WHILE high-profile cases such as Parmalat, Worldcom and Enron grab the headlines, the reality of fraud is that it is often low-tech, small-scale and all too achievable, particularly within small businesses.

That doesn’t make it any less threatening to the health of business, however. A recent Home Office report put the annual cost of fraud to the UK economy at £14 billion. It is very unlikely that this is the full story, as many frauds go undetected and unreported.

Nick Hood, a business turnaround specialist and partner at Begbies Traynor, the accountant, says that the idea of fraud in smaller organisations is often met with wide-eyed astonishment. The reason is that these companies have entrepreneurial roots and winning new business is their oxygen.

The financial controls and credit checks that a finance department within a large company takes for granted are not in place, and the prospect of a large sale is generally met with enthusiasm. The problem is that an order from an unknown company, or a large order from an established customer who usually puts in much smaller orders, can be risky. There are plenty of individuals who set up companies to work a particular market, establishing a track record of paying for small orders, then putting in a larger order only to default and disappear. This old-style “long firm” fraud is alive and well, Hood says.

It is essential to check companies and the individuals behind them. Among the modern business trends that help bogus individuals and companies appear above board are serviced offices and the trend towards meeting new contacts in hotel lobbies. It is very easy, he says, for companies to look good in plush surroundings, but everyone should be checked with credit agencies, Companies House and even competitors.

These trading frauds are not the only point of vulnerability, of course. Growing companies can easily lose the personal bond that existed between the owner-manager and the employees who helped to get the enterprise off the ground.

David Dearman, a partner at PKF, the independent accounting and consulting practice, says that it often comes as a shock to the owner-manager when they walk around the shop floor or office and find that, for the first time, they do not know everyone there.

This kind of transition point is just the time to introduce an objective risk assessment, Dearman says. “What is very important is instilling an anti-fraud culture based on an understanding of the whole business and its risk points.” Owner-managers must show their employees that they are ethical and that best practice is taken seriously.

Employees — whether disaffected or crooked — can be the prime movers behind some of the more complex and large-scale frauds, George Moore, a business turnaround specialist, says. Many companies have to put up with missing stationery, personal telephone calls and even the theft of mobile phones or computers. Larger scale fraud is often carried out by employees working in collusion with suppliers. Such frauds can be as simple as accepting kickbacks or they can be more complex affairs where an employee deliberately rejects goods already paid for as defective, returning them to the supplier who then resells them as new.

More ominous, Moore says, is the owner or partner defrauding fellow owners, investors or the tax authorities. This type of fraud often occurs when an owner feels that the business is not doing well enough to fund their lifestyle.

The fraudster sets up a parallel company and starts diverting income. Meanwhile, they may be submitting fraudulent tax returns, defaulting on the payroll and, all the while, asking investors for more cash to get the business over a supposed trading slump.

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