When company fraud is an inside job

POSTED: 2nd June 2014
IN: Guides

It might be a school bursar over claiming for hours, an employee accepting a customer payment but not recording the sale, or an assistant stealing merchandise and selling it on eBay.

It might be a school bursar over claiming for hours, an employee accepting a customer payment but not recording the sale, or an assistant stealing merchandise and selling it on eBay. Employee fraud isn’t always on the spectacular scale of rogue traders bringing down banks – but small companies suffer all the same, even from inflated expense claims. undefined

“In the absence of specialist support, small firms are always that much nearer the edge,” says Mike Emmott, adviser on employee relations at the Chartered Institute of Personnel and Development (CIPD). “It’s not that managers of smaller firms are less competent or experienced – they just don’t have the same cushion. They are often forced to work more on trust. They have less back-up and fewer cross-checks. So they often won’t know there’s a problem until it all goes belly-up.”

One in five small companies have been defrauded by an employee at some level, says Action Fraud, the UK’s national reporting centre for fraud and internet crime. The latest survey by fraud prevention service Cifas showed that staff fraud has increased by 40pc over three years. British retailers are losing about £1.5 billion a year from theft by staff, the Centre for Retail Research estimates. “It’s those on the inside who can do the most damage,” says Stephen Proffitt, head of Action Fraud. “They might have access to your key assets, and know how your processes work – and how to side step them.”

Small businesses are particularly vulnerable to fraud because time-pressed owners simply don’t have time and resources to oversee the minutiae of day-to-day business, or implement checks and balances. Research shows that many employees defraud their company because they know they can get away with it, and they can rationalise why they pilfer – they’re not paid enough for instance, or they’ve been badly treated, or fear they might lose their job.

But micromanaging employees isn’t necessarily a solution – CIPD research suggests employees who are too tightly monitored might feel more stressed and negative about their employer. There’s a fine line to tread between mutual respect and self-protection. However, says Action Fraud, small businesses can introduce processes that limit opportunities for misappropriating funds or placing too much trust with one person.

Flatter management structures typical of modern companies tend to give junior staff more responsibility. Often online business practices make it easier to hide dishonest transactions. So how can a company protect itself? Since the UK’s small business sector varies wildly – from technology start-ups to long-established family businesses – there’s no one-size-fits-all approach, says the CIPD. But there are obvious precautions.

Carry out rigorous checks before taking someone on, says Action Fraud. Check with at least two independent referees and verify personal information if you can. It also helps to create the right company culture – a robust anti-fraud policy statement will lay down your expectations and help establish a “zero tolerance” workplace.

Keep an eye out for unusual behaviour says Action Fraud - the worker who doesn’t want to go on holiday or doesn’t respect company systems and controls in place, or any employee with a sudden change in lifestyle, or who seems overly stressed or secretive, or who works longer hours.

By identifying what’s most valuable within a company – it could be data, knowledge or stock for instance – small businesses can begin to protect their valuable assets. Weak internal controls are a major factor in facilitating fraud, says Cifas – avoid having only one staff member who deals with accounts or invoicing for example. Companies also need to make regular checks and audits.

Training staff to be vigilant and having an anonymous procedure for encouraging colleagues to report theft might nip dishonest behaviour in the bud. Data theft is now a real threat to business – identifying who needs access to what information – such as customer payment details – and limiting access to sensitive details will reduce risk. “It’s not about distrusting your staff,” says Proffitt. “Just make sure you really know them.”

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