Tuesday, June 3, 2014


Hass and Associates Cyber Security Sound Business Advice: Seven tips to proactively prevent fraud

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The personal battle of owner-operators against fraudsters

For autonomous entrepreneurs, fraud is a truly ominous and pervading risk. Private businesses are very susceptible to the threat of fraud because of the character of their enterprises.

Majority have no corporate structure to identify and/or engage with an occurrence, choosing often to shrug their shoulders and let it go.

Yet, there is a lot businesses can do to protect themselves. Like any big company, owner-operators can take steps to detect the signs of fraud and reduce the damage within their group.

A KPMG report entitled, “Who is the typical fraudster?”, recently released findings based on 350 fraud investigations. It showed a “distinctive model” that describes qualities and work habits of fraudsters. Appreciating these telltale signs can help you establish a workable risk management approach.

The study also disclosed that most fraudulent events are either steps to cover up losses or low productivity, or includes the misuse of assets (misappropriation or purchasing fraud). A revealing fact derived from the study is that the main cause for majority of the proliferation of frauds remains to be the exploitation of faults in internal controls (a surprising 74% of all cases had such unstable internal controls). In short, the opportunity for fraud is potentially high.

One other reason clearly arises from human nature: motivation. Fraudsters are often enticed by personal desire to satisfy a need such as an addiction or driven by a pressing financial problem. Strongly related to that is psychological justification. This factor must be present to lead people to breach the law and to commit unlawful deeds. For instance, they rationalize and convince themselves they are being short-changed and tell themselves they are merely “taking out a loan” and are planning to pay it back anyway.

Once fraud is committed, usually it is personal; and being so, private businesses are very prone to considerable damages. And more importantly, the effects of duplicity can considerably ruin an environment wherein senior workers are also treated as intimate friends.

Dealing with our customers who are private firms, we observe so many common organizational qualities which engender the opportunities for fraud. First, there exist no internal control systems, whether due to lack of knowhow, time, or, simply, due to childish trust.

Second, business owners have a tendency to foster more intimate personal connections with their employees and tend to trust them with major tasks.

Which leads us to a third threat. Trusted employees in private business usually perform independently, and, in most instances, manage a variety of responsibilities. A big company would never give to one employee the tasks of handling deposits, mail, and bank statement reconciliation, for instance. It is obvious that one person handling both record-keeping and assets, subjects the person to the temptation of misusing assets and manipulating accounting records to hide the fraud.

What then can a private business do to reduce the danger of fraud?  Seven tips below will show you some best practices that can help you improve in your risk-management capability:

1. Never give the task of handling your assets to only one person. Doing so can place you in a very risky situation and allows that person to manipulate your assets in case the opportunity and motivation arise. Make sure your banking procedures (e.g., withdrawals, deposits, account reviews, etc.) are assigned to different employees.

2. Be watchful on your financial tasks. Make certain that have access to electronic banking and remittance activity records. Impose a monthly report of your financial statement as well reviews and check if numbers match the sub-ledgers.

3. Never sign blank checks. This seems an obvious mistake; but many enterprises practice this to simplify payments. Determine to whom those checks are for. Are they individuals or firms you know?

4. Conduct independent assessments of financial procedures and examine the figures. Oftentimes, entrepreneurs overestimate the loyalty of persons and stop scrutinizing these kinds of tasks.

5. Conduct background evaluation on new employees. Fraud is not limited only to long-standing workers. There are persons who have the modus operandi of shifting from one business to another in order to commit fraud.

6. Beware of the “red flags” with your personnel. These are telltale signs showing aggressive attitudes, secrecy, arrogance, emotional stress, desire to micromanage, passing on blame and intimidation, and many others.

7. Never let your desire to remain “lean and mean” cause you to disregard the value of legal counselling services. Hire someone with the ability to assist you on the vital task of identifying possible risks, apply controls and prevent likely damages.

Private businesses are prone to fraudulent schemes. These businesses often have a built-in culture of intimate personal relationships and confidence. Hence, although the amounts involved may seem smaller compared to other firms, the potential for fraud are significantly higher, and the resulting damages can be even bigger and much more tragic.