Whilst we would all like to believe that our employees are loyal and honest, there are still many reasons why your employees may commit fraud and a great many ways in which they might attempt to do so. According to a recent report by the Association of Certified Fraud Examiners, the typical organisation loses five per cent of its annual revenue each year due to employee fraud.
Unfortunately, I have detected a great many cases of fraud and staff theft recently. I don’t go looking for them, they are a by-product of the other work that I do but the scale of the problem is beginning to worry me.
The business pyramid
Whenever I am preparing a business for sale or starting a new consultancy project, the first thing that I do is to prefer a financial model of how the business works. I call it a ‘business pyramid’. I start with the bankings for the last year, break these down into the different income streams, then use key performance indicators to work right back to the number of valuations that the business carries out every week.
The pyramid has to add up as a matter of mathematical fact and, if it doesn’t, there is always a reason. I also look at the expenses and all the key performance indicators and compare them to business norms. When something is wrong, it stands out like a sore thumb.
A residential sales business is quite simple to analyse. A medium-sized office in Southern England banking, say, £500,000 per annum might typically raise 150 sales invoices each year and make perhaps 500 payments to suppliers, so the total number of transactions will usually be around 650 per year. As a consequence, it is quite hard for staff to steal money from a residential agency business. Common scams involve a member of staff selling houses for people off the books and being paid in cash or taking cash backhanders from buyers in return for selling property to them at the low market value. These scams are quite easy to detect, however, because they show up clearly in the KPIs.
Every transaction is an opportunity for a dishonest member of staff to steal money. I have seen it all.
A letting business banking £500,000 per annum is, however, many times more complicated. Such a business in Southern England will have around 350 properties under management. That’s 350 holding deposits paid, 4,200 monthly rental payments, 1,500 invoices for repairs, 350 gas safety invoices, 350 inventory invoices and 350 deposit registrations. This totals 7,000 invoices and at least another 7,000 supplier payments and rental payments to landlords, that’s 15,000 transactions every year. Every single transaction presents an opportunity for a dishonest member of staff to steal money from you. I have seen it all. Rents that are not paid to landlords, payments for repairs that never took place, deposit refunds that are not paid back to tenants – the list goes on and on and on.
Protect your business
- 1. Prepare a written fraud policy. Staff will be less likely to try to steal from you if they know that such a policy is in place.
- 2. Check references carefully for all staff.
- 3. Review your internal controls. If one member of staff is responsible for payments without supervision, your business is wide open to fraud.
- 4. Swap roles on a regular basis. This quickly reveals suspicious payments or anomalies in bank balances.
- 5. Spend time getting to know your staff. This should help you to spot any anomalies in their lifestyles.
- 6. Prepare your KPIs and management accounts every month – they will quickly identify any anomalies.
If you do uncover a fraud, you will be very disappointed by the response from the authorities. The banks are often very slow to act and before they freeze suspicious bank accounts, they often spend a long time worrying about data protection and the rights of the fraudster. The police can also be slow to act because they see fraud as a victimless crime. You may also find that it is not easy to reclaim your losses. You may have fidelity insurance that covers the risk of employee theft but the insurance company may not pay out if your anti-fraud procedures are not sufficiently robust and even if they do, it will be some time before you receive payment, which can play havoc with your cashflow. I have seen businesses go bankrupt while they waited. When it comes to fraud, prevention really is better than cure – simple checks and new procedures could save your business from disaster.
Adam Walker is a business transfer agent and management consultant who has specialised in the property sector for more than twenty-five years. www.adamjwalker.co.uk