Another episode in the Q&A video series for SME’s and business leaders.
Read this episode
Intro: I’m Stuart Ayling and in this episode of Q&A I’m once again speaking with Justin Hogg, Founding Director of Right Source. The topic for this episode is fraud in small business and we’re going to be looking at the most common sources of fraud as well as the key things you can be doing to minimise fraud in your business.
Stuart: I’m speaking now with Justin Hogg who has returned for another brief chat. Justin is the Founding Director of Right Source and he helps prevent businesses from running out of cash.
He provides the ability to have an honest conversation around financials and works with not-for-profits right through to multi-million dollar businesses so his experience covers a wide range of different types of business. Through these conversations Justin helps businesses to gain transparency, manage their risk around these areas of finance, and ultimately make better decisions. So thanks Justin for being here once again, look forward to having a quick chat with you.
Justin: Thanks Stuart. It’s always good. nice to be here.
Stuart: Excellent, well let’s make a start and get right into a because today’s topic is fraud in small business. Now it’s often the case that people will think about fraud it’s like the big corporate fraud White Collar crime people escaping with millions of dollars and you know, all the big headlines stuff. How does fraud really relate the small business? Is it a real risk for small business?
Justin: I actually find fraud is more of a risk for small business because they don’t tend to have the processes or controls of larger businesses. Now it may not be the multi-million dollar frauds but, I know a small business losing $50,000 can really hurt it so it can have an even more devastating effect in small business.
Stuart: Yeah that’s for sure, it’s you know, every penny counts. So what needs to be done in your experience from working at that accounting financial management perspective within a business, what needs to be done to ensure that a business is protected from fraud?
Justin: It’s a couple of points. One is that the business needs to be reporting and understanding it’s numbers because quite often fraud will pop up in where a number doesn’t look right for some reason and just by the fact of reviewing your numbers regularly you’ll actually catch it a bit earlier.
The other process of just more preventative is where you work with your financial professional and your Accountant to actually understand your business processes and make sure that there’s controls in place to stop fraud being able to occur rather than detecting it after it has occurred.
Stuart: OK so if we want to look at putting some of these practices in place, a business owner may think we’ll look I don’t want to have all these strict systems in place. My staff might think I don’t trust them. You know, it’s all going to become more hassle within the business. So what’s your recommendations on on that line of thought?
Justin: It’s putting these practices, or processes, into place to help prevent people getting themselves into trouble. A lot of fraud, actually 50% of frauds actually happen through internal, so an internal trusted staff member is the one who is committing the fraud.
And in my experience they don’t set out to commit fraud, they might have their children going away in a school camp, they haven’t got enough cash, they’re just going to borrow a little bit from the business. They fully intend to pay it back.
No one notices, something else comes up, they borrow a little bit more and then all of a sudden they’ve borrowed 50, 60, $100 thousand, there’s no way for them to get out of that they can’t pay it back.
That tends to be more the process that happens. So it’s it’s trying to make sure the people don’t get themselves into trouble as the first part. Whether you trust them or not it’s actually…umm, if you trust them and you care for them you actually want to put these things in place.
Stuart: So it really comes down having those sort of solid financial management practices in place around, around the whole sort of, well I was going to say around the accounting sort of the financial management process but where’s the biggest risk within businesses? Like for specific things that a business should look at having strong systems in place for when it comes to avoiding fraud and this financial loss area. What are the key things that they should be looking at having in place?
Justin: The easiest thing is around cash. That’s usually the biggest thing, I mean people might take inventory and that type of stuff but cash is the big one. And that can be through having a rotation of position so more than one person managing the bank account is it good way. Even if that means that if someone’s putting the transactions in someone else’s approving them.
If you can’t do that, and a lot of small businesses can’t because there’s just one person and that’s it, looking to get in either your accountant, your external accountant you might have, or there are other consultants who will just come in once a quarter and just check a few things out and just by having just by people knowing that someone else is going to be looking at it, will help prevent a lot of things happening.
Stuart: Yeah, so part of it what you’re saying there is part of it is the information flow for the business owner but also raising the level of awareness among the team within the business that these things are in fact being monitored and that there is a way that they’re expected the handle them.
Excellent. Hey look, one thing I would like to touch on before we wrap up is this area of cyber fraud. Now I know you’re not in the technology space you’re coming from the accounting perspective but there’s often online or email based sort of scams, which sort of the fall in the category of fraud from my perspective.
How does that activity connect to the good practices within the business? What are your thoughts on that?
Justin: One of the ones that I see a lot of is where you get you an email comes in, one good example of that is when if you set up a trademark for example. There are people who will monitor when trademarks are registered and then they send an email to the business who’s registered the trademark saying you need to pay this fee to ensure you trademark is maintained.
Stuart: Actually I’ve actually had that happen to myself so I know exactly what you mean. And you think, how do these people know what I’ve been doing?
Justin: Exactly. Because it’s public information in the trade mark space so they send an email through. It looks relatively legitimate so if you don’t have processes in place to make sure that suppliers are set up with the right authority or that invoices are paid once someone’s approved or verified they’re correct, it could be quite easy for these things just to get simply paid the money sent, and even if you realise after the fact that the moneys sent, you’re never gonna get it back. So it’s it’s having those processes that protect the business from just throwing the money away.
Stuart: Hey one of those steps you were just talking about, I know there’s a couple of businesses I know first hand experience with them where they actually call up they will make a phone call to the supplier to verify the first payment, make sure all the bank details are correct and if there is any other change part of the system is actually make that personal phone call to someone they know is a legitimate sort of a contact within that organisation to check the bank account details before they process any payment. Is that the sort of thing which you suggest they look at?
Justin: Exactly. And these processes don’t need to be complicated. And that’s a very simple process. New supplier or supplier sending an email saying they want to change their bank details processes is look up the business, you find out their phone number give them a call saying is this you, do you really want to change this, before anythings done. And that way you’re more likely to prevent anyone who is hacking into your system, sending you fake emails to update supplier to the wrong bank account.
Stuart: Excellent, well thanks again Justin for sharing those valuable tips. I look forward to speaking with you another time. Thank you.
Justin: Cool. Thanks Stuart see ya.