Majority of SMBs unprepared to handle workplace fraud

A majority of Canadian small and medium sized businesses are not prepared to protect their organization against workplace fraud, according to a recent survey.

No less than 80 per cent of the country’s 1.4 million SMBs have no plan to deal with this type of fraud responsible for loses ranging from $5,000 to in excess of $200,000 per victim, according to a study commissioned by the Certified General Accountants Association of Canada. No less than 26 per cent or 290,000 SMBs were victims of at least one instance of workplace fraud last year, the survey found.

Rock Lefebvre, vice-president of CGA – Canada, typified workplace place fraud as “deliberate misuse or misappropriation of an organization’s resources or assets by employees, managers or company owners for direct or indirect financial gain of the perpetrators.”

“This is something that can happen in all levels or the organization, but we find that fraud by managers is nine times more damaging that those committed by rank and file employees,” Lefebvre, who is one of the authors of the study said.

The CGA also differentiated workplace fraud from so-called “white-collar crimes” associated with high profile cases such as those involving companies like Enron or executives like Bernard Madoff, now in jail for a high-profile Ponzi scheme. The accounting association said such crimes are often committed by a corporation and their officials for the benefit of the corporation or its principals. The typical white collar crime perpetrator is also likely to be a highly educated, white male in his mid-40s occupying upper managerial positions while workplace fraud offenders are younger people with significantly lower levels of education, the CGA report said.

Workplace fraud, also known as insider fraud, is prevalent in SMBs, according to Esther Friedberger Karp, a Toronto-based professional small and medium-sized business adviser.

“I see these types of things happen in companies where the owner has taken a hands-off approach to company financials and is not familiar with how the money flows,” said Karp, who is president and owner of CompuBooks, a business consulting, computer training and business process re-engineering firm.

Types of workplace fraud

Lefebvre said CGA has classified occupational fraud into more than 50 sub-categories of asset misappropriation, corruption and fraudulent statement.

The most common type of workplace fraud cited by SMBs is misappropriation of inventory or assets followed by misappropriation of cash.

“Most occupational fraud occurring in Canadian SMBs, however, falls into three general types: skimming, larceny and forged notes,” he said.

Skimming involves diverting funds received by the company before the actual amount is logged into the company’s books. Larceny, Lefebvre said, is “theft of funds” after it has been recorded in the books.

Some perpetrators also forge receipts or cheques to make it appear that the company is being billed by another business or is paying for delivered goods or services. The money often ends up in an account held by the perpetrator.

“We’re not talking about the theft of pens and staplers here. These are incidents that could involve amounts of $5,000 upwards. And we’ve found that a loss of $10,000 can put some SMBs in hardship,” said Lefebvre.

Sixty one per cent of respondents also said that fraud negatively affects employee morale, public and client trust as well as company valuation.

SMBs are complacent

Canadian SMBs collectively lost a “conservatively estimated” $3.2 billion last year due to workplace fraud, according to the CGA.

Despite these numbers, the survey found that more than half of the respondents of 59 per cent do not carryout periodic assessments of their exposure to fraud. No less than 74 per cent actually believe their exposure to occupational fraud is low but about 80 per cent admitted they are not prepared to respond to occupational fraud.

At least one-fifth of SMBs surveyed confirmed that fraud occurred in their companies four or more times in the last fiscal year.

Measures to combat fraud

Workplace fraudsters often use a combination of social engineering and technology, said Karp of CompuBooks.

For instance, in one company she investigated, she found that the person in charge of handling cheques had entered into the company computer that these cheques were made to pay business expenses. In reality, the person was pocketing the money. When the cheques came back the company, the person simply destroyed them to cover his tracks.

The perpetrator was found out because banks now take image captures of cheques for anti-fraud purposes, said Karp.

Among SMBs using at least one detection measure, 59 per cent rely on internal auditors and 49 per cent hire external auditors.

Fifty-seven per cent of victimized SMBs said they revised disciplinary actions for employees. At least two in five victimized companies modified protocols for hiring and retaining employees and adjusted policies and channels for reporting employees’ concerns about fraud.

Lefebvre said companies should also employ checks and balances in areas where cash and assets are handled. “”The most common mistake we found is that SMB owners rely on a single person to handle all financial dealings,” he said.

He also suggested that companies create an anti-fraud information program as well as mechanism for reporting fraud. “We found that most fraud as exposed by employees or through accidents and inconsistencies discovered by employees.”

Karp agrees. She said SMB owners should encourage rotation of duties and division of labour especially in areas where funds and assets are concerned. Here are some of her tips:

1. Have a team of employees that take turns kin handling duties such as disbursement, accounts receivable, inventory or delivery and dispatch. This ensures your company will have personnel to cover absences but also serves as a check and balance so that one person cannot cover up discrepancies.
2. Have a system for division that divides responsibilities. For example the person writing the cheques should not be the same person recording bank statements. The person receiving delivery should not be the same person checking inventory.
3. Encourage people to take their vacation. There are instances when fraudsters refuse to take vacations for fear that employees taking their place will discover their acts.
4. Audit often and become familiar with your business’ accounting. The more often audits take place, the less chances a fraudster has of hiding discrepancies.
5. Use accounting software. Look for software that provides an audit trail. Some products also have features that keep track of changes and deletions. This will help uncover questionable entries or discrepancies.

Nestor Arellano is a Senior Writer at ITBusiness.ca. Follow him on Twitter, read his blog, and join the IT Business Facebook Page.