A guide to preventing and detecting fraud in your organisation

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It is important to protect you and your employees from the impact of a fraud in your organisation. We would recommend that you put in place the following procedures and controls in your business to assist you in detecting and preventing fraud.

1. Segregation of duties – It is more difficult for an individual to commit a fraud if they are not involved in all steps in a process. Wherever possible don’t have only one person who is responsible for controlling an entire area of the business.  This in particular includes the accounting function but will also include other key areas.  For example ordering goods, stock control and despatch in a business where stocks include attractive consumer goods.

The involvement of several people reduces the risk of intentional manipulation or accidental error and increases the level of checking. Function which should be separate are:

• Initiation of a transaction
• Authorisation
• Execution
• Custody
• Recording

While small businesses may find this difficult even the involvement of a second person in a process can be beneficial.

2. People Control - Recruit the right people by selecting an individual with appropriate skills and training.  The importance of reference checks for training and employment is important to ensure they are the right person for the job and not putting themselves in a position to exploit your organisation. Also for current staff, management need to ensure that the staff are motivated and their training needs are being met.

Watch out for employees who are overly protective of their role – they may have something to hide.  Similarly watch out for disaffected employees, who might be bearing a grudge or those whose circumstances change for the worse or curiously for the better.

Be on the lookout for unusual requests from staff involved in the accounts function and also watch out for employees who never take their holiday. These could both be indicators of fraud.

Ensure that you have a clear policy that fraud will not be tolerated within the organisation and ensure that this is communicated to all staff.

3. Accounting Controls - Policies and procedures should be established in relation to accounting controls. Never sign blank cheques other than in exceptional circumstances and ensure that the corresponding invoices are presented with the cheques. Prepare monthly bank reconciliations, Creditor ledger reconciliations. Prepare monthly management accounts and compare these actual results against your budgets so you are aware of variances. Investigate the variances without delay and by taking prompt action you could prevent a fraud from developing.

4. Risk Register - Identify which areas of your organisation could be at risk, then plan and implement appropriate defences. Target the areas where most of your revenue comes from and where most of your costs lie.  Develop control to defend these areas.  Effective controls include:

• Segregating duties
• Supervision and review
• Arithmetical checks
• Accounting comparisons
• Authorisation and approval
• Physical controls and counts

5. Authorisation and Approval Controls – Reporting lines should exist between staff and should be clearly documented and communicated to staff.  All transactions should require authorisation or approval by an appropriately defined person. The authorisation limited should be defined. Example, all office stationery purchases may be approved by the office manager up to €500. Above this amount approval of the financial controller is required.

6. Physical Controls – This relates to the physical custody of assets and the procedures to restrict access to authorised personnel only. Physical controls are vital for assets that are valuable, portable, exchangeable and desirable. Examples of controls would be passwords for computers and lifts, keys / swipes cards for access to stock room or warehouse. 

The implementation of these six steps within your business will make it more difficult for fraud to take place in your organisation and they will help you to detect fraud in its initial stages before it seriously effects your bottom line.

Contact Deirdre McDermott Audit Director OSK for further information on preventing fraud in your business or in relation to our audit and accounting services or call  01 439 4360.

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