By: Anton van Heerden

To create a sustainable business and prevent economic crimes such as fraud, the best place to start is to understand the human psyche. Believing that a person capable of crime can be stereotyped is probably the first mistake. Typically, most small businesses don’t believe that they are susceptible to fraud and thus don’t pay it much attention. They eventually pay a heavy price for this omission as small businesses are often the most vulnerable and easiest targets for fraud, and in particular payroll fraud.

In the United States, 39% of fraud cases occurred in businesses with fewer than 99 employees, with payroll fraud schemes accounting for nearly 10% of the $600 billion lost to fraud in a year. A scary reality is that on average, small business fraud lasts 24 months with the average American business losing 7% of revenue to fraud.

In the 2009 PricewaterhouseCoopers (PWC) Global Economic Crime Survey, South Africa was found to have the second highest level of fraud (62%) behind Russia (71%). According to the survey, accounting fraud has become increasingly prevalent and with the level having reportedly tripled since 2003. Next to asset misappropriation, accounting fraud is the second highest level of fraud globally.

Fraud practitioners point to three factors that are commonly found where fraud occurs – known as the Fraud Triangle. These are incentive/pressure, opportunity and attitude/rationalisation. In the survey, PWC found that 68% of fraud cases were attributed to pressure, 18% to opportunity and 14% is attitude.

Interestingly enough, in South Africa 92% of fraudulent crimes are opportunistic. As Professor Mervyn E. King says: “You cannot legislate against dishonesty nor legislate honesty.” The culture you create in your company is as vital as the management controls put in place to prevent fraud.

What is certainly clear is that fraud is a reality for all size businesses in South Africa and it should be a management priority to ensure that the correct culture is created and is supported by stringent measures to prevent and eradicate any forms of fraud.

Unfortunately there are still too many small businesses that are vulnerable because they fail to put basic controls in place. SCAM STOP says that 73% of fraud crimes would be avoided if proper systems were in place. According to Mervin King: “A man who collects honey will always be tempted to lick his fingers.”

In understanding fraud, we believe that there are five main causes in small businesses:

  1. Trust: 90% of people in a position of trust commit a fraudulent crime. Small business owners tend to form close relationships with their employees and thus have a high level of trust. For an employee to steal from you, you must trust them.
  2. Small workforce: With a small team, many business owners believe that controls are impossible, which is not true. Even with a small number of employees, controls can be implemented and will assist in reducing the likelihood of fraud. A positive aspect of having a small team is that you can monitor the well-being of your employees, which is often directly related to fraud.
  3. Failure to delegate: The desire to control everything is a common trait of a small business owner. As a result, there appear to be controls in place but as the owner has overburdened himself or herself with too many tasks, he or she does a poor job in executing them and the controls are lax.
  4. Unclear job responsibilities: ln a small business, it often seems that everyone is responsible for everything. This provides an opportunity for a dishonest person to overcome controls by being able to work in more than one part of the business.
  5. Controls not a priority: Companies with poor systems will always be a target. Controls are simply not always a priority for most small business owners. Spending money on preventive controls should be seen as an investment and not an expense. Much like insurance, you hope you will not need it – but if you do, controls can be there to help.

So how do you curb what is a global phenomenon? The first and most obvious solution is to implement a reputable accounting and payroll solution. This immediately reduces the power an employee has by virtue of its embedded controls. While people have egos, can be manipulated, may get desperate or maybe dishonest, systems are not. With regular and irregular checks, internal audits and a consistent focus on the psyche of your people, the incidences of fraud should decrease. This of course, should be part of the rules or policy of the company which is effectively and regularly communicated to the employees.

Where there is a will, there is possibly a way and sometimes even taking the aforementioned measures does not eradicate fraud, especially within the payroll which is difficult to detect. One way to identify any suspected fraud is to enlist the help of professional forensic consultants. An investigation will review how the apparent fraudulent activity took place, who participated, and the total monetary value involved. The findings of the review will be documented with a detailed description of the steps which were followed in the review process. The monetary findings are detailed in Excel documents, and these may then be used in legal or internal procedures

To prevent such an activity from reoccurring, it is important to conduct a risk and process assessment after a review. This is an evaluation of a company’s payroll and the processes followed in the payroll office.

During such an assessment, the following are some of the items covered:

  • Segregation of duties
  • System access
  • Processes and procedures followed in the payroll office
  • Aligning of payroll processes and procedures with the complexity of the business

The assessment investigates the resources, software and output of the payroll. The findings and recommendations are then documented and discussed with the client for implementation by qualified consultants,

In the payroll environment, the major fraud threats arise from a lack of processes and segregation of duties, and ineffective checking and reconciliation. Particular hotspots are the adding on and paying of ghost employees, incorrect payments, duplicate employee records and the manipulation of leave records. To counteract this, companies must ensure that user access rights support the segregation of duties. Also, a payroll should be checked on at least two levels. This second-level check should make use of audit trails and system-generated reports to identify the most common risk areas. Training tor this level of payroll user is therefore also of utmost importance.

The integration of skills, such as accounting, auditing, legal, and investigative, into a single team is the most effective way to expose and stamp out fraud and corruption. A payroll team with a good knowledge of tax principles, for example, can identify possible fraudulent activity around the manipulation of tax calculations and deductions.

Risk management consultations and training are an integral part of preventing commercial crime. By being involved in reviews, forensic consultants gain the skills necessary to identify possible risk areas and they can also use their payroll knowledge to make expert recommendations to clients about how to utilise their payroll system to best manage and lower risk areas.

If such measures are implemented, commercial crime can be prevented or at least detected early.