Protecting your private business from fraud

Transcription

1 Protecting your private business from fraud

2 As a private business owner, you want to do everything possible to cost-effectively protect your company against fraud. It s very likely that, at some point, your business will be the target of some form of fraud. And while there is no guaranteed method of fraud-proofing your business, there are a number of preventative measures you can take to lower the risk.

3 EY survey finds fraud is a global phenomenon According to EY s 13th Global Fraud Survey, fraud, bribery and corruption continue to occur at various levels around the world. Canadian private businesses are not immune to experiencing these risks. According to EY s 13th Global Fraud Survey: More than one in 10 executives surveyed reported their company has experienced a significant fraud in the past two years One in five Canadian executives believes bribery or corrupt practices happen widely in Canada (half the global average, but still a disturbingly high level) Six percent of respondents stated that misstating financial performance is justifiable in order to survive an economic downturn (rising to 11% among CEOs) One in 5 CEOs has been asked to pay a bribe Fewer than 50% of those surveyed see cybercrime as a significant risk Fraud is a real issue for private companies. Taking the necessary steps to lower your risk can help prevent it from occurring in your company.

4 Tips to protect your private business Common misconceptions about fraud Some myths My people would not commit fraud It could not happen to me I would know if something fraud related was happening in my company If fraud was occurring I would discover it quickly Even if fraud was happening, any damage would be insignificant

5 The hard reality It only takes one employee to perpetrate fraud Fraud risk is inherent to any private business in any industry Any private business can have gaps in its system of internal controls There is misrepresentation in every fraud, and those committing fraud become very good at covering up their actions A company s reputation risk is a greater threat than the direct loss

6 Keep on alert for red flags Some of the red flags to watch out for include: An employee who seems to be living beyond his or her means Employees vocalizing rationalization for inappropriate behaviours Unexplained profits and losses in the books Evidence of inappropriate relationships between employees and customers or suppliers Evidence of inappropriate relationships between employees and customers or suppliers An employee who never takes vacation An employee who works a lot of unsupervised overtime Evidence of financial hardship Tips to protect your private business

7 Reinforcing policy from the top down A strong ethical tone from company leadership makes it clear that fraud will not be tolerated. This means that your top executives must set an example of strong ethics and transparency. You should always be looking for opportunities in meetings and communications with employees to reinforce your company s code of conduct and clearly outline what will and will not be tolerated. It s important to remember that employees may come from varying backgrounds and may have worked in organizations that have very different conduct standards. Setting a clear and concise policy provides employees with the guidelines they need in order to properly follow your company s protocol.

8 Conduct background diligence Hiring the right employees is another major component of reducing fraud. When hiring new employees, check references and perform background checks that include press searches, employment, licensing and criminal history. You should also perform a verification of education, past employment (including reasons for leaving) and references. This can either be completed internally or using a third-party vendor who specializes in conducting employee screening procedures. It s a good practice to always check a potential employee s social media presence, as this may provide clues into their suitability for your business and confirm details they may have outlined in their job application. Tips to protect your private business

9 Establishing internal controls Establishing internal controls can help you prevent or reduce fraud and theft in the organization. Internal controls operate as checks and balances and can include activities such as reconciling bank statements and internal audit reviews, which can uncover whether the company s money is being misappropriated by management or employees.

10 Segregation of duties and signing authority No single employee should be responsible for both the approval and reconciliation of any function. Segregation of duties helps prevent fraud, as it creates the need to include more than one person to commit the fraud. Smaller organizations don t always have enough people to fully segregate duties but are often able to compensate through closer supervision of employees, particularly where the owner is active in the business. You should strictly control the number of people who can authorize issuance of a cheque and develop clear guidelines around when cheques should be issued. When an employee who has been granted signing authority is no longer with your company, their signing powers should be removed immediately. It is advisable to remove their signing powers and transfer them to another employee prior to the individual s exit from the business. Tips to protect your private business

11 Mandatory vacation An employee who never takes vacation may look like a diligent, hardworking overachiever, but sometimes that s not the case. Employees who have a fraud scheme underway often avoid being away from work or having another person perform their function for fear of detection. Encouraging mandatory vacation allows another employee to step into the role for a period of time, allowing them to identify potential inconsistencies or fraudulent behaviours.

12 Provide reporting channels Employees are entrenched in the day to-day activities of the business and are often the first ones who detect fraud in the organization. Implementing an ethics hotline that allows employees, managers and customers to report anonymously when they see something wrong is a great way for potential fraud-related behaviours to be brought to your attention. It s important to follow up on all tips so that employees recognize that their concerns will be addressed. It is often difficult for employees to take the first step of reporting these concerns; ensuring that their apprehensions have been taken seriously provides encouragement that the company is taking swift action and encourages others across the organization to come forward if they have suspicions or evidence of fraud. Tips to protect your private business

13 Surprise visits and site tests One of the best ways to prevent fraud is for employees to be aware that random audits of their department may be conducted at any time. Once a month, pick a transaction or policy associated with your business and have the employees in charge of those functions walk you through the details and process steps. Although these random visits or audits rarely uncover deeply embedded fraud schemes, the mere idea that random audits will occur may deter some employees from taking the risk. And if they do happen to uncover fraud, that s just one more reason to keep doing them.

14 Employee and management training Offering employee and management fraud training programs is a great way to demonstrate your commitment to preventing and detecting fraud. An effective fraud training program should include education of what actions constitute fraud, how fraud harms everyone in the organization and how to report suspicious activity. It s important that training be continuous and reinforcement of the antifraud policy include examples of behaviour that is and isn t acceptable. Training should stress the importance of employees speaking up when they see something that looks wrong. For managers, it is crucial to provide training around how to spot red flags of fraud and provide guidance around what to do when they suspect fraud. An engaging management training program should provide information around basic fraud schemes, what to look for and how to prevent them should they be identified in the business. This, combined with a strong ethics training program, will provide solid reinforcement to your company s code of conduct and policies surrounding fraud. Tips to protect your private business

15 Fraud can cause significant financial damage to private companies of all sizes. It can happen to any type of business in many different ways, and no business is too small to be targeted. This means that the revenue, reputation and long-term health of your private business could be at risk unless you take action. As a private business owner, you should take an active approach towards fraud prevention and understand where your business may be susceptible to fraud risks. Fortunately, there are simple things you can do to take control and help protect your private business. The most important investment you can make is to take the time to identify where you may be at risk from fraud. While risk-taking plays a part in business, you must know, assess and reduce those risks where possible to stay in control.

16 We can help

17 No two companies are the same, nor do they have the same fraud risks. However, there are many strategies private companies of all types can use to help reduce their fraud risk. Our Private Mid-Market team is focused solely on private companies, and we welcome the opportunity to discuss your unique business needs further. Please learn more by visiting us at ey.com/ca/pmm Contact us

18 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young LLP. All Rights Reserved. A member firm of Ernst & Young Global Limited This publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact Ernst & Young or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this publication. ey.com/ca