Podcast 65 Transcript: Fraud

Written by Ian Portsmouth

Ian Portsmouth: Welcome to the Business Coach Podcast, an advice-oriented series that tackles the top issues and opportunities facing Canada’s small businesses.  I’m your host, Ian Portsmouth, the editor of Profit Magazine and we’ve developed this podcast in cooperation with BMO Bank of Montreal. 

When it comes to the English lexicon, 2009 will be the year in which the general public became intimately familiar with such terms as Twitter, adjuvant and staycation.  At the same time many younger people heard their first utterances of ponzi.  Indeed, investment swindles were a big story this year with Bernie Madoff and Montreal’s Earl Jones in starring roles.  But you don’t have to have a gullible investor to be the target if not the victim of fraud. In today’s increasingly complex and hectic business world, entrepreneurial businesses are prime candidates for being duped out of major dollars.  How big is the threat and what can you do to stop it?  I’ll put those questions and more to Cathy Penny, Director, Fraud and Electronic Monitoring at BMO Bank of Montreal.  Cathy, thanks for joining the Business Coach Podcast.

Cathy Penny: Thank you.

Ian Portsmouth: So how worrisome is the threat of fraud against small business and can you quantify the level of the threat?

Cathy Penny: Well, unfortunately, a lot of fraud goes undetected and there isn’t really any central reporting for this type of fraud but there have been various studies and estimates and it is estimated that 6% of revenues could be lost to fraud and in the U.S. that could be as high as $600 billion a year.

Ian Portsmouth: Those are staggering figures.  Do you think that small business owners adequately protect themselves against the myriad fraud dangers that they are exposed to?

Cathy Penny: Actually, some of the same research shows small businesses are more vulnerable to fraud with half of the fraud in small business and mainly because they lack a lot of controls or they fail to have adequate segregation of duties and often in a small business, everyone knows each other personally and there is a high degree of trust.

Ian Portsmouth: I guess there is also a certain degree of naivety there, I think a lot of business owners probably think that individuals would be the targets of fraud and that big businesses are the targets of fraud but they tend to think that they are sort of invincible.  Do you agree with that?

Cathy Penny: Yes, I think so.  And they are very busy with their core business so they don’t really understand the threat and it is not something that people really like to put their mind to.

Ian Portsmouth: Most business owners believe that the bad guys are outside their businesses trying to get in, as you mentioned earlier, there is a high degree of trust within small businesses.  But the statistics show that most business fraud is actually committed by employees of the victim companies.  So what are some of the more common types of fraud committed by employees?

Cathy Penny: So often employees will pay false invoices to companies that they control, or they will siphon out payments so that it’s buried in your bad debt experience but actually one of your employees has been taking cheques, padding expense accounts, stealing goods.  These are all common ways that employees defraud their companies. 

Ian Portsmouth: So, it is not just the people in the accounting department who are cooking the books.  It could be anybody committing fraud.

Cathy Penny: Yes.  Anybody who’s paying invoices or have control over any expenses.

Ian Portsmouth: So what are some of the danger signs of employee fraud and what are some of the basic steps that a business owner can take to prevent employees from committing fraud?

Cathy Penny: Well, often, your most dedicated employee is the one you should be watching out for, the person who doesn’t take vacation, the person who does everything themselves, the person who doesn’t have anyone covering them off or backing them up.  Often too, you’ll have employees where there is signs of personal difficulties either financial or drug problems.  So these are some of the signs that you can detect their might be a problem with employee fraud.

Ian Portsmouth: And I guess it is important to underline the fact that such crimes are often crimes of opportunity.  People who are otherwise honest when given the opportunity will put their fingers into the cookie jar so to speak. What can you tell us about a couple of specific types of fraud that we see in small businesses?  Let’s talk first about advance fee scams.  What exactly are those?

Cathy Penny: This situation is where a small business owner thinks they have been engaged to do a big job or selling you services for a good price.  And so in most cases, they are very excited to have this buyer and they will advance money or equipment up front and then their goods are gone and the purchaser is gone.

Ian Portsmouth: Cathy, another interesting type of fraud is the line of credit or loan scam.  How does that work?

Cathy Penny: Small business owners are approached by someone reportedly being able to get them operating lines of credit and get them a better deal from a bank.  So they often pretend to be accountants or financial advisors and they will put together a package to get a bank loan.  What the small business does not realize is they’ve siphoned out some of the money and the arrangements with the bank are not what the customer thinks.  So they may think they have an operating line when they actually have a term line and the individual that arranged it is long gone with the chunk of the money and the bank and the customer are renegotiating the deal.

Ian Portsmouth: So in both cases advance fee scam and line of credit scam, I guess the golden rule applies “if it sounds too good or looks to good to be true, then it probably is”. Right?

Cathy Penny: Yes.  And know who you are dealing with.  We talk about know your customer in banking, and it’s every bit as important in your business.

Ian Portsmouth: Now, there are so many types of fraud out there, so many scams that small business owners can be victims of.  Where would you recommend they go to learn more about the dangers and how to protect themselves?

Cathy Penny: There are a few places.  On the internet, there is a book put out by the Association of Certified Financial Examiners, Small Business Fraud Prevention manual.  So if you google that, you’ll find that’s quite an informative book.  The RCMP has also put out some publications of the descriptions of many types of fraud.  And the Insurance Bureau of Canada also has some information on small business fraud.

Ian Portsmouth: It’s all scary stuff Cathy and thank you for telling us about it.

Cathy Penny:You’re welcome.

Ian Portsmouth: Cathy Penny is Director, Fraud and Electronic Monitoring at BMO Bank of Montreal.

That’s it for another episode of the Business Coach Podcast.  Be sure to check out other episodes, which you can download from BMO.com, profitguide.com and iTunes.  If you have any comments or suggestions about the podcast, then please send them to me at ian.portsmouth@profit.rogers.com

Until next time, I’m Ian Portsmouth, the editor of Profit Magazine, wishing you continued success.

Originally appeared on PROFITguide.com