Fraud: honesty is the best policy

I have been trying to draw attention to the recent increase in fraud. This
has led to the obvious question ­ how do we prevent fraud? Unfortunately, if you
are going to trade, employ and purchase you cannot prevent fraud. I could
suggest measures to really tighten up your accounts payable procedures but it
would take 90 days to pay suppliers who will in turn increase their price. The
cost of fraud prevention has to be balanced against savings and the ability to
be ‘fleet-footed’ in your business dealings.

What you can do is put trip wires in place so that you know within weeks, not
months, that you have been defrauded.

You can also reduce your risk profile. This is analogous to the purchase of a
domestic house: rather than location, location, location think recruitment,
recruitment, recruitment. If you only recruit honest people, no matter how poor
your control environment, you will never suffer internal fraud ­ (57% of all
reported fraud). If you recruit dishonest staff, no matter how fantastic your
control environment, you will always be defrauded.

It is simplistic and not helpful to say only recruit honest staff without
expanding on this point. Organisation need to take a risk-based approach to the
due diligence they carry out prior to recruitment. You may decide that the
individuals who expose you to the most risk are the managing and finance
directors; and heads of procurement, marketing and IT. You need to carry out
more due diligence for these positions than for other members of staff.
Disturbingly, I see an inverse relationship between pre-employment checks and
seniority. There will be fewer background checks on recruiting a managing
director than the receptionist. Obviously a dishonest managing director can
expose you to a much greater fraud risk than a dishonest receptionist.

Many people do not have faith in written references. Some employers are
afraid of the perceived litigation risk of giving an adverse reference.
Interestingly, I have not heard of anyone being sued for an adverse reference.
But I have heard of employers being litigated against for bland references where
an employee has gone on to defraud their next employer.

Don’t concentrate on designing out fraud, concentrate on having a better
fraud-risk profile than your competitors.

Simon Bevan is a partner at BDO Stoy Hayward

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