South African small businesses face big challenges when it comes to managing fraud risks. Financial strain, rapid growth, and a lack of resources and expertise create ample opportunity for motivated fraudsters to take advantage of small businesses.
There are loads of definitions for the term fraud. International Auditing Standards (ISAs) define fraud as follows: “The term ‘fraud’ refers to an intentional act by one or more individuals among management, those charged with governance, employees or third parties, involving the use of deception to obtain an unjust or illegal advantage”.
The latest Association of Certified Fraud Examiners (ACFE) Report to the Nations shows that South African companies experience the highest level of fraud in sub-Saharan Africa, followed by Kenya in second place and Nigeria ranking third. This is a damning indictment of how exposed and vulnerable South African small businesses are.
This article will bring two fraud incidents that occurred within South African SMEs and German SMEs. Chief Executive Officer of Western National Insurance, Jurgen Hellweg, explains that one of their clients became aware of many anomalies on his financial statements and stock sheets. After investigation, it was traced back to a manager who was pocketing cash instead of “returned” stock.
As a result, our client suffered a loss of over R 700 000 over a two-year period, which the insurer settled. The discrepancies were not detected earlier due to the cancellation of stock take operations during the Covid-19 lockdown period but were eventually identified when the normal stock take process was resumed.
In Germany, a medium-sized enterprise producing office furniture, senior personnel was under excessive pressure to meet financial targets, in particular sales targets set by the owner-manager.
To meet these targets and improve their career, senior staff members decided to overstate revenues by recording significant fictitious revenues during the last quarter of the year. The enterprise was subject to mandatory statutory audit for the first time as it exceeded the relevant criteria of Art. 267 of the German Commercial Code.
As part of the statutory audit, the appointed auditor performed substantive analytical procedures relating to revenues using disaggregated data and compared current revenues reported by month and product line with data of comparable prior periods. In that way, fraudulent financial reporting was discovered.
Small business owners should educate themselves about various frauds and the financial ramifications they may bring to their business. It is critically important for small-and-medium-sized enterprises (SMEs) to employ mechanisms to protect their companies from fraud risks, especially now that we live with the COVID-19 pandemic which has cast shadows on our lives.
Committing fraud could be attributed to some things. The pressure to achieve an expected earnings target can lead is said to be one of the reasons for people to commit fraud. The paper issued by the European Federation of Accountants (FEE), it posits that the existence of national and international criminal networks can increase the risk of fraud.
How Can SMEs Prevent Fraud
SMEs must utilise the most effective measures and mechanisms to prevent fraud. It is prudent and advisable that SMEs can the right insurance for their business, even though it is not relatively big.
A paper issued by the European Federation of Accountants (FEE) in 2005, enumerated and elucidated measures that SMEs could employ to prevent the risk of fraud. This article will focus on ways, which are setting up policies and procedures and whistle-blowing.
Set Up Of Policies And Procedures
A sound internal control system represents one of the most efficient ways to detect and prevent fraud within an organisation. SMEs should set up equally effective though often less sophisticated internal control systems than larger enterprises, mainly employing documenting basic policy statements and procedures (ideally by a small team and not by one person only, the so-called “Four Eyes” principle) and distributing them to all employees.
The policy statement of an enterprise should include a mission statement and ethical rules and indicate the consequences for those who perpetrate fraud and how suspected fraud can be reported.
In some cases, fraud can be suspected or identified by colleagues. It is very important to encourage such people to speak out, to be able to stop fraud. At the same time, it should be ensured that people who report fraud do so in good faith and have real proof. As mentioned before, a channel for reporting suspected fraud should be provided by SMEs policies and procedures.
It should be ensured that those who report fraud in good faith are not harassed or victimised by the perpetrators of the fraud – their identity should be protected, if necessary. It is also important that fraud reporting should not be financially rewarded, as that may create incentives to report fake fraud cases to obtain recompense. For more information, visit www.hulisa.co.za.