FRAUD can hit any business and as Raoul Dowding Veterinary Surgeons can testify, vets certainly aren’t exempt. A two-and-a-half-year £100,000 fraud, perpetrated by Claire Hazell, almost sank the business and there’s no chance of seeing the money again.
Raoul Dowding’s only consolation is that Hazell was sent to prison for 18 months. Interestingly, when Hazell started work for Dowding, she was being prosecuted for defrauding a previous employer out of £29,000 for which she later received a 12- month prison sentence.
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 the recent annual FraudTrack report from BDO, total reported fraud in the UK stood at £1.19 billion for 2008, up 14% on 2007’s figure of £1.04 billion.
The survey, however, only covers reported cases of fraud in the UK at a time before the recession really started to bite. This is just the tip of the iceberg as the total amount of actual fraud is certain to be substantially greater.
Generally, of the investigations that the professionals carry out, fewer than 5% go through the criminal courts. The modest increase in reported fraud should not be seen as the giving of any comfort to UK plc. Corporate vessels will run aground, not just because of economic conditions but also because they have been defrauded.
This is just the beginning, more and more fraud will be uncovered in the next two years and some of these will be stunning in their size.
Following the money
The report highlights the fact that fraud in the financial and insurance sector increased by 83% to £788 million and accounted for 66% of all fraud in the UK.
The financial and insurance sectors are where the money is. It is no surprise that this sector suffers the most. Frauds, particularly in commercial lending, where banks will find that they have been misled as to the value of properties taken as security for loans, will increase.
Third party problems
A third area of concern from the report is fraud perpetrated by third parties, such as suppliers and customers. Third party fraud hit £273 million during 2008 – an increase on the 2007 figure of 347%.
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.
Some investigators have given a“triple whammy” warning – management stealing from their companies, suppliers ripping off customers and regulatory bodies breathing down businesses’ necks.
This warning is now becoming the reality and it will probably continue to get worse.
Blowing the whistle…
Many investigations are started by a whistle-blowing letter within a business or organisation: 99 times out of 100, there is always something wrong at a business that has received a whistle-blowing letter yet they often cause management squirming and indecision.
The advice is clear: always look into the claims made and always investigate. The whistle-blower may not be accurate but there is usually something amiss.
…but making less noise
Paradoxically, whistle-blowing 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 are now common and many people are just thankful of having a job. Why would they want to cause trouble by whistle-blowing? More likely, they will put their heads down, work hard and be thankful they can still pay their mortgage.
There has been noticeable increase in custodial sentences for those fraudsters who have been caught and put through the criminal justice system. The average sentence length is up by just under a quarter. In particular, the sentencing of those involved in major frauds (frauds with a value of £50 million) has increased substantially.
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 on year – males aged between 20 and 39 make up the largest group of fraudsters with the second placed category being males aged 40 to 59: 80% of all the frauds in this year’s survey were committed by men.
Twelve tips to reduce fraud risk
So what can you do to protect your business from fraud? Here is a set of proactive measures to help organisations through these difficult and fraudulent times.
Motive
1. Be wary of false accounting. Particular attention should be paid to relationships between the sales team and the customers, with management looking at year-end sales team behaviour and the post year-end issue of credit notes.
2. Review your bonus structure. Fraudsters rationalise to themselves that their performance is worthy of reward. Ensure that your bonus structure is fair, transparent and aligned to the behaviours you wish to reinforce.
Opportunity
3. Consider remote locations. There is often a link between fraud and the distance from head office. For example, within a London-based organisation a small, seemingly profitable regional subsidiary will often get less management attention and therefore the opportunity to commit fraud increases.
4. Conduct zero-based budgeting. Organisations should pick an area of their business, for example marketing, and embark on a “zero based budgeting” exercise rather than relying wholly on trend against prior year.
5. Pay attention to areas where there is no physical product. Any area of the business that has no physical product, for example consultancy services, factory cyclical maintenance or advertising, are often more susceptible to procurement fraud.
6. 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 the fraud risks.
Indicator
7. Don’t neglect over-performance. If something is too good to be true, it usually is. When you are assessing the performance of a business or an individual within it, make sure you pay adequate attention to overperformance.
8. Review changes to the supplier master file. This is part of a computerised accounts payable system where data are 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.
9. Monitor the car park. Although it is stupid to flaunt your ill-gotten gains at work, most fraudsters do. Pay close attention to the cars parked in the staff car park and consider whether the salary you pay certain people warrants the vehicles they drive.
10. Perform background checks on recruitment. Don’t give those with a flawed history the chance to commit fraud in your company. Over 50% of people lie on their CV, so pre-employment screening to detect such falsehoods can prevent the employment of those lacking integrity.
11. Pay attention to morale. Fraudsters are often dissatisfied with their work and rationalise their entitlement to further reward.
12. Investigate high staff turnover. It is very hard to be a whistle-blower 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 tell you about concerns that they may not have raised prior to deciding to leave the organisation.
Fraud will never completely go away. but that doesn’t mean that you cannot combat it. Keeping a watchful eye and ensuring your staff know that fraud will be investigated and reported will go some way to protecting your business.
