Crime begins to pay for the mid-tier

Fraud and wrongdoing are the buzzwords on many accountants’ lips at the moment as it becomes increasingly clear that police forces do not have enough manpower or expertise to chase every financial criminal out there in the business world.

Just two weeks ago Supt Ken Farrow, head of the City of London Police fraud squad, complained the government was not making sufficient resources available to fight fraud.

The alternative for business? Go private. And accountancy firms are ready. Indeed this week it became clear many forensic and fraud investigation units are enthusiastically ‘gearing up’ for what they anticipate will be a deluge of requests to help investigate financial wrongdoing.

And what’s more it appears to be the mid-tier firms which are best placed to cash in on tracking down the crooks that give big business a bad name.

From putting in preventative IT systems, to tracking down the offenders, the mid-tier stands ready for action. And, compared to many accountants, they really do see action.

This is not just about poring over spreadsheets, bank statements and ledgers – it’s about eyeballing the criminal, working out where he’s stashed the loot and figuring out just how he managed to fiddle the books. ‘This is why I do it,’ says one financial bloodhound. ‘It’s the psychology of the whole thing that has me hooked.’

There are some specific reasons why the mid-tier should suddenly be looking to make more money out of fraud investigation, but it’s worth considering the backdrop to all of this.

It can’t have slipped anyone’s attention that companies are more sensitive than ever about the integrity of their accounts in the wake of Enron and WorldCom. Both events contributed to an increase in the number of directors wanting fraud and forensics experts to go over their systems to make sure the company and shareholders are not being taken for a ride.

But if you put those two seismic events aside trouble was already afoot.

Earlier in the year a survey from PricewaterhouseCoopers revealed the value of commercial fraud doubled from #82m to #162m in 2001. The year also saw the revenues for forensic and fraud services double. In a poll by PwC 90% of respondents said companies should be obliged to implement anti-fraud measures – a message that businesses now appear to be listening to.

Then in May it became obvious that no lesser figures than PM Tony Blair and chancellor Gordon Brown were being warned that the way in which audits are carried out in the UK gave rise to a ‘massive risk’ of fraud.

Richard Parlour, partner at Richard Butler and a member of a government advisory committee on financial crime, warned ‘the accounting world needed to get its act together’.

But anecdotally another phenomenon is now being observed. Companies audited by the Big Four and concerned about possible conflicts of interest in the wake of Enron and WorldCom are turning to the mid-tier players for services like forensics and fraud detection.

A partner in one of the top ten firms in the UK says: ‘We used to be focused on SMEs but now we’re seeing work come in from across the FTSE-250.’ Indeed the value of contracts are now much larger. Instead of raising a few thousand, the top line can now be counted in millions.

Richard Bolton, a partner in forensic services at PKF, says he sees the market expanding in general and work coming as a result of perceived conflicts affecting the Big Four.

‘I’m sure that’s right. The market for firms in this sector should be much improved and we are gearing up to deal with it. We have dealt with some fairly large clients in the past and we are expecting to see more work. Conflicts are clearly a major issue and become more significant as the firms become larger.’

Bolton joined PKF from a Big Five player and explains it was ‘a great relief’ to join a firm that did not suffer so continuously from conflicts.

Of course it is doubtful whether the Big Four would admit this shift away from their forensic services. Although there appears to be movement in other sectors which has seen Big Four firms massively discounting their services to beat mid-tier rivals to contracts.

That said, if there is a panic in forensic and fraud investigation services it’s being kept well under wraps. Indeed, with such growth in the sector, may be plenty to go around.

If that is the case does it mean fraud really is on the increase, or are we just unearthing more of it?

Whatever the answers the mid-tier is poised to cash in. Let’s just hope its gain doesn’t reflect a much greater crisis at the heart of UK plc.

WALL OF SILENCE CLOAKS FRAUD FIGURES

One of the key methods of detecting financial crime is whistleblowing and a recently published survey found the phenomenon is on the increase in the UK.

Some 83% of respondents said they would report their colleagues or boss for major fraud while 44% said they would report minor offences. Unbelievably, 39% of people admitted they had lied to cover up mistakes.

Alex Plavsic, head of fraud investigations at KPMG, which commissioned the survey, says: ‘The impact that some of the recent corporate failures may have led to a significant change of attitude towards fraud in the workplace.’ But the scale of financial crime is difficult to gauge. While both KPMG and PwC put out annual figures, the FSA insists ‘there is little data available on the incidence of financial crime.’ The point is that you can only see what is reported – a good deal of crime may go undetected because it is not reported.

Many companies do not want their dirty washing aired in public. Even if they have a conscientious whistleblower, they may want to keep it hush hush rather than risk embarrassment and loss of clients because the company’s financial controls and systems now appear to be vulnerable.

As one fraud investigator says: ‘Companies call us in but sometimes don’t know what they want. That’s part of our job to find out what it is they want to achieve. Do they want to recover the money, do they want to bring charges? They don’t always want the police involved.’