How to Prevent Fraud

The cost of ignoring fraud is high

The risk of fraud exists no matter how deep a business owner sticks his or her head in the sand! Companies are at greater risk from the fraudster if they ignore the threat and think "..but it will never happened to me..." Preventing fraud need not be difficult however and certainly not as expensive as dealing with it after it happens. It seems such a shame that entrepreneurs with great business opportunity ideas end up losing everything to the fraudster.

Set the tone from the top

 Every business needs a fraud policy. More accurately this is an "anti-fraud" policy. It is the attitude of the business to fraud. This may seem a simple idea to adopt, but it is surprising how many organisations do not consider the risk of fraud and are surprised when it takes place. Worse still, many directors, mangers and business owners set a bad example to their staff.

For example, consider the business owner that attempts to get a cheaper deal by offering cash to a supplier. He is fully aware that the supplier may not declare the income for tax, thus allowing for a cheaper service. When staff see this they may see the environment  encourages "fiddling" of their expenses. Any impropriety by senior staff will encourage fraud. This is why a fraud policy must set the tone - a message that fraud will not be tolerated.

The fraud policy may be a simple photocopied document pinned to a staff notice board. It might be a glossy published book circulated to all staff. The important point is that the anti fraud policy is communicated clearly to everyone - that fraud will not be tollerated and if discovered it will be dealt with properly.

Review your controls

It is important that a business examines its own security to fraud. It may well have controls in place within its accounting system that will deter the fraudster. For example it may require two signatures to authorize a new supplier being added to the system, and approval by a senior manager when this supplier gets paid.

Resting on laurels and assuming that these controls will prevent the serious fraudster from recruiting an accomplice supplier and then arranging them to be paid for false invoices (fresh air invoicing) - for payment requests when nothing has been provided - is a mistake. The fraudster could collude with another member of staff to set up a new supplier account, and then forge the supervisory signature when a payment is demanded. The fraudster is working 24 hours a day - not to make you money but to devise ways of getting round your systems and thereby stealing!

The message is that it is important to review controls continually, from the mindset of a fraudster, doing "what if" scenarios to see if there are ways in which the controls could be avoided.

A bigger problem than you imagined?

The trouble with fraud is that it is easy. Criminals see fraud as a business, their business risk is getting caught! If they think that they have a 5% chance of getting caught, this is a risk they will take - to make millions.

The VAT (value added tax) fraud that plagued the first decade after the millenium is a good example of an easy fraud. Dealing in mobile phones earns you lots of cash, if you do not pay the VAT. Criminals were raising fictitious invoices for transactions worth millions. with the tax system as it was in 2005/2006 it was easy to pretend to be turning over many £millions each month. At on point, the trade in mobile phones by "unofficial" traders was bigger than the global mobile phone market!

There are many other examples of types of fraud. They might not affect your business directly, but there is always a chance that you are caught on the sidelines of a fraud. By dealing with a fraudster unintentionally you might not lose any money, but you could end up taking the fall! do your due diligence on your customers and your suppliers. Just because you have been given credit easily does not mean you should buy blindly from the generous creditor - you could be laundering for the criminals!

Be aware, be suspicious and never cut corners!

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ChloeAliceWilson profile image

ChloeAliceWilson 7 years ago from Spain

It's a scary thought that the people you trust and employ in your business could be out to defraud you but I guess you have to be careful and protect yourself. Thanks for the reminder.

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    And in conclusion...

    So if you do nothing else, you must put in place a fraud policy. Then, review your anti fraud controls. Do not rely on these being checked by your auditor during his annual visit. For one thing their job is not to prevent fraud, and even if they have experience to do this they will not carry out this duty unless they are paid extra!

    It is necessary to monitor fraud controls regularly. The reason is that be being seen to be actively reviewing fraud controls on a regular basis, not just once every year, the very act of review will deter the fraudster. Remember, frauds happen in companies that are audited every year - very often the frauds have been going on for many years. Alternatively, the fraudster may wait until after the audit, when he will have 12 months in which to work undisturbed!

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