Vigilance is key to countering fraud

PUBLISHED : Saturday, 06 June, 2009, 12:00am
UPDATED : Saturday, 06 June, 2009, 12:00am

In today's turbulent economic climate, a lot of small and medium-sized enterprises (SMEs) may be exposed to fraud, as they desperately attempt to boost their cash flow and sales. Businesses can minimise their exposure to fraudulent activities if they exercise vigilance and adhere to established standard practices.

According to Nick Robinson, national leader of forensic and dispute services at Deloitte China, there has been an increase in fraud and corruption cases - particularly involving SMEs - aggravated by the economic downturn.

'People are under pressure in a recessionary environment where shortages of cash and funds have driven organisations to move into more questionable areas of financing and funding,' he said.

Although fraud can occur in any industry, at any time and at every level within an organisation, Mr Robinson said that trading, export and supply sectors were more vulnerable to fraud because they relied on the business performance of other companies in the supply chain.

Deviating from standard business practices and internal controls to chase short-term gains could subject businesses to fraud, including employee fraud, according to Chris Lau, deputy president of CPA Australia Hong Kong China division.

Mr Robinson said employee fraud or management fraud could happen at all levels and were triggered by a combination of factors involving cash flow, rationalisation and opportunity.

'The opportunity emerges when a supply chain gets longer and supervision decreases. People will deviate from standard practices when they find themselves in a situation where they could be losing their jobs or when they are around people involved in this type of activity. This makes it easier for employees to rationalise this type of illegal activity,' he said, advising SME owners to look at the risk of fraud and corruption, and manage the risk with integrity.

'Business owners must be cautious about who they do business with, who their joint venture partners are and who their business contacts are within the environment. In a bribery case, people won't pay bribes with their own money, but they will use their company's money. There will be a link between the bribe or corrupt payment and a fraud, or the creation of funds within the company to facilitate the bribe payment.'

Mr Lau advises companies to consider using police and other reference checks on all new employees to prevent employee fraud. It is also essential to implement internal controls, such as splitting the roles of counting money in the till and operating the till, to minimise the level of fraudulent activities such as embezzlement and forging documents.

Other questionable practices that businesses should look out for include the exploitation of non-traditional sources of finance. Companies should also perform credit checks on potential customers, verify who the potential customer is and who is behind that business, impose credit limits or use a letter of credit if exporting is involved. To avoid paying for goods that are never delivered, companies can implement financial delegation controls to manage staff purchases and conduct reference checks on potential suppliers.

According to Mr Robinson, any fraud or corruption damages the reputation of an organisation, so it is worth the effort for SMEs to protect their reputations by resorting to risk mitigation.