Companies in denial on 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 involve 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 M&A 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 they are getting an accurate valuation on any property being bought”.

Fraud hotline
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 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 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 sentence length since 2003, there have been tougher sentences for larger
frauds of £1m and above.

Low priority
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 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.