SMEs bearing brunt of fraud

11 July 2018 | Web Article Number: ME201810784

Business Tech
Quality Assurance
Security
SMME Development & Support

FRAUD affects small businesses much more severely than large corporates, with global research revealing that small and medium enterprises (SMEs) generally lose twice as much money than their corporate counterparts in the event of employee fraud.

Discussing the most recent statistics compiled by the Association of Certified Fraud Examiners (ACFE) and putting it into a South Africa context, National Director of Forensic Services at Mazars, Christo Snyman (pictured), noted that the average loss reported from a single incident of fraud was as high as $200 000 (R2.7 million) for companies with fewer than 100 employees.

“This is a shocking statistic when taking into account that smaller businesses have every chance to go under following such a loss. It is also worth noting that larger businesses only lose $104 000 (R1.4 million) from a single fraud event by comparison.”

SMEs bearing brunt of fraud

He said the main reason for this disparity is also made clear by the research. “From the report we can see that around 25% of fraud cases detected in large companies were as a result of improper internal controls, compared to the 42% attributed by small businesses for the same reason.

“Further to this, the biggest risks faced by small businesses are also different when compared to their larger counterparts, with 43% of fraud cases taking the form of corruption, and 22% of cases being noncash fraud (electronic funds transfers, for example). Corruption and noncash fraud only appeared in 32% and 16% of cases for large corporates, respectively.”

Snyman added that a lack of anti-fraud controls within a small company enables fraud to continue for much longer. “The vast majority of these fraud cases were committed by employees, and, if a company cannot effectively monitor the activities of the people inside its organisation, it may take years before it is discovered.”

The average duration of the fraud schemes captured in ACFE’s report was 16 months. “An important piece of information that one can take from this report, is how vital the implementation of a fraud hotline. The research shows that fraud losses were around 50% smaller at organisations with hotlines, than at those without, and that hotlines were responsible for bringing around 42% of fraud cases to light.”

Snyman said that SMEs in South Africa should use this information to put better preventative measures in place for their organisations.

“A well-structured set of measures to monitor and prevent any acts of employee fraud is, of course, of vital importance. Along with this, ACFE’s report shows us that all businesses need to put systems in place whereby employees can anonymously report fraud taking place.”

He said it was crucial to understand the profile of the average fraudster. “Company Directors and members of an organisation’s management have been shown to be more likely to commit fraud, and employees in charge of cash transactions need to adhere to strict anti-fraud measures.

“Organisations need to keep an eye out for warning signs, such as employees who start living beyond their means, develop addictions or spiral into debt, and companies need to put support programs in place to help employees through difficult stages, if need be.”

It was also imperative for businesses to conduct ongoing internal audit reviews of their operations. “Bringing in a third party to conduct an internal audit is the first step in creating iron-clad anti-fraud measures. Make sure that one’s company has dual controls in place when affecting payments, as well as a zero-tolerance policy towards fraud, which, if revealed, results in disciplinary action or criminal prosecution.”

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