NEWS EXTRA
THE SMALL MATTER OF FRAUD A
Adam Bernstein looks at how fraud can happen unexpectedly and what preventative measures companies can put in place.
ccording to PwC’s 2018 Global Economic Crime and Fraud Survey, only 49% of organisations said they’ve been a victim of fraud and economic crime. While some might question the percentage quoted, the natural question that follows is what about the other 51%? Have they not suffered?
The answer is that they probably have, but
either haven’t spotted it or consider the activity just par for the course.
According to PwC’s 2018 Global Economic Crime and Fraud Survey, only 49% of organisations said they’ve been a victim of fraud. More probably have suffered, but either haven’t spotted it or considered the activity par for the course.
Philippa Dempster, managing partner of law firm Freeths, believes fraud is widespread. “The 2019 England and Wales Crime survey estimated that there are more than 3.9 million fraud cases a year.”
As the PwC report highlights, while the authorities, firms and staff are more acutely aware of the risks of fraud, the biggest problem is that few recognise that the fraud that goes unseen is just as damaging – possibly more so – than the fraud that is found. Andrew Northage, a partner at Walker Morris LLP, has seen awareness of fraud rise: “It is certainly the case that companies are now more mindful of the policies and procedures they must have in place to raise employee awareness of fraud and to deal with it if it occurs.”
Is there a typical fraud that firms should look out for? None really, but Dempster lists a number of examples that she’s seen which include requests to pay a ‘fake’ bank account, fictitious invoices, invoices paid in one currency but posted in another, finance employees abusing a system, ex-employees abusing a system, and the overstating of accounts.
Advice on prevention
Prevention is invariably better than the cure. It’s for this reason that Dempster recommends organisations “create an open culture with regular awareness training and vigilance - sending examples around of latest scams, ensuring good cyber security and also basic IT hygiene with regular password changes.” To this list she adds watching for unusual behaviour such as an individual living beyond their means, and having CCTV and suitable stock control systems in warehouses. She would most definitely would enforce holidays – “often this is the time when things
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are discovered… especially in accounts teams.”
But there’s other tell-tale signs to look for Northage – “domineering or bullying management, obsessive secrecy and close or closed relationships with suppliers; there may be an unwillingness to delegate menial tasks, or you may notice a significant change in an employee’s lifestyle.”
Northage thinks that “different kinds of fraud warrant different approaches. For instance, if facing push payment fraud, email must be closely monitored.” He suggests that when dealing with payments, it is prudent to confirm payment details by telephone before transferring money, particularly if account details have changed at the last minute. One suggestion from Northage to guard against similar frauds from inside a business is to “consider introducing checks beyond emails from supervisors before payments can be authorised; email chains can be easily edited to make it look as though the payment has been authorised.”
Major events usually involve senior management, especially those with the authority to override controls. However, employee fraud schemes often involve theft by exploiting systemic weaknesses, such as stealing cash before it has been recorded, fictitious expense reimbursement claims and/or stealing company property.
It shouldn’t be a surprise that employees are the key to detection. On one hand, employees that see solid policies will be deterred from engaging in criminal acts. On the other, honest employees will become critical allies in the fight who, with suppliers, can become key sources of tips and information.
Another suggestion is to have systems and processes that cross check each other. One specific test, for example, could look for duplicate invoices and payments. On this tack, Northage is keen to highlight overly complex corporate relationships or autonomous branches. “Firms may have a lack of clear reporting lines or areas of responsibility, opaque management accounts, a high volume of transactions or excessive profits in peripheral functions. These and aggressive accounting policies and forecasts with reward schemes linked to results may indirectly encourage achievement through more mendacious means.” He warns to look for results that may be always at or just above budget, or oddly exceeding market trends.
Warning for management Even if directors are not directly involved in fraud that occurs on their watch, this does not mean they will be unaffected. As Northage details, any reputational damage to the firm may, by extension, mark their reputation. Depending on the circumstances of the fraud, its occurrence may indicate that a director could be in breach of their duties, even if they were not the perpetrator. In certain circumstances, a director may face disqualification or personal liability for any financial losses the company sustains.
In summary
Fraud is everywhere, often hiding in plain sight. It’s impossible to stop it but firms can take steps to keep the risk of an incident occurring to the minimum. Considering that fraud can be so destructive, it’s an issue that cannot be ignored.
www.buildersmerchantsjournal.net February 2020
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