Is your business susceptible to fraud? : Three warning signs

18 February, 2016 by
Ken Burgin

Without even realising it, you could be setting yourself up to be a victim of fraud. Ken Burgin explains just how easy it is to be duped.

Ever had a trusted employee rip you off? When I spoke with a bar owner recently, she was still in shock after uncovering a six-figure fraud carried out by a 'trusted' manager over more than four years. I hope that doesn't sound familiar.

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Most people who commit fraud against their employer are not career criminals. The vast majority are staff members who have no criminal history and don't even consider themselves lawbreakers. Donald Cressey, a criminologist, calls it the ‘Fraud Triangle’. He says there are three factors that must be present for an ordinary person to commit fraud: pressure, opportunity and rationalisation. Think about how this could apply at your business: 

Pressure
This comes from a 'non-shareable' financial problem that can't be disclosed or solved in a legitimate way. It might a drug or gambling addiction, desire to impress friends or problems with a loan that must be repaid urgently. Non-shareable problems involve some sort of embarrassment or shame. They threaten the fraudster's status as a person who is trusted by others. In almost every fraud case, their financial problem relates to gaining or maintaining status.

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Opportunity
Opportunity arises when the fraudster sees a way to use their position of trust to solve the financial problem, knowing they are unlikely to be caught. Think of all the opportunities that arise with money handling at your business: balancing the cash against the POS readout, counting cash, making up floats, 'correcting' over-rings and errors. Inadequate stock control with liquor or food gives plenty of opportunity to trade these items for cash. Most hospitality businesses offer wonderful opportunities for fraudsters, with little monitoring of warning signs and sloppy cash control systems.

Rationalisation
This is the third part of the triangle. Cressey says most fraudsters are first-time offenders with no criminal record. They see themselves as ordinary, honest people who are caught in a bad situation. This lets them justify the crime to themselves in a way that makes it acceptable. They may say they were 'just borrowing it', felt they were entitled to it, had to look after their family or felt they were being underpaid and therefore deserved it. Sometimes they feel the employer is dishonest and should be 'sharing the spoils'.

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Prevention is possible in all three parts of the triangle. Do you have your 'sources' for information about staff problems? Ideally, regular staff reviews will give you an understanding of the 'whole person' and their needs. Drug, alcohol and financial counselling services are widely available, but you need to be bold to suggest them – this can be a sensitive topic.

Tight checks and balances with cash and stock handling will eliminate most opportunities, with unexpected spot-checks to keep people on their toes. You should also have a clear division of labour between those who count and those who check the figures – whether it's cash, liquor or food. Would an external stocktake service really be so expensive if it meant the job was done properly? Is there a good reason why the cost percentages in your recipe software are lower than the monthly food cost percentage?

Your Code of Conduct should also talk clearly about the value of integrity and honest dealings in the business, so rationalisation is harder ('but nobody said I couldn't borrow!'). A separate Theft Policy can be useful, making it very clear about grey areas. This is not about staff needing a sainthood as a condition of employment, but there are too many times that trust is misplaced through naivety or laziness. It’s time to wake up!