Recession fuels rise in business fraud

COMPANY finance directors are being warned to look out for the tell-tale signs of fraud as the recession makes corporate criminal activity more likely.

James Treadwell, partner at Moore and Smalley Chartered Accountants and Business Advisors, says tougher economic conditions are increasing the pressure and motives for suppliers and employees to commit fraud.

And he believes companies should make it a priority to put systems in place to prevent fraudulent activity and minimise risk to the business.

He said: “Whether its managers trying to conceal bad results from internal and external observers, employees attempting to boost pay and income through illegal means, or staff providing false information to justify their position, fraud often increases during a recession.

“Prevention is definitely better than the cure, as what can start as minor misdemeanours can quickly become major abuses of position if they are allowed to go on unchecked and this can put a business at considerable risk.”

James points out three types of fraud businesses should be wary of: external, committed by someone outside the company; internal which is committed by management or employees, and which accounts for more than half of all reported fraud; and collusion, a combined effort between someone inside the company and someone external, such as a supplier.

Figures from a recent report show the total reported fraud rose to £1.9 billion in 2008 in the UK, up 14 per cent from the £1.04 billion in 2007. While in the financial and insurance sector fraud increased by a massive 83 per cent to £788 million – accounting for 66 per cent of all fraud in the UK.

James says there are some tell tale signs businesses should be able to spot that signal fraudulent activity is taking place. They include:

• Suppliers with an incorrect VAT number or with a PO Box
• New suppliers that are dealt with by only one person within the company
• Suppliers who regularly change legal advisors and auditors – this could suggest they are trying to find ‘sympathetic or laissez faire’ advisors
• Lots of corrections to the cashbook or entries in different handwriting
• Missing entries or ones that are not up-to-date.
• Lots of entries in the cashbook to similar people that are just below the threshold for approval.

James also recommends a number of measures to stop would-be fraudsters taking advantage of lax controls. These include:

• Making expenses procedures as transparent as possible – even introduce a zero tolerance policy for anyone caught making fraudulent claims.
• Separating duties. No single employee should be responsible for both recording and processing a transaction.
• Only authorised employees should have access to physical and financial assets and information, as well as accounting systems.
• Most importantly, communicate with your employees and make sure they know the company policy on fraud – and the all round implications of being caught.

James concludes: “Businesses should always seek expert advice and make sure they have an updated response plan in place to suspected fraud. Should any suspicions be aroused, businesses should act fast, but quietly and calmly, to catch the culprits.”