How fraud prevention can improve profits and cash flow

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In my last blog I spoke about the increased risk of fraud in the current climate and the challenges of SMEs in preventing fraud.  Whilst businesses can thrive on friendliness, informality can also result in loose procedures that leave a business exposed to fraud or error.  Here are some tips which should not only help you guard against fraud or error but can also help you drive improvements in profits and cash flow:

Practical segregation of duties, authorisation and review
Stand back and look at current processes and make changes where practicable. For example, if the payroll is prepared by the person who prepares the BACS payment there is a risk that a non existent employee could be included on the payroll. Can master employee data be updated for joiners and leavers by a different person?  It should not take up a vast amount of time for the payroll to be reviewed by a director (staff costs are normally a major expenditure, so it makes sense to do this from a commercial point of view, especially where costs vary from month to month).

Healthy scepticism
Previously trusted employees can perpetrate fraud. Not only can trust be misplaced, but a change in circumstances can lead to desperate measures (e.g. a spouse is made redundant and there is a huge mortgage to be paid).

Creating a culture of mistrust would be detrimental to the business.  However, an awareness of the areas that are susceptible to fraud together with the wherewithal to ask questions when things do not seem right can be effective. If there is regular management review (see below) carried out from a commercial perspective then questions can firstly be raised in a friendly and constructive manner.

Management review
Regularly reviewing financial performance helps ensure that a business stays on track and identify opportunities for improvements in performance. In order to properly review financial performance it is important for there to be relevant, reliable and informative management accounts (ideally monthly). (For further information on management accounts have a look at my blog Management Accounts: are beans part of your recipe for success?).

Where a fraud occurs it will either be reflected within a cost (or reduced income) in the profit and loss account or hidden as an overstated asset (or understated liability) in the balance sheet.

When reviewing the profit and loss account it is helpful to have an expectation of what the figures are likely to be (i.e. margin percentages and overhead levels and to look into anything that it is out of the ordinary). Performance reviews that focus purely on the profit and loss account may result in a fraud hidden in the balance sheet.

Reviewing the balance sheet should include looking at supporting information on debtors and stocks, for example, and may also result in cash flow wins for the business.

In most cases a strong review of management accounts will add great value by providing clues as to how profitability and cash flow can be improved. It can also be a deterrent and help detect fraud.

The bank balance
Fraud usually impacts on a business’s bank balance. A cultural focus on cash in terms of week to week management (including rolling cash forecasts) not only (stating the obvious) helps improve cash flow but can be another tool to help deter or detect fraud.

Employee matters
Not taking holiday may be a sign that the member of staff does not want someone else to take over their work. A lifestyle beyond that expected for the salary is another warning sign. Carry out proper checks on people when hiring staff, including references.

Employment contracts and staff handbooks can help send a clear message to employees.  Contracts could include a clause that makes it clear that employees are personally responsible for the losses arising from their fraudulent acts.  The staff handbook should set out what is regarded as fraud and policies regarding hospitality from customers and suppliers.  It also should explain the action to be taken if a fraud by another employee is suspected.

Finally, supervision and appraisal makes good business sense and can also help deter or detect fraud.

There is no one size fits all solution, but a review of the risks and making practicable changes will help reduce the risk of fraud. Most SMEs are unlikely to be able to have a watertight system of control and owners should be aware of the weak areas. Whilst fraud prevention can be seen as something that is negative, that doesn’t improve the business, many of the above tips should FIRSTLY help you improve your business’s performance, but are also a means of deterring and detecting fraud.

If you would like to know more about how this can be applied to your business then please contact me, David Lewis, on 020 3137 2279 or e-mail mail@camroseconsulting.co.uk.

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Comments

  1. I came across this article by Professor David Rosen, although much of my blog is aimed at slightly larger organisations, this case study may strike a chord!:

    Fraud at Work: Occupational Fraud: A case study http://www.darlingtons.com/blog/2013/01/14/fraud-at-work-occupational-fraud-a-case-study/

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