The Missing Madoff Millions! How to avoid fraud in your business

Many will have been shocked by the news from the US of the missing Madoff millions - or rather billions. One of the features of this scandal was that a high proportion of his investors knew Mr Madoff personally and trusted him with their money. It perhaps underlines the dangers of thinking you know someone and, in consequence, perhaps not being as careful as one might otherwise be.

Some form of fraud or theft could be happening in your business right under your nose. Are your internal controls strong enough to catch it?

Often small business owners only find out about fraud and theft when it’s too late. And very few businesses are able to fully recover, if at all, from an internal theft. Having good internal controls means you can focus on doing what you do best, building your business.

We’ve seen it in our clients – it’s happened to them, so I’m keen it doesn’t happen to you. It’s generally perpetrated by someone you know well and trust, and in these times of economic pressure, people will do things which are out of character, so you need to be extra careful.

Here is a useful checklist to help you think about the risk of fraud in your business.

Fraud Checklist

Fraud is a potential threat to every company, including small and medium entities. The risk of fraud can be managed. The following is a checklist of simple and affordable measures on managing the risk of employee fraud, including some technology-based measures that can be adopted when the threat of fraud is higher.

Accept the idea that fraud is commonplace and can happen at any business.

Set an appropriate ethical example for employees to follow, and treat them with respect and fairness, including fair play.

Ask your employees to identify ways in which someone could commit fraud at your company and the ways to avoid it.

Develop a code of conduct that explicitly prohibits employees from committing fraud, conflict of interest and other illegal acts. Ensure all employees, vendors and customers get copies of it. Consider having key employees provide annual confirmations of their compliance and have a clear company policy on time and expense reporting.

Adopt a “trust, but verify code”. If you need only one bookkeeper, conduct a careful background check before hiring. Take note of employees who appear to live substantially beyond their means.

Verify the credentials of all new vendors before they are authorised to supply the company. Periodically review vendors to identify possible improprieties.

Make sure all disbursements are properly approved.

Protect yourself against cheque alterations by adopting electronic transfers for large payments, using direct deposit for payroll, placing a financial limit on cheques and implementing up-to-date cheque security measures.

Review original bank statements before your bookkeeper does. Keep an eye out for unexpected overdrafts or declines in cash balance.

Make sure bank statements are reconciled each month and that an expert adviser, such as your accountant reviews the bookkeeper’s work periodically.

If something seems odd, whether it is a disbursement to an unfamiliar vendor or unexpected costs, consider the possibility of fraud.

Growth and Profits! Or Cash and Choices?

You don’t want those!

You want CASH and CHOICES! Growth and profits help the business to fulfil your personal objectives. You didn’t start the business so that you could have thousands of employees, and earn millions of pounds. You started is that you could have the freedom to do that kind of work you like, be your own boss, take holidays or pursue outside interests when you like, and have the cash available to do so, and even into your retirement.

But it’s not always how you end up, is it? Overworked, stressed, needing help but not knowing what, and struggling to get a week in Majorca let alone anything more exotic.

Most business advisory tools are used to drive growth in profits. But without a clear understanding of what YOU want, that only does half the job. You need to be clear about your goals, and by that I mean personal goals.

Driving growth and profits up is a means to an end, not an end in itself. It still needs to be done, and that’s what we do best here. But we are know why.

Because other key thing that we try and build in is choice. You can choose to take four weeks off or you can choose to work. Sometimes – most of the time these days – you can’t choose. You have to work. But if we can build in the choices then the work becomes easier, stress levels drop, and who knows – you make it for your four weeks off.

It’s essential to plan personal goals as well as business ones. Just doing the business ones is just doing half the job.

Do the maths!

People have some number blindness particularly when they’re trying to be positive. I come across this all the time, and in particular, in this recession, people are keen to feel good about their jobs and their houses. So they forget what the numbers really mean – particularly percentages.

If your house has dropped by 50% in value, and then goes up by 50%, it doesn’t go up to the same level it was at the start. Let’s do the sums.

Price year one £100,000
50% price fall -£50,000
Price at the beginning of year two £50,000
50% price rise £25,000
Price at the end of year two £75,000

Do you see how percentages can mislead us? And oh how we are being misled at the moment!

