PracticeAccounting FirmsFraud to rise as crunch bites

Fraud to rise as crunch bites

The rise of crime as a result of the credit crunch

The credit crunch has had an adverse effect on many people’s lives; for some,
however, it has been the impetus for criminal activity.

The effect of the current downturn on the occurrence and the detection of
fraud, is difficult to assess. But one thing is certain, it increases the
likelihood of it both happening and being revealed.

The Organisation for Economic Cooperation and Development warned this week
that Britain is uniquely vulnerable to the deepest economic slump since the
recession of the 1990s.

Companies that have experienced unprecedented levels of growth over the past
few years currently face difficulties in meeting forecasts and expectations. The
temptation to conceal bad news from external and internal observers increases,
thereby fuelling an incentive to commit fraud and secure results by any means.

The test now is whether the increased corporate governance measures
introduced since the last significant corporate collapses of early 2000, are
sufficient to curb the growing temptation to commit fraudulent activity.

In times of economic downturn, recurring fraud that had previously been
masked by high profit levels and lax internal controls are also likely to emerge
for the first time. For example, transactions or business areas that were
profitable may now become loss-making and thus subject to more scrutiny.

Not only are levels of reported fraud likely to rise, but it is expected that
patterns of fraudulent activity will differ during different economic cycles.
When lenders ramp up their scrutiny levels, certain individuals may come under
increased pressure to access funds and consider hiding their adverse credit
history, thereby submitting fraudulent loan applications.

For fraudsters who previously relied on targeting corporations and financial
institutions, the landscape has changed as well. With such companies increasing
their internal controls as a result of the crunch, fraudsters are now focusing
on individuals rather than institutions.

This has led to a growth in the incidence of identity theft. Individuals and
companies alike must reassess their need for self-applied controls rather than
rely on the security measures supposedly provided by the regulators.

In the meantime, we have already noticed a marked increase in demand for our
services and are gearing up resources to handle the expected increase in the
emergence of fraudulent activity.

Julian Jones is head of the forensic accounting
division, Quest Limited

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