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Fraud prevention strategies for SMEs

According to Action Fraud, the National Fraud and Cyber Crime Reporting Centre, as many as one in four small businesses fall victim to fraud, resulting in an estimated loss of £18.9 billion to SMEs in the UK. It’s a staggering figure and depending on the extent of the losses is potentially catastrophic for small businesses.

Accura, the research arm of Vocalink, reported that Millennial entrepreneurs are more vulnerable to fraud attacks, with 35 per cent of young business owners claiming to have been a victim of some sort of scam. This figure rises to 55 per cent for entrepreneurs under the age of 25. Comparatively, fraud offences against business owners over the age of 45 is as little as 2 per cent.

Clearly, fraud is an increasing threat to SMEs, and it would appear to be a particular problem to small businesses run by Millennials. We’ve put together a guide to highlight the main types of fraud SMEs may encounter and some prevention strategies. Protection for SMEs is all about risk reduction. On a related note, read our article on retirement savings scams and how to protect seniors from fraud

What are the main types of Fraud?

The main types of fraud are fake invoicing, mandate fraud and CEO fraud. Fake invoicing can be committed by external fraudsters, suppliers themselves or employees. Mandate fraud is when a fraudster gets you to change a direct debit, standing order or bank transfer payment from an organisation or person you make regular payments to. CEO fraud is niche, but it is highly successful. It’s when hackers design and send a fraudulent email, pretending to be the CEO, to a member of staff requesting a bank transfer.

Fraud is a major challenge to SMEs, and can have serious consequences, but with a few simple strategies, the chances of falling foul are much less.

Know your customers

Fraudsters can come in the guise of customers. Either using forged currency, using someone else’s payment card details to make a purchase, or by building a relationship with you to gain a credit agreement they have no intention of honouring, fraudsters posing as customers can easily dupe you if you are not looking out for them.

Know your employees

Employee fraudsters don’t normally fit the stereotypical criminal profile. They are often seen as exemplary and loyal employees, and nine out of ten of them are first-time offenders. For most it is a case of opportunism, which is enabled because the management trusts them so much. Action Fraud report that as many as one in five small businesses have been defrauded by an employee at some point during their trading.

Look out for false travel and subsistence claims, misuse of the company credit card, colluding with suppliers to falsify invoices, abuse of flexible working and false overtime claims, theft of company assets, bogus payments, self-authorisation of payments to oneself, theft of incoming cash, and false accounting to cover up theft.

Be aware that most fraudulent activity started by an employee comes about from difficult circumstances. It’s usually an act committed by a normally moral employee under financial strain.

Know your suppliers

Managing your suppliers is absolutely crucial to your business. Fake invoice fraud is rife, and there are plenty of fraudsters and dishonest companies out there looking for an opportunity to steal your money. Be vigilant about overcharging, and employee collusion with a supplier. Do your research on suppliers and regularly review their financial health. Credit reference agencies can help with that. They will charge a fee, but it could be worth the cost.

Know your assets

Identify, monitor and secure your business assets. Your assets consist of both tangible and intangible items and are what gives your business its value. Assets include buildings, vehicles, office equipment, stock, money, customer data, industry knowledge, ideas and even reputation.

As well as the obvious importance of protecting assets for the solvency of the business, there are legal obligations too. The Data Protection Act 1998 stipulates a number of strict rules regarding the use of personal data.

Implement appropriate systems and controls

Small businesses are particularly vulnerable to fraud purely because they are slow to set up proper systems of control and often don’t appropriately segregate accounting duties.

  • Assess your customers’ profiles and use your common sense. If a business transaction seems too good to be true, it probably is.
  • Introduce order processing systems to ensure you are only charged for what you buy.
  • Have a single point of contact with each supplier and always call them through the switch board to verify changes to any payments.
  • Don’t overlook the importance of implementing internal checks and balances for accounting systems.
  • Know your employees well. HR software can help you keep tabs on sickness, holidays and important employee information, as well as keep you up to date with performance management.
  • Audit high risk areas often. Maintain consistent scrutiny of payroll and expenses.
  • Implement a streamlined cash monitoring system.
  • Keep a close eye on online banking. In fact, watch bank accounts like a hawk. Cybercrime has never been more sophisticated.
  • Don’t leave bills, direct debits and paperwork with financial information on lying around.
  • False invoicing is increasingly an issue for small businesses and is most easily scammed using fake email addresses. If you accept invoices by email, check invoicing emails with your system prior to payment. The best prevention is to use accounting software with a platform allowing you to send POs and receive invoices online that only bone fide suppliers are signed up to.
  • Check bank accounts regularly and report any suspicious debits to your bank.
  • Create a culture of fraud awareness in your business. You need whistleblowers.

Know when to seek help

When you suspect fraud, especially from within the company, you would be advised to seek the help of a professional accountant. Specialist forensic accounting services from certified forensic accountants can help investigate fraudulent activity. Prompt action could save a small business thousands of pounds.

Most of all never become complacent. You can also read our related investment fraud to learn more about this topic.

Category: B2B News

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