Preventing internal fraud

The next article in the Remedy business advice series looks at preventing internal fraud.

Small businesses are just as vulnerable to fraud committed by employees as large companies, and often it never comes to light. It’s important that managers look closely at all staff from time to time. With the new Bribery Act now in force, it is important that business owners recognise the warning signs and put controls in place to identify where the risks lie. Here are six ways to help prevent internal fraud:

1.) Separation of duties

There will always be unscrupulous suppliers who are prepared to make it their business to get too close to buyers for everyone’s comfort. Any suspect purchase must to be overpriced to offset the “kickback” and every overpriced purchase causes damage to the health, viability and competitiveness of the business. If the accounts department is entirely separate from the buying function, it’s much harder for this kind of dishonesty to flourish because there then has to be collusion, and that multiplies the risk and divides the proceeds.  Get competing suppliers to quote for everything and rotate the list of usual suppliers regularly. This will help to prevent the formation of fraudulent arrangements, and remember, overpriced supplies means either greedy suppliers or corrupt buyers, and you can do without both.

2.) Rotate bank signatories

Even partners, co-directors, fellow shareholders and employees with years of loyal service can be tempted to stray from the path of honesty when they are habitually handling large financial transactions. Covering the administrative tracks of a missing cheque for a significant amount of money is not difficult. It’s easy to change the name of the authorised signatories and counter-signatories on company cheques, so periodically rotate them. If anyone wants to know why, you can tell them you’re acting on professional advice. An unannounced change of the bank mandate can throw up quite a few surprises.

3.) Beware the habitual early starter

Having a member of staff who invariably arrives earlier than anyone else can be great for the business but it’s a good idea to ask yourself why they should be so dedicated and keen, particularly if they are not in a senior position. It could be that they need to be first to reach the post in the morning and fraudsters can escape discovery for months after ordering supplies or making purchases charged to the company’s account. As long as the crook intercepts the invoices, reminders and threatening letters in the post, they will remain undiscovered. In a matter of months they could run up debts of tens of thousands of pounds and damage the company’s reputation. It may be wise to change the incoming post routine from time to time or arrange to collect your post direct from local Royal Mail office periodically. It may be sensible to separate the habitual “early risers” from the post.

4.) Check up on qualifications

If someone works for you with little or no supervision, it’s a good idea to make sure they’re doing their work. The trusted new employee could be an unqualified fraudster who knows just enough about your business to get the work outsourced to freelancers, suppliers or subcontractors. You could be paying someone’s salary or wages for months without realising that they’ve struck a verbal deal with a third party who’ll want paying eventually, perhaps after the fraudster has moved on. Put in place control systems to check references and qualifications and undertake unexpected spot checks on unsupervised employees with management buying responsibility.

5.) Review the credit checking

Every business runs credit checks on new customer accounts, but there is the possibility that one of the people responsible for doing the checks could set up a bogus customer account, approve it, then start supplying to a non-existent customer. Your accounting system would probably be fooled, and if you throw in a few regular refunds for non-existent supplies and someone has a damaging systematic fraud in progress. To avoid this, make independent verification and credit checks on new account customers through a third party. One of your professional advisors would probably be able to arrange it and that way there’s less chance of the “bogus account fraud” taking root.

6.) Look out for short holiday syndrome

Because bank cheques take roughly four days to clear, someone using multiple bank accounts can cover fraudulently drawn cheques. Using three or more accounts means that there are always funds to meet the next cheque to be presented. The fraudster has to keep on top of all the cheque movements, and an absence of more than four working days brings the whole thing tumbling down.  Most people like to take a couple of long breaks a year, so if a seemingly over-conscientious administrative employee insists on taking lots of short breaks of two or three days scattered through the year, it may be a sign of malpractice.


The vast majority of people who work in business and administration are honest, conscientious and truthful, but the few who are not can do enormous damage to an otherwise healthy business. Business owners are responsible for identifying and mitigating risks to the business and should stay alert to the possibility of internal fraud.  It is often the most amiable, agreeable and well-liked individuals who con their way into legitimate businesses with criminal intent, and their victims are often well-seasoned business people. By introducing simple but effective control measures, the opportunities for fraud can be eliminated.



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