EXECUTIVE REPORT
Fraud: The biggest competitor you don’t know about
According to a 2018 PwC survey, 49% of organisations said they’d been a victim of fraud. Many more have probably suffered but they just didn’t realise, says Adam Bernstein.
Philippa Dempster, managing partner of law firm Freeths, believes fraud is widespread, and notes that “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. Firms ought to think of it as the biggest competitor they didn’t know they had.
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.”
There is no typical fraud according to Dempster; she 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 placing CCTV and suitable stock control systems in warehouses.
Further, she most definitely would enforce holidays - “often this is the time when things are discovered…especially in accounts teams.”
But there are other tell-tale signs to look for says 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 adds that “different kinds of fraud warrant different 12
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 fraud events usually involve senior management where they can 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. Another suggestion is to have systems and processes that cross check each other looking 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 close to budget, or exceeding market trends.
It shouldn’t be a surprise that employees are the key to detection. On one hand, those that see solid policies will be deterred from engaging in criminal acts. On the other, honest employees will become critical allies and key sources of tips and information.
Warning for management
Even if directors are not directly involved in fraud, they will not be unaffected. 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.
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