Fraud and the Small Business

Posted: Monday, 1 March 2010 @ 14:42
Fraud costs the UK economy many times more than all other types of crime taken together. The incidence of fraud is hugely under-reported, as the police have no interest in recording fraud as a crime unless they are also making an arrest. The fact is that there has been (and continues to be) exponential growth in the perpetration of fraud, brought about by the increase in cross border travel and ease of international communications through new technology.

We have all seen the emails which are dressed up to look like banks and other financial institutions. Danger often comes closer to home for small businesses and may be less obvious.

Internal Fraud

‘Internal’ fraud is instigated by an employee or sub-contract worker and may include where an employee assists an outsider.

Small businesses, particularly in the IT world, rely primarily on trust in their employees or outsourced service providers. Increasingly it is no longer necessary for employees or sub-contractors to be gathered together in an office. Most software or web developers can operate just as efficiently as a ‘network’ of people working from different locations.

If essential functions, such as financial record keeping, are conducted at a location remote from the core business, then the possibilities for fraud are almost limitless.
In recent experience, we found that a trusted employee had formed a company with a very similar name to the name of the company for which he worked. Hence, a bank account in a confusingly similar name could be opened. A proportion of payments properly due to the employing company were banked into the account of the other company. A downturn in sales was reported to cover this theft.

In another substantial internal fraud, a director had created a company of his own which he then commissioned to provide work for the company of which he was a director. As he held the cheque book, he wrote out hundreds of thousands of pounds worth of cheques to his own new company for unnecessary work that was never done.

The common thread in each case is that the guilty party controls the information flow back to the core of the business. There is no independent overseeing of the flow of critical information.

Those in charge of a small business are often entirely pre-occupied by the need to keep work coming in, to make the product or to service customer needs. In such circumstances it is very easy to miss the critical tell tale signs that the business is being defrauded as the more that is lost inevitably means that more hard work must be done to make up the shortfall. A self-perpetuating spiral of decline ensues.
Those who conduct their own small businesses would be wise never to leave any single aspect of the conduct of the business in the hands of one person.

Contact Cousins Business Law for advice on this topic.

Blog by Nigel Musgrove
Nigel has been providing dispute resolution advice as a solicitor for over 35 years. As well as advising SMEs and business owners on disputes he also offers a specialist licensing law service. View profile
Call Nigel on +44 (0)1285 847 001 or by email
This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation to discuss your particular circumstances.

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