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DTE Forensic Accounting warns of internal fraud in small businesses.

DTE Forensic Accounting Services : 18 June, 2007  (Technical Article)
Too much trust and a lack of checks and balances in family run firms can easily lead to heavy losses wards DTE Forensic Accounting Services.
Businesses are being warned to beware of employee fraud following a scam that left a family-run company facing a financial crisis.

The ruse involved a trusted secretary at an insulation business in Blackpool who was jailed for 12 months after swindling her employers of £60,000 through bogus supplier payments and a payroll scam.

Nick Fail, head of DTE Forensic Accounting Services, fears that other businesses could become the victims of similar scams and is urging them to take preventative steps sooner rather than later.

"Our team helped police to prosecute the fraudulent bookkeeper and evaluate the financial impact of the fraud, which had spanned several years. Although we became involved in this case when it was already too late, it isn't too late for other companies whose financial controls may be similarly at risk," says Fail.

The fraud was simple: the bookkeeper paid herself a massively inflated salary by adding nonexistent overtime to her pay and also made payments to fictitious suppliers, which ended up in her own bank account.

"She received some £60,000 as a result of the fraud, but the total cost to the company was nearer to £80,000 when PAYE and national insurance contributions on the fraudulent wages had been taken into account," explains Fail.

"In addition, the loss seriously impacted on the company's cash flow, resulting in the threat of redundancies elsewhere in the workforce, a delay in growth plans and a loss of reputation."

The victim was a small family company where all the employees knew each other well and were trusted implicitly. The bookkeeper had been a close family friend of the owners and as a result few financial controls were in place.

The fraud was possible because of the following factors:.

* There was no segregation of duties. The bookkeeper had sole control over all the accounting functions of the business.

* No checking of the bookkeeper's work was carried out by the directors. For example, the payroll was not reviewed before payment and there was no effective way of recording and authorising overtime.

* There was no proper system in place for reviewing and authorising payments to suppliers.

* The directors would sign blank cheques so that payments were not interrupted if they were away from the office. It turned out that the bookkeeper had accumulated stocks of these from which she could make payments to herself whenever she wanted.

* There were a number of other risk factors including the bookkeeper's financial difficulties and poor time keeping.

Fail adds: "This disturbing case is a cautionary tale to all businesses, and the central message is never think 'it can't happen to us'. In 2005 the annual economic cost of fraud was some £20 billion, or £330 per head of population, according to official figures, and this cost is believed to be rising."
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