business or your personal life, so don’t take this as a complete list. However, these are the ones that tend to be most common in businesses: 

Cheque fraud

This could happen in a few different forms, either using a genuine company’s cheque or creating a fake one. The genuine cheque can be altered (the payee’s name is changed) or forged (the fraudster uses a stolen blank cheque).  

Corporate identity fraud

This occurs when a fraudster impersonates a company’s identity or financial information to steal money, goods or services. This could happen through bogus websites, fake invoices or phishing emails. 

Invoice fraud

This usually happens through suppliers who submit false invoices for services or goods. Don’t blame the supplier straight away though, as a genuine supplier may have also been duped into submitting invoices to a false bank account. Alternatively, a dishonest employee could also fake a supplier account and set up invoices to a personal account. 

Insider fraud 

Also known as employee, staff or occupation fraud which happens when an employee (current or former) steals or alters a company’s assets or business information (for example customer data). This could involve simply stealing for personal gains or even threatening the employer with gained information to obtain money. 

Is fraud happening in your business?

Identifying that a colleague is stealing from your business is difficult, especially if the fraudster is in a position of trust. Besides, a lot of the time these people have the knowledge and ability to manipulate the financial records and books to avoid suspicion. This will not be easy, but there are some warning signs to look out for that may indicate fraud in your business. 

10 warning signs of possible fraud

1. Change in Habits
We tend to believe that colleagues who work extra hours and burn the midnight oil are loyal and committed. However, if your bookkeeper, office manager, accountant, or any employee with private access to the company’s books, products or property develops new habits, such as coming to the office on weekends, working through vacation time or working longer hours, it may not be loyalty to the business. 

2. Rarely takes holidays
This can be an indicator that an employee does not want colleagues to have access to the accounts or records in their absence and possibly expose wrongdoing.

3. Signs of recent stress
Quite often, employees who are committing fraud are under some kind of stress or emotional pressure that forces them to act in this way. Sudden debt, drug addiction, divorce, gambling, are some of the many factors that may lead to the problem.

4. May have over-extended personal finances or excessive lifestyle
Greed is one reason for committing fraud. A lifestyle that is inconsistent with income and excessive personal expenditure may indicate fraudulent behaviour.

5. Refuses promotion or job rotation and gives no credible reason
These are both unusual traits.  If an employee refuses on more than one occasion it could indicate an unwillingness to ‘let go’ in case a deception is found out. Similarly, if an employee insists on working in isolation away from others when it is not always appropriate it could be a warning sign. 

6. Defensive mechanisms
Business owners should be aware of employees who invent illnesses as a defence mechanism to divert attention and avoid being questioned about their handling of transactions and accounts. There may be good reasons to be extra vigilant. This is particularly the case where answers to straightforward questions are inconsistent.

7. Excessive secrecy – avoiding internal reviews
Be wary of colleagues who are avoiding or postponing scrutiny, such as internal audit reviews, for seemingly plausible reasons.  This should not be accepted repeatedly.

8. Inflated expenses
Employees committing fraud may also overstate their expense claims in addition to their main crime.  Monitor expenses and watch for perennial over spenders or spikes in claims.

9. Accounts not reconciled to underlying records
More than half of company fraud is committed by management and directors. One management fraud is to manipulate the financials to show that the business is performing better than it really is.  Often, in these situations, key accounting reconciliations are suspended to enable the manipulation to go undetected.

10. Posting to vulnerable balance sheet accounts
In order to cover fraudulent activity the perpetrator will need to process accounting entries to conceal the underlying transaction. Usually, balance sheet accounts that are rarely fully reconciled are used, such as suspense accounts or VAT or PAYE. If an unexpected build up of balances occurs on these accounts it needs to be fully looked into.

Ways to prevent fraud in business

This doesn’t mean you’re hopeless, or that there are no proactive measures to prevent fraud in your company. They may require some additional time and effort but it may be the difference between successful business and insolvency. 

10 tips to reduce the possibility of fraud

1. Check employees
Thoroughly check the qualifications and background of people in positions of trust as part of the pre-employment process.  Include credit reference checks and make potential employees aware that you will do so. Any reluctance to agree may indicate a background such as bankruptcy or previous fraud.

2. Restrict information access
Set clear limits on who can access confidential information and monitor the access.

3. Bank authorisation
Make sure you have absolute control of the bank mandate.  Require at least two signatures for cheques, and have a secure BACS authorisation process.

4. Bank statements
Always open bank statements yourself, or look online daily.  Look for unexplained bank charges or unauthorised transactions.

5. Change passwords routinely
Change security passwords for access to bank accounts, accounts software and other sensitive data routinely.  Track the issue of passwords.

6. Delegation
If you delegate to others, make sure you keep overall control and know what your colleagues are doing.

7. Rotate / share jobs
Rotate jobs periodically, or in a smaller business consider job sharing so that colleagues have visibility of what each other does.

8. Holidays
Ensure holidays are taken in accordance with the Working Time Directive regulations and are not voluntarily waived.

9. Anti-fraud policy
Have a clear anti-fraud ‘whistle blowing’ policy in place where colleagues know the signs, how fraud may endanger the business (and the employment of everyone) and how to report possible fraudulent activity

10. Outsource – it’s safer
Instead of managing the risk internally, outsource your bookkeeping/accounts and payroll, as these areas of your business may be the most exposed to a possibility of fraud. Outsourcing offers the highest degree of security and continuous auditing. 

Fraud prevention – resources 

Attached below you can find some additional free resources from the Fraud Advisory Panel. These include factsheets and helpsheets with further information on different types of fraud as well as ways to avoid it.  Download them by pressing on the links below: 

asfb-favicon2-transp Fraud hotspots in smaller business

asfb-favicon2-transp Introduction to Fraud indicators

asfb-favicon2-transp Pre-employment Screening

asfb-favicon2-transp E-commerce risks to online retailers

asfb-favicon2-transp Identity Fraud

Ready to outsource? 

Here at ASfB our “virtual accounts office” handles everything off-site on our premises, giving total confidentiality. None of your employees need to know the details of your business finances. The access to company funds is fully regulated and audited.

If you want to have a further chat on providing your business with a secure “virtual accounts office”, contact us on 01202 755600 or email