Heads in the sand over fraud

Reported UK business fraud increased by almost 40% from just under £1bn in
2005 to £1.37bn in 2006. But, according to BDO Stoy Hayward, the real figure is
likely to be closer to £5bn because just 15% of businesses report fraudulent
activity to the police.

The firm’s FraudTrack report found that of the surveyed finance directors,
80% prioritised amending the company’s procedures if they found out they had
been victims of fraud. But less than half prioritised dealing with the
fraudster.

The tools of fraud have also become far more sophisticated in recent years
with the huge leaps in technology.

According to PricewaterhouseCooper’s forensic team, 80% of evidence in fraud
trials involves electronic records, a statistic helped by the adoption of tools
such as PDAs, mobile phones, iPods and resources such as the internet.

Simon Bevan, national head of BDO Stoy Hayward’s fraud services team, says
that the mergers and acquisitions boom has also contributed to the explosion in
fraud.

‘A lot of money has been lent over a short period of time to management teams
for investments and acquisitions,’ he says. ‘Based on experience in the dotcom
boom I have no doubt that some business plans will have deliberately been
over-optimistic’.

In particular, banks, housing associations and businesses need to ‘ensure
that they are getting an accurate valuation on any property being bought’.

Another way to insure against fraud is to implement a hotline service for
employees – a service that KPMG has recently rolled out.

Having discovered that insider fraud committed by management or staff
accounts for more than half of all the fraud that is taken to court, the Big
Four firm launched a ‘whistleblowing’ hotline service.

The service, called Ethics Line, has been operating in other jurisdictions –
such as Europe, Australia and the US – for a number of years.

David Luijerink, a director of KPMG Forensic, believes that the hotline can
reduce the risk of employees going outside of the organisation with their
concerns, which could potentially lead to unnecessary reputational damage.

Many employees who suspect fraudulent activity taking place are reluctant to
report it due to a lack of confidence in their organisation’s current reporting
systems and fear of victimisation or retribution.

Statistics compiled by KPMG show that 50% of frauds are discovered following
a tip-off from an employee.

Perhaps the biggest priority for FDs, though, is the recovery of any money
owed and, unfortunately, this is no easy task. While there has been a consistent
fall in the length of sentences since 2003, there have been tougher sentences
for larger frauds of £1m and above.

As unfair as it may sound, police have to decide which crimes take priority
and result in an investigation – business fraud, as a consequence, is not high
on their agenda.

In such a situation, a company then has the option of doing nothing or taking
the case, if it should financially warrant it, through the civil courts.

Companies that want to recover money must do so through the civil courts if
they want it done quickly and effectively, according to BDO Stoy Hayward’s
Bevan. ‘Going through the criminal courts with the police is hugely time
consuming and does not normally result in financial recoveries for businesses
that are victims of fraud,’ he says.

According to Jarrod Haggerty, forensic technology director at PwC,
legislation such as the Data Protection Act make it increasingly important for
FDs to have fraud prevention measures in place.

He believes that companies need to ensure that any anti-fraud regime they
have in place is suited to their structure, industry and tailored to their
business culture.

It should also be made clear to employees that a workplace-based machine
remains the property of the business.

‘If companies want to have ethics-based systems, where fraud prevention and
compliance go hand in hand, then getting consent of employees is critical,’ he
says.
This is an edited version of a piece that first appeared in Financial
Director