ALEX McLAREN

Occupational fraud and abuse, the economic cancer that most businesses do not want to acknowledge, is now more prevalent that ever before.

A recent survey sponsored by the Association of Chief Police Officers suggested that fraud could be costing the UK economy as much as £20bn per year. However this amount, enormous as it may be, is certainly only the tip of the iceberg. The problem is that these figures are representative of reported fraud and to add insult to injury it is estimated that less than 5% of fraud is reported. On this evaluation, as much as £400bn could be lost to fraudsters within the UK, or in percentage terms nearer 6% of business turnover.

Good fraud prevention plans begin with the understanding that an organisation may be at risk. However, many business owners do not want to believe they are at risk of fraud.

"We're too small for anyone to bother" or "I trust everyone here; they've been with me for years" are among the common objections given by business owners.

However, a recent government report agrees with ACPO survey mentioned above that fraud in all its forms is costing the UK economy £20bn per year.

A good place to begin the process of developing better internal controls is to educate owners about why they may be at risk.

There are at least three reasons why small or medium-sized businesses in particular are especially at risk for fraud. First, the very size of the organisation limits its ability to separate functions related to the authorisation, record-keeping, and physical safeguarding of assets.

Without this segregation of duties, internal control functions are weakened or susceptible to circumvention. In very small businesses, these weaknesses are mitigated through the owner's personal oversight. However, as the business grows, the owner is less able to review every transaction and the opportunity to commit fraud is increased.

Second, SMEs tend to disregard or subordinate the importance of periodic accounting functions such as account reconciliations and analyses. In other cases, the preparation of the financial statements is outsourced. Therefore, the individual transactions are never scrutinised by anyone within the organisation who has knowledge of their appropriateness.

Third, the management may not have adequate fraud awareness. That is, they may not realise the areas in which the company is vulnerable to the risk of fraud and, therefore, do not take the appropriate measures to prevent it. Along these same lines, it is common for the management of smaller businesses to believe that the close relationships that exist among a smaller group of people prevent fraud from being committed. In reality, these feelings of absolute trust may create an environment of perceived opportunity to commit acts of fraud.

Bottom line is quite simply that businesses must invest time and resources into the problematic area of fraud and abuse. Most employees do not set out in their career with the intention of defrauding their employer, but somewhere along the line, perhaps due to an unforeseen financial pressure, the "victimless" rationale and, of course, the failsafe opportunity, the means of occupational fraud flourishes.

There is a tendency for business owners to believe that financial controls are an unfortunate expense like insurance. As in the case of insurance, people are reluctant to pay for items for which they see no immediate benefit. One way to deal with this is to put internal controls in the context of an investment in the company.

The most valuable commodity a business owner/director has is his or her time. As we all recognise, an entrepreneur's time ought to be spent in those activities that generate the most income. Therefore, good financial controls are not just an expense, they are actually an investment that allows the company to become more profitable by freeing an owner's time to do what they do best - make money.

Similarly, it is not enough simply to make money, it has to be protected once it enters the company. As the value of assets increases, the measures to safeguard them also need to improve. Most business owners understand this concept in the context of physical assets.

Once the connection is made with financial assets, owners usually grasp that good financial controls are an investment in protection in the same way that a burglar alarm or better locks would be for more valuable inventory or office equipment.