Fraud is a problem, never more so during times of economic hardship where temptation and need are great. It won’t be surprising, then, that according to KPMG’s Fraud Barometer: Half Year Highlights 2022, fraud is on the rise (KPMG, 2023). It found that the total value of alleged fraud reaching UK Crown Courts in the first half of 2022 (January to June) was £532.6 million, an increase of 288 percent compared to £137.4 million in the same period in 2021, and that fraud cases against financial institutions were the highest by value at £305.2 million in the first half of 2022, a jump of 4,333 percent compared with the same period in 2021.
The tip of the iceberg
Of course, this is just the tip of the iceberg as the total amount of actual fraud is certain to be substantially greater and includes not only fraud against employers, which Statista (2022a) approximated to be at 5,638 offences in 2021/22, but also frauds not reported. In fact, fraud is now believed to be the most common crime in England and Wales and costs the UK economy £137 billion each year (Hyde et al., 2022).
Fraud is now believed to be the most common crime in England and Wales and costs the UK economy £137 billion each year
The worry is that not all businesses fully comprehend that they can run aground, not just because of economic conditions, but also because they have been defrauded. And given the economic situation we’re now facing this is just the beginning; more and more fraud will be uncovered in the next two years and some of them will be stunning in their size.
But for the moment, consider the November 2022 case of, as the Independent put it, “a vet [who] made records of fake pets to scam insurers out of thousands” (Mathers, 2022). In this instance, Donal Johnston (formerly Fegan), a vet at Northern Ireland-based Banbridge Vet Pets, invented accounts for dogs that didn’t exist and arranged for insurance money to be paid into a bank account he owned when he set up insurance for a receptionist’s cat and dog. It was a practice manager that uncovered the fraud – some £13,214. Johnston was dismissed and was given an RCVS sanction that was postponed for two years.
There are other cases but the point is this – fraud can happen in small veterinary practices.
Third-party problems
Another area of concern is fraud perpetrated by third parties, such as suppliers and customers. BDO’s FraudTrack 2022 reckoned that this is the number one type of fraud and is worth around £6bn (BDO, 2023).
Examples include suppliers under-delivering goods and perhaps overcharging for the pleasure of that under-delivery too. Customers will defraud suppliers when they see weak systems – claiming under-deliveries of stock when in fact the delivery was correct, withholding payment for “disputed invoices” and simply disappearing without paying are very common.
Claiming under-deliveries of stock when in fact the delivery was correct, withholding payment for ‘disputed invoices’ and simply disappearing without paying are very common
Some investigators have given a “triple whammy” warning – management stealing from their companies, suppliers ripping off customers and regulatory bodies breathing down business’s necks. This warning is now becoming the reality and it will continue to get worse in the recession.
Blowing the whistle…
Many investigations are started by a whistleblowing letter within a business or organisation. Ninety-nine times out of 100, there is always something wrong at a business that has received a whistleblowing letter, yet they often cause management squirming and indecision. The advice is clear – always look into any claims made and always investigate. The whistleblower may not actually be correct, but there is usually something amiss.
…but making less noise
Paradoxically, whistleblowing may fall during a recession and the reason is simple: employees will not want to rock the boat in the sea of a precarious employment situation. Stories about redundancies will become more common and many people are just thankful for having a job. Why would they want to cause trouble by whistleblowing? More likely, they will put their heads down, work hard and be thankful they can still pay their rising mortgage.
Getting tough
There has been a noticeable increase in custodial sentences for those fraudsters who have been caught and put through the criminal justice system. According to Stuart Miller Solicitors, the maximum sentence is 10 years for fraud, but if it involves money or property (confidence fraud) and is over £500,000, then a sentence of seven years or less would typically be given. For those crimes where the value of the fraud committed is below £100,000 but over £20,000, then a sentence of four years is typical (Stuart Miller Solicitors, 2023).
The motives for fraudsters rarely change year on year – greed and the want for a lavish lifestyle give rise to nearly two-thirds of all fraud. The paying of debts and gambling problems make up the other usual suspects in terms of motive. Where potential fraudsters are motivated by debt or gambling, the fraud that they are most likely to commit is employee theft and cash fraud.
The demographic of a fraudster is all too familiar year after year. Statista believes that worldwide, approximately 20 percent of all fraudsters were between the ages of 36 and 40 years old in 2020 and 2021. Similarly high were the numbers of fraudsters between the ages 41 and 46 (Statista, 2022b).
Reduce the chance of fraud
So, what can practices do to protect themselves from fraud? Below is a set of proactive measures to help management through these difficult and fraudulent times.
Motive
- Be wary of false accounting. Particular attention should be paid to relationships between staff and customers, with management looking at year-end sales behaviour and the post-year-end issue of credit notes or refunds
- Review the bonus structure. Fraudsters rationalise to themselves that their performance is worthy of reward. Ensure that the bonus structure is fair, transparent and aligned to the behaviours the practice wishes to reinforce
Fraudsters rationalise to themselves that their performance is worthy of reward. Ensure that the bonus structure is fair, transparent and aligned to the behaviours the practice wishes to reinforce
Opportunity
- Consider remote locations. There is often a link between fraud and the distance from the head office. For example, within a London-based organisation a small, seemingly profitable, branch elsewhere will often get less management attention and therefore the opportunity to commit fraud increases
- Conduct zero-based budgeting. Organisations should pick an area of their business, for example marketing, and embark on a “zero-based budgeting” exercise – a method of budgeting in which all expenses must be justified for each new period – rather than relying wholly on trends against prior years
- Pay attention to areas where there is no physical product. Any area of the business that has no physical product, for example consultancy services, cyclical maintenance or advertising, are often more susceptible to procurement fraud
- Assess IT vulnerability. Fraudsters use widely available tools, such as keystroke loggers, to obtain sensitive data like PINs and passwords. Appropriate administrative controls and passwords, prevention of unauthorised software installation, restrictions on USB ports and other measures can reduce fraud risks
Any area of the business that has no physical product, for example consultancy services, cyclical maintenance or advertising, are often more susceptible to procurement fraud
Indicator
- Don’t neglect over-performance. If something is too good to be true, it usually is. When assessing the performance of a business or an individual within it, make sure adequate attention is paid to over-performance
- Review changes to the supplier master file. This is part of a computerised accounts payable system where data is held on suppliers, including their bank account details. It is very important that an exception report is produced of any changes to standing data on the supplier master file
- Monitor the car park. Although it is stupid to flaunt ill-gotten gains at work, most fraudsters do. Pay close attention to the cars parked in the management car park and consider whether the salary staff are paid warrants the vehicles they drive
- Perform background checks on recruitment. Don’t give those with a flawed history the chance to commit fraud in your business. Over 50 percent of people lie on their CV, so pre-employment screening to detect such falsehoods can prevent the employment of those lacking integrity
- Pay attention to morale. Fraudsters are often dissatisfied with their work and rationalise their entitlement to further reward
- Investigate high staff turnover. It is very hard to be a whistleblower at work. It is much easier to polish your CV and look for another job. Management should pay particular attention to those areas of the business that have high staff turnover. It is good policy to have in place a system of exit interviews for staff, enabling them to understand concerns that they may not have raised prior to deciding to leave the organisation
Summary
Fraud will never completely go away. However, that doesn’t mean that practices cannot combat it. Keeping a watchful eye, ensuring that staff know that fraud will be investigated and reported, will go some way to protecting the business.
