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
