Fraud to rise in downturn
Article Date: Jul 29 2008
Michael Mulligan, Halliwells
Business fraud, already at record levels, is expected to increase further as companies and individuals come under growing pressure to make ends meet. Michael Mulligan, a corporate recovery partner at law firm Halliwells, explains how to protect your company against criminal activity.
Reported fraud cost UK businesses more than £705 million in the first six months of 2008, an increase of 74 per cent on the same period last year, according to BDO Stoy Hayward.
At the same time, the UK economy is threatening to fall into the abyss. The combined effects of the credit crunch, rising oil prices, fluctuating interest rates and inflationary pressure will inevitably result in a surge of insolvencies in the next 12 months.
As demonstrated in the last recession, insolvency and fraud go hand in hand. Staff may be motivated by a desire to remain employed or pay the bills, while company directors may commit fraud in order to keep the business afloat or make financial results look better.
This means that all companies need to be extra vigilant against fraud in the current climate. There are three main varieties to watch out for: external fraud by someone outside the company; internal fraud by management or employees; and collusion, a combined effort between someone inside the company and, say, a debtor or supplier.
The key aspects of fraud management are:
Prevention
Naturally, this is much better than cure. Establish an anti-fraud culture supported by the appropriate policies, controls and procedures to prevent your business becoming a victim.
Detection
Consider implementing staff training and awareness programmes, whistleblowers’ hotlines and spot audits. With business increasingly relying on IT, companies often tend to become very process driven, so creating an environment where staff are incentivised for asking the right questions rather than churning through as much work as possible will increase detection rates.
Investigation
Ensure your business has an up-to-date response plan. If your suspicions are aroused, act quickly before the trail goes cold – but don’t necessarily go in with all guns blazing. Seek expert advice in complex or delicate situations.
Insurance
Check the company’s policies are consistent with current business risks.
Finally, don’t despair: though fraud often leads to insolvency, insolvency can be the first step to recovering stolen funds.
My company discovered we had been the victims of fraud by our inhouse accountant over 6 years ago now, at least £430,000, maybe as much as a million had been diverted, we will never know.
Report this comment »Firstly you may seek advice from a lawyer to see what your options are as you struggle to come to terms with the betrayal of trust by a longstanding and valued member of staff. The partner of a large City law firm told me ABSOLUTELY NOT to go to the police. It was some years before we realised that was because the Police will not charge you for getting a Court order to see the bank account transactions of the individual concerned, but we had spent around 20K in 4-5 months and the barrister went back on his original opinion.
Secondly,you may assume you can just go the police. The police will expect you to do all the work to prove your case, yet another strain on your time and finances at a time when both are stretched to the full.
Thirdly, you may also assume that if your audit had been done for 17/18 years by a top 25 firm that the loss will be limited to as yet unaudited accounts. Not the case with us, and they were extremely offensive when I questioned them about it.They also failed to spell out their concerns for over 5 months when they did become aware of problems.
Do we trust professionals or the Police now? Unfortunately not.
The embezzler served 5 months of an 18 month sentence ( primarily for also stealing from his other part time employer) and may well have half a million to a million sitting safely abroad.
The auditors have done a great 'rabbit in the headlights' impression, not maybe what you are hoping for in your hour of need and have as yet denied all responsibilty.
Us? We were forced in to Receivership almost 6 years ago after 27 years in business and I was forced to buy the company back. I am still paying off the mortgage for the extra £100,000 I put in to the company to try and keep it afloat.
Moral- Never trust your finance person. Signing virtually all the cheques myself was n't robust enough- he appears to have stolen the cheques our clients sent to us and probably paid them in through a parallel account. The Police never even bothered to ask him how come there was an extra half a million, mainly in cash going through his account in the space of 3 years( his salary was under 40K a year)
Thirdly, change your auditors every 5 years or so, otherwise they take you for granted.
Finally, great stress and disaster gives you great clarity and makes you realise the most important things in life are relationships-family, friends, colleagues and partners, not a new Ferrari or a bigger house.
We now have the best team ever, at the very top of their profession, warm, focused and fabulous, and we have been more successful in the last 18 months than ever before- but the price was too high! And the professionals, with a notable exception in our forensic accountant, were grasping and concerned only for themselves, not their clients, a very saddening discovery.