Fraud is everywhere in business and the franchising sector presents its own inherent risks due to the diversity of its products, geographical locations and its people.
Setting the scene upfront by initiating a ‘big picture’ discussion on integrity for new franchisees and staff can be a crucial step in helping to avoid and reduce instances of fraud in a franchise system, according to David Morgan, a Principal of Forensic & Risk Services at PKF Accountants & Business Advisors.
Courtesy of a long history in fraud investigation, both in the police force and in business consulting, Mr Morgan is uniquely qualified to provide valuable insights into occurrences of fraud, how to identify it and manage and minimise the risk.
He says many in business have a narrow view of fraud as just hands in petty cash, but it can take many varied forms such as manipulating company financial records (e.g. payroll, royalty payments), theft of stock and collusion with suppliers for personal benefit to name just a few. The biggest risk areas are staff in financial roles as well as those dealing with customers, suppliers and managing stock.
Mr Morgan believes that fraud in the workplace is best managed when its falls under the broader umbrella of integrity in the way a company does business, a very topical issue in the franchising sector.
“Unfortunately, the first time that most franchise businesses even consider the threat of fraud is when they are hit in the face with it,” he says.
“For the typical mid-sized franchise, only when fraud happens and they get burnt by it do they know about it. Before this point, they are not pro-actively doing anything to identify or manage the risk.
“This usually means their first encounter with fraud is played out in public, under the scrutiny of the press and all the potential damage to their brand and reputation that comes with that.”
Educating businesses about the risk of fraud in the workplace and the steps that can be put in place to manage it aims to avoid the embarrassment of confronting the issue for the first time under the spotlight of the press and public.
Mr Morgan says one of the most important steps is firstly to get businesses thinking about the risk of fraud and then starting conversations about it and the broader issue of integrity.
“For many in franchising, this is just not even on their radar and from a purely commercial perspective you can see why they may want to put their head in the sand about it,” he says.
“But the key is get them looking beyond just the commercial or operational imperatives to their wider responsibilities regarding ethical behaviour by everyone throughout the business. The commercial pay-off is this approach can save them a lot of money, time and potential brand and reputational damage in the long run.”
Mr Morgan says integrity in business must be all encompassing and he stresses the importance of franchises sending clear messages to their new franchisees and staff right from the beginning.
He believes franchisors should be encouraged to introduce the topic of integrity in their induction programs, where the focus is currently mostly on operational matters.
Adding a half-day session on integrity in the way the company does business will deliver valuable outcomes in terms of culture, reporting of problems and management of fraud risks.
“It is all about setting the right moral compass for everyone throughout the business,” he says. “Fraud typically takes a long time to uncover, with the average case taking 18 months from when committed to when uncovered, and a lot of money can be lost in that time.”
“The best chance that you have of identifying it is through your people, not an audit or falling upon it accidentally. So they need to be informed that if they see a problem or have concerns, this is how they report it and it will be acted on. It is about building that trust from the very start.”
While culture is the starting point for ensuring integrity in any organisation, Mr Morgan said there are a number of other basic frameworks that can be implemented to address issues like fraud.
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