Fraud - The Unseen Company Disaster Unless Checked

It is a matter of conce
that many businesses do not seem to be taking reasonable steps to defend themselves against fraud.

According to BDO Stoy Hayward's research, less than a third of UK businesses have a fraud-training programme and 40% do not have any fraud prevention measures in place.

The recession may be prompting businesses to cut costs by scaling down or dismantling the internal controls which act as a check on fraud - this could turn out to be dangerously counter-productive.

SMEs will not be in a position to operate internal controls on the scale of larger companies. However, any business, regardless of size, is potentially at risk and should take reasonable precautions to avoid falling victim.

When attempting to prevent corporate fraud, management must be aware of the warning signs and be willing to identify operational risk factors and implement effective solutions to the problems. Operational red flags are among the most important red flags of fraud to be aware of.

If the following occurs then you are more susceptible to fraud.

Operating in "crisis mode" or "fire drill mode". When companies don't establish "normal" operations because there is always a crisis, it becomes next to impossible for employees to determine when something out of the ordinary is going on. A constant state of chaos means that it is hard to pay attention to details, and things that might otherwise be considered unusual will not be flagged.

No clear lines of authority. Employees must understand the pecking order within a company. If they do not, they will be unclear about who receives complaints, and they may be less likely to report suspicious behaviour. Even in companies that utilise the "team" concept throughout, there is still a chain of authority that should be clear in case of trouble.

Lack of segregation of duties. This is one of the most basic internal control concepts in the accounting function. The idea is that no one person is allowed to have too much control over or access to an area. For example, the person depositing money to the bank account should not be responsible for updating customer accounts or for reconciling the bank statement. Either of those two duties would give the employee an opportunity to cover up a theft from the bank deposit. Companies without effective segregation of duties are more susceptible to internal fraud.

Lack of authorisation controls. Employees should have predetermined levels of authority, and well-defined levels that require additional authorisation. In addition to just requiring authorisation for transactions above a certain amount, management must also monitor employees to ensure that they are abiding by these authorization controls.

General lack of internal controls. One of the biggest operational red flags a company can exhibit is the lack of internal controls. Companies must have policies and procedures in place to protect the integrity of the accounting and finance function. When there are little or no controls in place, employees are free to engage in behaviour that harms the company, and it may go completely unnoticed.
The following are more red flags of fraud that every company should be on the lookout for:

Personal red flags. Characteristics or actions of an employee that raise suspicions about fraud.

Structural red flags. Deficiencies in a company's setup that make the company more susceptible to fraud.

Personnel red flags. Problems with the employment screening and hiring process that make it more likely that a company will hire dishonest employees.

Accounting red flags. Transactional irregularities that might suggest fraud is occurring.

Financial performance red flags. Pressure to meet certain financial targets that may increase the likelihood of fraud.
Warning signs in staff behaviour

Increased levels of stressr
Lifestyle not commensurate with salary.
Personal financial problems.
Reluctance to take annual leave.
Unwillingness to delegate.
Cosy relationship with contractors and suppliers.