The government told us that the economy’s performance in the first quarter of this year showed a 1.9% drop. Now that has been revised to 2.4% drop. I wonder if more revisions are coming. That’s 4.9% in the 12 months by the way. The largest deficit since official records began just after the war. They didn’t offer us this fact – you had to go look yourself.

Let’s look at the USA for a moment. Employment numbers last month showed a better than expected drop. This wasn’t though a genuine improvement, but new and improved techniques for recording the numbers. More adjustments for seasonal adjustments and birth and death models were built in. The discouraged workers – those who have given up looking – were not included in the jobless figures at all, for the first time. Without all these shenanigans, the figures would have shown unemployment getting worse at the same pace as last year. If the authorities were measuring on the same basis as in the 1930s, then they will be showing similar levels as those in the Great Depression – about 20% of the workforce. But we can’t tell people that can we?
My message is simple – check the numbers and question the basis.

Now here’s the entertainment – Warren Buffett’s response to an enquiry about when the positive effects of the US government stimulus package will be seen “ We’ll see the benefits eventually but not yet. You can’t make a baby in a month by getting nine women pregnant”.

But the one I really like comes from Ryanair CEO Michael O’Leary “ the UK needs a new government because they are a group of witless, hopeless Scots whose solution to the recession is to tax your way out of it. If that was the answer, Ted Heath would have an elected to six successive terms.”

Question – assuming that the government is going to lose the next election, are they setting up the next administration to fail so they get back in five years time? Of course, that implies that we are paying for this.

Boom & bust?

Where is the economy going on? And equally important, in what timescale? I wish I knew!

Unemployment is up a whole 10% in the last quarter to 2.26 million. Yet there has been a bounce in the stock market, and our oh so short term memory is leading us towards the end of the recession. After the stock market collapse last year, people expected a bear market rally and that is what we have had. There has been a bounce in economic activity as businesses were forced to restock after cutting back so sharply last year. But the rally continued, and people have started to question whether this is a bear market after all. They wonder if the recovery is actually genuine. Surely this is what bear market rallies do – they suck in investors, stocks rise, until eventually there aren’t any buyers left, and stocks plummet again.

It’s always wise to consider the fundamentals. Any recovery in corporate earnings is probably short lived, because it has been made by cost-cutting, and by government spending money that we don’t have. At some point the economy must generate growth without the benefit of extra government money fuelling it, and cost-cutting in corporations can only go so far. What cost-cutting does is make life harder for businesses in the future. By all means cut out waste now, but remember on a countrywide scale that firing people leads to higher unemployment, which leads to less spending power, which leads to fewer sales for your company.

The general public is desperately paying off debts as fast as it can, and so are companies. I make no complaint – it’s what people should be doing, but people also need to be aware of the long term implications of this policy. Companies are doing everything they can at the moment to reduce their indebtedness, usually by selling more shares to their shareholders to repay debt. They’re not raising money on the market to invest in future growth. They’re even repaying debt when interest rates are low.
And it can clearly be seen that interest rates are likely to rise – look at the standard variable rate mortgages now, and what a building society will offer you as a fixed rate of two to five years in the future. There is about 1½ percent difference – higher of course. They expect interest rates to rise. So does everybody else.
Which in the long term tends to leads to inflation. The government will be pleased, because then it will be repaying at the enormous amounts of debt that it incurred in bailing out banks etc with cheaper money. We, as taxpayers, should be pleased as well because it will reduce the amount of time that we have to pay interest to the people who have bought this debt. But we as consumers will be paying out through an inflationary period in the longer term.

In the near term, we are still in a recession and there may be some deflation. In short, we’re back to boom and bust.

Holes and avoiding them

Denis Healey’s First Law of Holes – “ When you’re in one, stop digging!”

A very good thing to keep in mind when you are Chancellor of the Exchequer. And also a very good thing to keep in mind when you’re in business.

Because, I have discovered, people have a habit of repeating themselves, especially when they are in some difficulty. The businessman thinks that if he works harder, the problem will get better. But often it is the method of working that is causing the problem. So working harder makes it worse quicker. So he works even harder, because he sees the problem getting worse, but he does not stop to think why. He is too busy doing when he should be thinking.

