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STICKY FINGERS – ARE YOU PROTECTED AGAINST FRAUD?

Are you taking appropriate measures to protected your business against fraud? Peter Cox gives advice with practical tips on how to keep a tight rein on your stock, finances and subsequent profit. 

Visiting many different retail and serviced-based businesses over the last 12 months I have become concerned at the potential loss of cash and profits that is occurring.

Most owners and managers associate fraud with large corporations they read about in the newspaper or on the web. However, every business, larger than a one-man news kiosk, offers plundering opportunities to the employee looking for them. Embezzlement is like a silent, insidious cancer, hidden and unsuspected, gnawing at the vitals and sapping the lifeblood. When finally discovered, its effects may be irreversible and its damage irreparable. A terminal case, the pest management business may die ‘after a lingering illness’.

With soaring expenses, shrinking margins of profit, and ever-increasing competition, the owner or manager of a pest operation is hard pressed to keep the doors open, the vehicle operating and remain solvent. They are in no position to share their hard earned profits with thieving employees – the delicate balance between financial solidity and insolvency may well hinge on the ability to plug the leaks

Most fraud in small business centres around false invoicing, bogus suppliers, staff issuing payments to themselves and concealing the paperwork on the computer, not ringing up cash sales as well as fraudulent credits on the EFTPOS machine. Shrinkage – theft of inventory – is also a component of fraud against a pest management operation.

Successful fraud occurs for two reasons – we have complete trust in our employees and book keeping is put it into the too hard basket.

So how do we minimise risk? Although this is not the definitive list, as managers and owners you should:

  1. Sign all or countersign all cheques, and internet and BPAY transactions. You are committing commercial suicide by allowing the bookkeeper to make out, sign and mail the cheque or process the online payment without backup paperwork.
  2. Do random stock takes of inventory in the shed and the vehicles and relate this physical count to the computer records.
  3. Make it your daily habit to review the bank account via the net. I do this with my business whether I am in my home office in Orange, NSW, or in a hotel room overseas.
  4. Get involved in the bookkeeping – do not become too dependent on the bookkeeper and make sure the accounts people take regular holidays.
  5. Start asking questions when you are regularly contacted by creditors asking for payment.
  6. Ensure all account sales invoices have a signature of the customer on it.
  7. Bank reconciliation is done to control the whole bookkeeping process; ensure it is carried out at east once a month on a regular basis. Some large organisations do the reconciliation weekly. If the bookkeeper does the reconciliation, the owner or manager needs to check it.
  8. Check the gross profit margin, when it starts to drop alarmingly it may well be in the purchase of stock, that is creditors are paid twice and one payment goes to the staff member. Another reason is that some cash sales are not being processed (the black economy).
  9. For those operations with a large inventory level, check also the stockturn. A jump in the stockturn without any noticeable increase in sales can point to an irregularity in the amount of stock on hand.
  10. Implement CCTV systems and review the footage if you suspect irregular activity and restrict after-hours access to the operation.

I know a lot of this is common sense, it is a pity some owners and managers do not display it in this area. Remember, if the fraud is ‘only’ of an amount of $1000, if your net profit margin is 10%, you will need to sell an additional $10,000 of business to recover the $1000.

In any situation where fraud is suspected, the employer must face the facts (as it is often hard to believe deceit from a ‘trusted’ employee) and take proven steps to reduce the risks and protect themselves against employee dishonesty. If they fail to act and then suffer loss, they have no one but themselves to blame.

There is an old Chinese saying, “May the gods protect me from those I trust. Against all others I can defend myself.”