August 23 2019

Introduce integrity to reduce the risk of fraud in franchising

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By David Morgan

Experiencing fraudulent activity can destroy companies and inflict mental anguish on the victims. Fraud is everywhere in business and the franchising sector is no different. Franchises are significantly susceptible to fraudulent activities. Initiating a ‘big picture’ discussion on integrity for new franchisees and staff can be a crucial step in helping to avoid downstream damage from fraud.

Fraud in Many Forms

Many in business have a narrow conception of fraud – that it’s just in petty cash; but it can take the form of many varieties such as manipulation of company financial records (e.g. payroll, royalty payments etc), 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. Fraud can be committed by your staff, customers, suppliers, externally organised criminals (e.g. cybercrime) or different combinations of all four.

Safeguarding your Livelihood and Reputation

Unfortunately, the first time that most franchise businesses even consider the threat of fraud is when they are hit in the face with it. This sometimes means their first encounter with fraud is played out in public under the scrutiny of the media, which has the potential to damage brand

and reputation. Proactivity is the necessary step to ensure the franchise stays out of the papers and in the good graces of its customer base. Fraudulent activity in the workplace is best managed when it falls under the broader umbrella of integrity in the way a company does business; a key issue the modern franchise must consider.

Crisis Aversion

There are a number of preventative steps you can take to safeguard your organisation from the effects of fraud. Understanding your franchise’s risk environment, implementing a Whistleblower Hotline, introducing relevant training programs and obtaining expert advice can go a long way to avoiding significant financial and reputational issues from franchise fraud.

Why Educate Businesses on Fraud?

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 generally not even on their radar. However, it is necessary for a franchisor operator to look beyond their bottom line to their wider responsibilities regarding ethical behaviour throughout the business. Ironically, from a financial perspective, this approach can save a lot of money and time, and also protect the brand in the long run.

Integrity in business must be all-encompassing. Franchise companies need to be sending clear messages to their franchisees and staff right from the beginning. Franchisors should be encouraged to introduce the topic of integrity in their induction programs, rather than purely focusing 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 these risks.

The Benefits of Promoting Integrity

Promoting integrity within your franchise is all about setting the right moral compass for everyone throughout the business. 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, rather than requesting an audit or falling upon it accidentally.

This makes it essential to have the correct infrastructure in place for your staff.

Furthermore, ensuring your procedures for reporting unethical conduct are communicated on a regular basis can also assist in this regard. Having conversations about integrity in your organisation can have immeasurable benefits in the long term. Ignoring integrity within the workplace is putting your franchise in an unnecessarily precarious position, so why take the risk?