Fraud Prevention and risk analysis - a perspective for 2010

7th June 2010

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Fraud statistics (and we all love those) emerging for 2009 are quite frightening. Fraud and forgery prosecutions have doubled in the past two years, and that only covers those which have been discovered. In a recent survey, 48% of companies said they had been the victims of fraud. Another survey reported that a significantly greater number of businesses expected to be the victims of fraud in the coming years, with 13% thinking that fraud was accounting for the loss of over 5% of their revenue (and 37% for more than 1%).

There is a new culture at government level to combat fraud – new legislation (the Fraud Act 2006, the new Bribery Bill), increased scrutiny and drives for public awareness (the new National Fraud Authority, National Fraud Reporting Centre and National Fraud Intelligence Bureau) and tougher enforcement (a new anti-corruption environment, an improved CPS, better trained police with additional resources).

But is any of this making a difference? The statistics suggest not. But we all know statistics – are more frauds being committed, or more being reported, or just more detected? Or are they simply being counted differently by law enforcement?

Whichever it is, central government messages alone are unlikely to prevent the continuing increase of fraud in business.

The key buzzword for fraud prevention is Trust. Not only at the individual, but at the corporate level too. If you want to expect to be able to trust employees, become a trustworthy employer. Take effort so that the culture of the business is one of integrity in all areas of its business dealings, in fact and not just in form. And let employees know you expect honesty and integrity from them, and that no form of dishonesty is tolerated (even where it appears to benefit - in the short term - the organisation).

How many organisations have implemented an effective pre-employment screening protocol, one of the most effective tools in combating fraud? Rogue employees are among those to whom a business is most vulnerable, and are responsible for a large proportion of commercial fraud perpetrated in this country. And, bear in mind, most of this is done by senior staff, often in or near the boardroom so, for any anti fraud system to work to purpose, it needs to be as much upwards facing as down. Such a protocol both inculcates a culture of honesty, and demonstrates that it’s important to the company. And it can be done treating them as part of your team, not the enemy.

The responsibility, however, for preserving corporate and staff honesty, and so the company’s assets, cuts both ways. While the sensible employer has a duty to itself to check the background and activities of its staff, and should be able to expect staff to act with integrity, equally it has a responsibility to its staff to put in place measures and processes which remove from staff as much as is reasonably possible both the temptation to be dishonest and access to ill-protected assets. Even something as simple (and well meaning) as remuneration structures can engender fraud, unless properly thought out, monitored and controlled. Therefore, a company can only blame itself it its internal procedures and systems of control are deficient; yet how many have put in place the most effective protection of all – not just controls, but active management of them - internal audit, anti fraud policies and procedures, recovery plans, etc.

Most businesses have fire drills – how many have fraud practice drills?

Most businesses run health and safety workshops – how many run trust and trustworthiness courses?

And what of the credit crunch this past year? Tightened cash flow for both companies and employees increases both the risk and incidence of fraud – by businesses on customers, by suppliers on businesses and by employees on their employers. But the same cost cutting exercises which increase the pressures which fuel fraud activity (often by otherwise and hitherto honest people) also create more opportunity for fraud because often the first things to go are training, internal controls, adequate management depth, segregation of duties, scrutiny and high standards.

Now more than ever management must engage proactively in strategies and policies for dealing with this vital part of their business.

Our forensic accounting services are not just there to put the pieces together when something has gone wrong. Together with compliance and risk advisory, we are able to assist in the development, implementation and monitoring of anti fraud policies and measures, bringing benefits, both cultural and pecuniary, to all stakeholders in the business.

Jeffrey Davidson, Partner, is Head of Forensic Accounting at Horwath Clark Whitehill.

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