According to Action Fraud, the UK's national fraud centre, one in four SMEs are targeted every year and if that’s not concerning enough, in many cases losses can run into thousands of pounds before they are even noticed by the business owner. However, the good news is that fraud is usually an opportunistic crime and as such is preventable by implementing strong controls to prevent and detect improprieties along the way.

What assets are at risk?

Although cash is the obvious target for fraud, the reality is that every business asset has a value and is therefore at risk. Stock is of particular concern as it is constantly being shipped in and out and many people may have access to it. However, you should also consider other assets such as equipment, intellectual property and also data, the value of which may not seem immediately obvious but could be worth a great deal if it ends up in the wrong hands. A good starting point is to make an inventory of everything you have and make sure you check that they can be accounted for on a regular basis.

How can I prevent fraud?

I would suggest focusing on the following three areas:

Know your customers - How exposed are you to non-payment for goods/services provided? Reduce this risk by doing your homework on your new customers. Is the company well established and what is their reputation? Google is always a good place to start and, depending on the amounts involved, you should also consider performing credit checks or taking references. If amounts are smaller (such as in retail) be especially wary of ‘customer not present’ transactions and orders where the delivery address is different to the billing address. Any attempts to circumvent your usual processes should also be viewed with extreme caution.
Know your suppliers - As with customers, new suppliers should be vetted and wherever possible never make advance payments in full. Similarly, with long-standing suppliers there is the risk of intentional overcharging creeping in (possibly with the collusion of one of your employees). Also look out for payments being redirected – another common fraudster approach.
Know your employees - Whilst none of us like to think that any of our staff are dishonest, there is always a minority who think they are ‘owed’ more than just their wages; whether that be by appropriating the odd item of stock or over-claiming on their expenses to more sustained activity involving false invoicing, pilfering cash or abuse of the company credit card. To avoid temptation it’s important to display a clear code of ethics and to clamp down hard on any infractions. Also watch out for employees who seem reticent to take holidays and make sure you vet all new staff thoroughly before hiring them.

How can I detect fraud?

The best way is through strong controls. Your accountant should be able to give you advice specific to your business but start by considering the following:

Target areas of your business based on the level of risk, initially looking at the biggest areas of revenue/costs and then work down.
Wherever possible, segregate duties so that there is more than one person involved in every process, i.e. the person placing sales or purchase orders should be different to the person authorising and processing the payments.
Implement physical controls (such as access restrictions) to stocks and valuable assets and ensure these are inventoried regularly.
Regularly compare your performance and cash flow against your budget or last year’s results. If there is something materially awry, it will stand out a mile.
Think about the level of supervision across your key functions and the formality of your authorisation process. No matter how small your business, there should be a clear ‘audit trail’ to ensure the accuracy and legitimacy of each transaction.

If you run a small business, some of these recommendations may seem onerous. But remember, even a fraud of £100 per week could add up to over £5,000 in lost profit over a year and potential lost sales of many times more. A strong control environment does not require an army of people. It just requires clear processes that are adhered to every day and a commitment from you, as the business owner, to roll up your sleeves and keep your eye on the nitty-gritty of your business.