Adam Bernstein delves into the murky problem of unseen fraud and how you can avoid making it your biggest barrier to success.

According to PwC’s 2018 Global Economic Crime and Fraud Survey, only 49% of organisations said they’ve been a victim of fraud. The problem is that more have probably suffered but didn’t realise.

Philippa Dempster, Managing Partner of law firm Freeths, believes that fraud is widespread, noting that “the 2019 England and Wales Crime survey estimated that there are more than 3.9 million fraud cases a year”.

As the PwC report highlights, while the authorities, firms, and staff are more acutely aware of the risks of fraud, the biggest problem is that few recognise that the fraud that goes unseen is just as damaging – possibly more so – than the fraud that is found. Firms ought to think of it as the biggest competitor they didn’t know they had.

Andrew Northage, a Partner at Walker Morris LLP, has seen awareness of fraud rise: “It is certainly the case that companies are now more mindful of the policies and procedures they must have in place to raise employee awareness of fraud and to deal with it if it occurs.”

Is there a typical fraud that firms should look out for? None really, but Phillipa lists a number of examples that she’s seen, which include requests to pay a ‘fake’ bank account, fictitious invoices, invoices paid in one currency but posted in another, finance employees abusing a system, ex-employees abusing a system, and the overstating of accounts.
Advice on prevention 

Prevention is invariably better than the cure. It’s for this reason that Phillipa recommends that organisations “create an open culture with regular awareness training and vigilance – sending examples around of the latest scams, ensuring good cyber security, and also basic IT hygiene with regular password changes”.

To this list she adds watching for unusual behaviour, such as an individual living beyond their means, and placing CCTV and suitable stock control systems in warehouses. Further, she most definitely would enforce holidays as “often this is the time when things are discovered… especially in accounts teams”.

But there are other tell-tale signs to look for, says Andrew, such as “domineering or bullying management, obsessive secrecy, and close or closed relationships with suppliers; there may be an unwillingness to delegate menial tasks, or you may notice a significant change in an employee’s lifestyle”.

Andrew adds that “different kinds of fraud warrant different approaches. For instance, if facing push payment fraud, email must be closely monitored”. He suggests that when dealing with payments, it is prudent to confirm payment details by telephone before transferring money, particularly if account details have changed at the last minute. 

One tip from Andrew to guard against internal frauds is to “consider introducing checks beyond emails from supervisors before payments can be authorised; emails can be edited to make it look as though the payment has been authorised”.

Major fraud events usually involve senior management, especially those with the authority to override controls. However, employee fraud schemes often involve theft by exploiting systemic weaknesses, such as stealing cash before it has been recorded, fictitious expense reimbursement claims, and/or stealing company property.  Another suggestion is to have systems and processes that cross check each other. One specific test, for example, could look for duplicate invoices and payments.

On this tack, Andrew is keen to highlight overly complex corporate relationships or autonomous branches. He said: “Firms may have a lack of clear reporting lines or areas of responsibility, opaque management accounts, a high volume of transactions, or excessive profits in peripheral functions. These, and aggressive accounting policies and forecasts with reward schemes linked to results, may indirectly encourage achievement through more mendacious means.” 

He warns to look for results that may be always at or just above budget, or oddly exceeding market trends.

It shouldn’t be a surprise that employees are the key to detection. On one hand, those that see solid policies will be deterred from engaging in criminal acts. On the other, honest employees will become critical allies in the fight who, with suppliers, can become key sources of tips and information.

Warning for management

Even if directors are not directly involved in fraud that occurs on their watch, this does not mean they will be unaffected. Any reputational damage to the firm may, by extension, mark theirs.

Depending on the circumstances of the fraud, its occurrence may indicate that a director could be in breach of their duties, even if they were not the perpetrator.  In certain circumstances, a director may face disqualification or personal liability for any financial losses the company sustains.

Fraud is everywhere, often hiding in plain sight. It’s impossible to stop but firms can take steps to keep the risk of an incident occurring to the minimum. Considering that fraud can be so destructive, it’s an issue that cannot be ignored, or else it may become your biggest problem