In this recession we are seeing the rate of personal bankruptcies and insolvencies rising. It’s no surprise – so many businesses were started in the boom years, and the owners have never experienced a recession so do not know what defensive steps to take. It’s such a waste when the business goes bust. The headline news is the personal bankruptcy and the redundancies. But that’s really just the tip of the iceberg. In the last recession a large housebuilder went bust in the south east of England, and 120 of its subcontractor firms went bust because of it. The same thing is happening now.

Apart from the personal tragedies, there is a collective pool of knowledge in any business which is now dissipated. So starting again is much more difficult for everybody concerned.

There is another, very common, issue when the business is failing, which is generally evidenced by business men rather than business women. The male of the species does not want his wife and family to worry, so does not talk in as much detail about the problems he is facing as perhaps he should. Then, when the business does fail, it is a shock to the family. His wife feels there has been a lack of trust in the relationship, and it puts it under even more strain than the business failure alone. So a failure in the business can lead to a failure in the relationship and the family as well. Such a waste.

So I think there are two points to note. Firstly, businessmen would benefit by being more open with their family. And secondly, they need to stop digging holes. To do that, they need to change the thinking. Or, at the least, stop and think. And if they cannot think of a better way of doing it, then they need to find someone who can.

The great house price debate!

In English it is called a complex equivalence. It’s when two statements are joined in your mind but not in reality – it’s as though someone has said ” which means that” in between the two sentences. Salesmen use it all the time when trying to sell the benefits will feature of some new car or the like. The rest of us just use it continually without noticing. “ You’re not smiling.” (which means that) “You’re not enjoying yourself”. No – I’m simply not smiling!

There’s plenty of this about in the discussions on the economy that you can hear about at the moment. Particularly where house prices are concerned, because they seemed to be the key barometer of how we feel about our personal wealth in this country.

Today’s announcement that the housing market has seen a bit of a pickup is a case in point. The Royal Institution of Chartered Surveyors has reported that buyer enquiries have risen for the seventh month in a row. Apparently, this means that house prices have at worst bottomed out, and may even be rising! Whereas I simply think that people think that the market is coming to a bottom and are looking for a bargain.

But if we look at historical measures of affordability, even this looks bizarrely optimistic. Historically, average earnings and house prices have a correlation – 3 ½ times average earnings equals average house prices. Currently, even after the last 18 months of price drops, it is nearer for a half times average earnings. So on that basis, a further drop is necessary just to make houses affordable again. Given that the UK economy is in recession, and that unemployment is still rising and will do so for the foreseeable future – at the least the rest of this year – I cannot see that the bottom has been reached yet.
There is another measure as well – apparently charts are available going back to before the 1800 is showing that house price cycles go in 18 year patterns. 14 years of growth and four years of falling prices. You work it out – how many years of falling prices have we had so far?

I also don’t follow the logic of people who want to buy before they are certain that the bottom has been reached. They argue that if they haven’t quite reached the bottom then at least they’ve bought the property they want at a reasonable price. However they can only judge that in hindsight once the bottom has been reached. They don’t know when they buy where the bottom is yet. They could be buying still quite expensively. Surely it is better to wait until a continual upturn has been observed, and buy then, knowing that they are away from the bottom? It makes much more sense to me.

But what are your views – there’s a survey on this page, so please take it and let me know your thoughts. Do you think house prices are going to go up, stabilise or go down in the near future?

Govt funded help

The Government are funding training and consultancy on a wide range of business issues allied to the recession. It can be for planning, strategic issues on finding new customers, keeping the ones you have, improving profits - in fact, pretty much anything that can demonstrate a business benefit for the owners and senior managment.

The scheme has been extended for another year, and is aimed at small businesses with 5 to 250 people, although smaller entities can benefit too, in the right circumstances. The paperwork is simple, and funding of £1000 is available for businesses that spend £1500 on this process.

As a firm, we've had a lot of success with this scheme. We've found extra profits for every business we've run it for, by using our specialist software package which facilitates a discussion on the areas for improvement, and produces an easily actioned list of changes.

It's good, produces quick results, and costs next to nothing. And might make your business survive!