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South African SMEs face biggest risk of fraud losses

24 March 2022 Western National Insurance

It is vital for South African businesses to take the right steps to protect their operations from potentiality catastrophic financial loss.

Jurgen Hellweg, Chief Executive Officer, Western National Insurance says that small-and-medium-sized enterprises (SMEs) face the biggest risk of major loss from this threat. “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.”

What is most alarming about this trend, according to Hellweg, is the fact that small businesses with less than 100 employees experienced the highest median losses of any organisation type. “The report shows that companies with less than 100 employees typically lose around $150 000 (~R2,3 Million) when fraud occurs. That is a blow that very few SMEs can recover from.”

He explains that this is why having adequate fidelity insurance is crucial to the survival of one’s business. “Fidelity insurance is a class of insurance that is designed to protect against losses resulting from fraud or theft by an employee. To put it more accurately, it covers the quantifiable direct financial losses that companies suffer if employees defraud them for personal gain.”

Hellweg adds that stock theft or even low-level financial fraud could be financially crippling without cover.

By way of example, Hellweg points to a recent claim handled by Western National Insurance. “One of our clients became aware of a number of anomalies on his financial statements and stock sheets. After investigation, it was traced back to a manager who was pocketing cash in lieu of “returned” stock. As a result, our client suffered a loss in excess of 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 was eventually identified when the normal stock take process was resumed.”

He advises that companies start by determining the right level of cover for their needs. “Much like liability insurance, deciding how much fidelity insurance to buy can be a challenge. A good adviser should be able to provide an estimate of how much cover to include in a policy. This will be based on factors like the company’s risk profile, number of staff, stock flow and possible incentives to commit fraud.”

Still, fidelity insurance on its own is not enough for a business to manage its risks. “For example, insurers typically cannot pay out on claims where an instance of fraud has been going on for longer than two years, or where the fraud started well before the business bought their insurance. Proper risk management is one of the basic requirements of any fidelity policy.”

He states that putting the right controls in place to detect and stop fraud should therefore be a priority. “One of the key requirements of a fidelity policy is that companies must institute and maintain mechanisms for checking and controlling accounting and clerical procedures and business processes such as stock control,” he asserts.

Hellweg states that having these measures in place can decrease a company’s spend on fidelity insurance premiums, and allow the insurer to adequately cover any losses from cases that fall through the cracks. “In the end, this is about protecting businesses from the threats that could close their doors for good. No company is immune to fraud, but combining good risk management with sufficient insurance should at least guarantee survival.

“This is where working closely with an adviser can be extremely beneficial as they have the skills to help client’s assess their risks and secure the right level of cover. Discussing these risks with an adviser is the first step in securing the future sustainability of your company,” concludes Hellweg.

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