Fraud doesn’t just happen to big Companies
it can happen to you too!

50% of Small and Medium Enterprises (SME’s) the victim of fraud

The 2006 Fraud Survey results highlighted that 47% of all respondents have experienced at least one fraud, up slightly from 2004’s 45 %. The average value of fraud was in excess of $700,000. For New Zealand respondents this was lower at $480,000, but this doesn’t mean that it is any less of a problem.

Consistent with the 2004 survey, the majority of frauds impacting on SME’s are committed by employees, often long serving and trusted, with the main motivation being greed and lifestyle. The frauds were most often discovered by internal controls. Interestingly, internal control failure was the most common reason for the fraud occurring in the first place, with 63% of frauds attributable to poor internal controls or the override of those controls.

SME’s have tended to have a more relaxed attitude towards fraud. This could be attributed to the increased difficulties in having internal controls, such as segregation of duties, or the closer working relationships in SME’s meaning a higher degree of trust exists between employees. Whatever the reasons, SME’s actually experience a higher incidence level of fraud, with 50 % of SME respondents experiencing at least one fraud in the past 2 years.

In a recent fraud case in New Zealand involving the misappropriation of $240,000 the owner of the SME concerned stated “We were all pretty good friends and got along well….. I don’t know how she could come to work every day and act so normal.”

22% of New Zealand frauds occurred purely because they took advantage of an opportunity. Clearly the opportunity to commit fraud increases where there are less internal controls and where there is a greater reliance on trust, such as may be the case in many SME’s.

One of the difficulties facing SME’s is their ability to absorb the cost of a fraud if it occurs. The fraud survey identified that in over 40% of the fraud incidents, none of the money lost was recovered, whilst the actual recovery rate of around 37% of the total dollar amount lost is still quite low. Those figures don’t take into account the additional financial impact, including business interruption, of having to deal with the fraud and the enormous reputational impact a fraud can have on a business. The fraud and the consequential costs can be crippling to an SME.
In order to better manage the risk which fraud poses, SME’s should consider the following common sense precautions which could save a lot of disruption, adverse publicity and money in the long term:

• Senior management must establish a good ethical tone at the top. Poor ethical leadership featured in the top four reasons for unethical behaviour to occur within organisations. Make sure you set acceptable standards that are monitored;
  
• Implement adequate segregation of duties and strong internal controls that are difficult to override. Where it is difficult to have adequate segregation of duties and internal controls, implement another fraud risk management strategy to manage the risk;
  
• Have a strategy to periodically review transactions and to observe unreasonable variations in the SME’s financial records;
  
• Look for and take notice of red flags such as employees who don’t take leave, live beyond their means and don’t delegate work - listen to your instinct; and
  
• Ensure that pre employment screening is conducted for all new employees and verify the identity of contractors.

Implementing these reasonable steps will help to better manage the risk of your organisation becoming another statistic or news headline.

The KPMG Fraud survey is conducted biennially with Trans-Tasman respondents contributing. If you would like a copy of the survey or would like any more information about the topics discussed in this article please call Sasha Cleaver on 09 363 3480 or email sashacleaver@kpmg.co.nz