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Employee fraud: an overlooked risk for UK SMEs


UK SMEs are losing £18 billion every year to fraud, says a recent study, with 35% falling victim in the past year. How can the fraud threat be stopped?

The most obvious cost of fraud is immediate: research from Sage Pay found that UK small to medium sized businesses lose an average of £3,450.

But the financial loss can pale into insignificance when compared with the reputational damage. Bad publicity associated with a fraud can negatively influence suppliers, customers and potential employees, discourage investors and affect relations with regulators.

Despite these serious consequences, too many SMEs are unwittingly exposing themselves to the risk of fraud. Almost a third of SMEs (32%) do not spend money on fraud prevention and the average investment in fraud prevention, £1,881 annually, is just half the average cost of fraud.

Perhaps most striking is the failure to use simple existing systems to tackle fraud. Many don’t even use some of the tools and checks that come as standard with payment gateways, with only 22% using CV2.

But the most common cause of fraud can come as a surprise to many small to medium sized businesses.

Insider fraud threat

Contrary to popular belief, most workplace crime is carried out by employees. Common types of ‘insider fraud’ include: asset theft, payroll fraud, corruption, theft of intellectual property and selling sensitive company information.

Companies that are underperforming or failing to motivate staff are more likely to suffer fraud. However, there is usually a personal factor such as uncertainty about employment, money worries such as debt, illness or gambling problems. Indeed, one well-worn phrase has it that “fast women and slow horses” lead employees to commit fraud. Secrecy and stress should be investigated, not just for fear of fraud, but also to ensure employee welfare.

Jokes aside, behaviour that is not exactly suspicious but still unusual, such as refusing to take a holiday, can be a sign that something is wrong. This reticence to take a break is a red flag to official fraud investigators as it may mean the employee is concerned that their crimes may be uncovered.

Close relationships with suppliers are usually to be lauded. But being too cosy could suggest corrupt activities such as inflated invoices and kickbacks to the employee.

How can owners and managers get to grips with such subtleties and protect their business. As a minimum, SME owners need to have a stated anti-fraud policy that:

  • Verifies anti-fraud work practices are followed and detects fraudulent activity
  • Develops written procedures that map out work processes in areas vulnerable to fraud
  • Checks everything is happening as it should, including balancing and dividing key responsibilities

A few simple tips can help build this plan and cut the risk of employee fraud:

Top tips for tackling insider fraud

  1. Use an auditor – the expense may seem unnecessary but can often be paid for by preventing a single case of fraud. Auditors have an independent view of your controls and can check company finances.
  2. Spread responsibilities – having a single person in control of an important area leaves little room for safety checks. ‘Segregation of duties’ (or ‘dual control procedures’) means ensuring that no one person controls a transaction form beginning to end. More people involved means fraud is harder to commit and easier to spot.
  3. Tighten log-ins – have software that requires users to change their password at regular intervals; this will lock out any fraudsters that have copied someone else’s details and discourage those who are caught from passing the blame.
  4. Check out new employees – be extremely vigilant in checking references and contacting previous employers. There are specific databases for employers that provide information regarding potential employees.

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