by Peter Coleman

FRAUD is usually associated with large companies, but the truth of the matter is that fraud is found in organisations of all sizes. It is important that small and medium-sized enterprises (SMEs) understand that they are not immune from fraud.

The impact of a relatively small fraud can be much more dramatic on a smaller company than on a larger one. Many small business operators believe that because they have small staff strength and they think that they know their staff well, they are not likely to be the target of fraud, or that they can easily recognise fraud at its early stage. This is always a false belief.

Case study

In a recent case, a small private company owned by two brothers was effectively put out of business by a person who had not only worked for them as a book-keeper for 30 years but was also considered a part of the family. This company had grown from a two-man business to an operation employing nearly 100 staff and contractors.

Their book-keeper, who had been with the company since its inception, had six staff under her to manage the accounts and sales collections.

This was a busy and apparently profitable business that gave the brothers the means to live in big houses, drive branded cars and go on expensive holidays with their families every year.

One day, the company's bank manager rejected the brothers' application to extend their overdraft facilities. The bank manager was concerned that the overdraft had been steadily increasing and the cash flow in the account did not match the financial statements presented to the bank to support the overdraft request.

The brothers called their accountant for help who then called in the Forensic Accountants. It became obvious that the book-keeper had, over a period of five years, skimmed nearly $3 million from the accounts. The brothers did not notice the missing funds as business had been booming.

The Forensic Accountants highlighted the need to pay closer attention to the procurement process as the purchases had increased more than the sales revenue and collections.

At the end of the investigation, evidence showed that the book-keeper had been taking small amounts of money for a period of time. As her financial pressures increased, she took increasingly larger amounts of money from the company to the extent where she could no longer balance or reconcile her own takings and the records of the company. She took her own life before she could be interviewed about the fraud. She had in effect stolen about five years' of the company's profits.

In the end, the bank refused to extend the company's overdraft and the brothers had to lay off most of their workers. The brothers were so traumatised by the fraud incident and what happened to their life-long friend that they closed down their business eventually.

Here are 10 easy steps you can take to protect yourself against fraud in your organisation. These steps are applicable to both large companies and SMEs.

Understand your profits

Large profits that you do not understand are more dangerous than large losses. Double-check the numbers and ensure that you are comfortable with the independence of your accountant, and that they have access to all the appropriate records.

Focus on distance

Operational risk increases with distance from head office. Even for a single operation, the risk rises with physical and organisational distance from management. Are you comfortable that your division heads have sufficient oversight?

Honour the Sabbath People

who do not take holidays or always stay late at work are not necessarily paragons of corporate virtue: 'Lifestyle' choices may be used to mask business realities and often frauds are only discovered when a person is away for sick leave.

Prepare to pay

There is no such thing as cheap risk management or segregation of duties. Utilise the experts to help you ensure that fraud risk management programme gets off on the right foot and stays there.

Invest with authority

The CEO is not the risk control function, but a risk control function without the CEO's backing will not prosper.

Reconcile with diligence

Reconciliation problems usually presage losses: a debit balance in a suspense account is usually not an asset. Double-check all the numbers and be prepared to query staff and management when they do not fit.

Track the cash

Accounting entries can be manipulated; cash disbursements cannot. Cash is the fundamental control, in that amounts of cash held can be counted, and values can't be faked - you either have the cash, or you don't.

Respect business quality

Volume is no substitute for value: your business was likely built on key customers who returned and gave you a base to grow. If these customers start to leave and you are assured that new and smaller-volume customers are replacing them, maybe something is going on.

Ensure it adds up

Accounting losses reflect business realities. If you feel that times have been difficult lately and yet your accounts give another story, could someone be glossing over the losses?

Watch your system

Computer systems are an open door to the heart of your business, and their integrity and security is not as complete as you think.

The writer is a partner with Deloitte Singapore and may be contacted at petcoleman@deloitte.com

This article was first published in The Business Times on September 23, 2008.