04 Jan Fraud

It’ll take more than luck to escape business fraud

It’s calculated that fraud is costing the UK economy £6,000 a second with as many as 1 in 4 businesses experiencing it at some point in their existence. So it’ll take more than luck to escape business fraud completely.

According to Freedom of Information (FOI) data between 2013 and 2016, company owners in Greater Manchester were most susceptible to crime with a total of 141,887 instances of business theft recorded by police in the area. West Yorkshire recorded 110,053 cases. However, the greatest rise in crime in the same period was found in Northamptonshire (yes, our neck of the woods!) where business theft increased by 70% in just 3 years. Only Bedfordshire came close, with half the rise at 35%.

Cyber crime (eg hacking into computer systems) quite rightly gets a lot of attention but don’t let this focus blind you to the simple fact that fraud is theft and comes in many guises. Expensive or complicated technology may be only part of your solution to fraud.

Most fraudsters are first time offenders spotting an easy opportunity – and sadly they are often employees. From junior to senior, the common factor is the position of trust they hold giving them easy access to assets through sensitive information and logins.

The fall-out from fraud goes beyond the financial. As an accountancy firm with extensive forensic experience, we know how easy it is for fraud to take hold, creating havoc in a business and destroying its very core.

In this blog we explore the nature of fraud and how you can put some procedures in place that will strengthen your individual business against someone cheating you out of your hard-earned money.

Fraud comes in many shapes and sizes

If you understand exactly what you’re up against, you’ve got a better chance of defending yourself from fraudulent activity.

Fraud is as old as humankind. It is recognised in law as a crime but due to its slippery nature it is very hard to prove. The crime involves a level of dishonesty – through trickery or scamming – that allows the perpetrator to purposefully gain an unfair advantage and thereby obtain monetary gain from their actions/representations or lack thereof.

Procurement and Payroll are areas most commonly targeted by fraudsters. Procurement is the most vulnerable because of the sheer size of expenditure for which it accounts. The high volume, low value nature of the transactions involved means some kind of ‘double-dealing’ can go undetected for a long period of time. All it takes is a toxic combination of legitimate supplier and unscrupulous employee to carry out any number of scams:

• Adding unauthorised costs to invoices
• Submitting false invoices
• Diverting payments from legitimate recipients
• Recording / invoicing amounts at odds with the actual provision of goods/services

Payroll fraud can include:

• Timesheet tampering
• Excess holiday pay
• Unpaid staff loans
• Wage / salary overpayments

The typical fraudster is motivated and empowered by 3 main elements:

1. Opportunity: as in the right environment and situation – access to logins and little supervision. (Between 2013 and 2016,  UK businesses suffered from ‘opportunistic crime’ to the tune of £184m worth of stock stolen from under their noses.)
2. Ability:the capability to dream up a fraud, carry it out and keep it hidden
3. Pressure:financial or coercion by family/friend/colleague

Many fraudsters rationalise their actions by claiming that this is a ‘victimless crime’. But it wouldn’t be a crime if it was victimless, now would it?

Take a logical approach to fraud prevention

Irrespective of the type of business you’re running, fraud prevention is a lot easier if you break it down into categories based on accessibility:

Internal (eg employees, contractors and consultants)

• Consider what can be taken physically. For example, equipment (from office stationery to tools and machinery) and supplies (wood if you make doors, clothes if you’re a fashion retailer, petrol if you run a forecourt), petty cash, office furniture even.
• Check what can be syphoned off financially(eg bank accounts) and how (from fake invoicing and payroll to straightforward taking of money).

External (eg suppliers, partners, competitors, unknown 3rd parties)

• Cyber and IT hacking– depending upon the size of your business you may need to consider expert advice and technical support.
• Building security– door and window locks, webcams, maybe a security firm.
• Intellectual property (IP)– are your copyrights and patents up to date and are any of them being infringed?

(Of course the ‘internal’ and the ‘external’ come together when someone inside the business colludes with an outside 3rd party on any of the above. This can really mask any fraud taking place and make it more difficult to detect.

Fraud is painful for the victims

Financially, it can be crippling – in some cases leading to insolvency. Typically it takes 1-2 years to uncover and even longer to unravel. And sometimes it’s very difficult to prove because of the lack of an audit trail. All this puts further financial pressure on the business. But it can impact in other, equally harmful ways too. Throughout the process, the psychological and emotional effects can lead to health issues for everyone involved, putting further strain on you and the business.

Fraud prevention is better than cure

You go to vast efforts to create a successful business, so putting measures in place to protect it from fraud must be a priority for you. This shouldn’t make you overly suspicious of your staff and suppliers – just rightly cautious.

Here’s our 11 point checklist for managing fraud prevention in your business:

1. Implement a robust recruitment policy that includes background checks for past criminal activity.
2. Make it known to all your employees that you have a zero-tolerance policy towards fraud – and that they too have a role to play in its prevention: create a culture of fraud awareness among staff and a whistleblowing policy (43% of companies rely on tip-offs).
3. Keep a log of assets and (if you have any) stock-in-hand, and have effective controls over their movement.
4. Set up controlled access to systems, using sophisticated logins (unique identification and passwords), and change them frequently.
5. Treat chequebooks and financial records with the same level of security as for cash – by securing and restricting accessibility.
6. Install high quality anti-virus software across all your computers and devices.
7. Consider IT-based security such as webcams and sensors in some areas of your business.
8. Restrict and closely monitor access to sensitive information ensuring: segregation of duties, clear lines of responsibility with proper supervision (job rotation maybe), tiered authority and signature levels for payments.
9. Reconcile regularly bank statements and other accounts.
10. Put robust processes and procedures in place – audit them regularly making sure to have clear documentation and audit trails. (This should help you spot a fraudster posing as a supplier and requesting payment to be made to a different bank account.)
11. Finally, have a crisis plan ready in case fraud is discovered, including a solid understanding of the laws governing investigations in the workplace. Here’s a useful guide from ACAS.

Most of the measures that you might put in place are simply good ‘house-keeping’ to ensure you keep on top of your management accounts. Business owners often uncover fraud when they start to look at the financials because something does not feel right. Then they begin to question and delve deeper into the movements of cash or stock flow…

Business-owners complain bitterly about rising costs but fraud is one that you can reduce yourself. Maintain a good balance between security and trust in the workplace however – you want your staff on your side against fraud rather than feeling they’re constantly under suspicion. It’s simply a matter of putting sensible procedures in place so you know that you’re doing everything in your power to minimise the risk of fraud.