Fraud Prevention

By GEOFF NAIRN

(Published in the Times report on Fighting Fraud on November 13, 2013. Read the original here.)

Prevention is better than cure and that is certainly the case with fraud, whose financial cost to the UK is estimated at more than GBP85bn.

“Putting in place pre-emptive measures could make very significant improvements to the financial health and stability of UK plc,” says Jim Gee, director of counter fraud services at BDO International, the accountancy firm.

UK businesses have finally woken up to the huge financial cost of fraud and the importance of prevention.

“There as been a big change in the past few years,” Gee says. Before, fraud was viewed almost as an act of God. Businesses hoped it wouldn’t happen to them and if it did, they would worry about it then. Now, fraud is viewed as a business cost that needs to be measured and managed to drive improvements to the bottom line.

That change of attitude has led to much more proactive approach to preventing corporate fraud, says Mr Gee, who was recently sent to Zambia to look for fraud in a mining company.

The firm had no concrete suspicions that fraud was occurring. Rather, it suffered from rising costs and wanted to see if fraud could be responsible for its shrinking bottom line.

Irrespective of the sector in which it operates, there are certain types of fraud that affect almost any business as they exploit weaknesses in the two “Ps”, procurement and people.

There is a wide variety of procurement frauds. For example, dishonest suppliers may try to claim payment for goods or services that have not been delivered, or they may deliver goods that have not been ordered — office supplies are a favourite — and then invoice the company for the unwanted and overpriced goods.

New technology makes possible new types of fraud. Payment redirection fraud has become quite a problem with the growth of electronic payment methods. With this scam, a fraudster emails or phones the accounts payable department of a business passing themselves off as a legitimate supplier and requesting that payments be sent to a different bank account — that of the fraudster.

But how does the fraudster get the details of a legitimate supplier?

“The amount of information that is in the public domain is remarkable,” says Howard Cooper, associate managing director of investigations at Kroll, a specialist in risk consultancy. Suppliers often list their customers on websites and in the building sector, where this scam is particularly prevalent, the names of subcontractors are often displayed at building-sites.

Many procurement-related frauds can be foiled through stricter policies and procedures.
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“The people who approve invoices don’t spend as much time as they should on the task,” says John Smart, head of fraud investigation at EY, the accountancy firm.

While it is relatively simple to train staff to rigorously check all invoices and goods delivered, it is more difficult to spot frauds that involve a dishonest employee, so-called insider fraud.

Mr Smart gives the example of a UK transport business, whose IT manager set up various fictitious suppliers to invoice the business for non-existent IT products and services.

The IT manager was able to get away with the fraud for considerable time because the fake invoices resembled those of legitimate IT suppliers and their prices were competitive, so they did not raise any suspicions.

The alarm bell finally rang when the business realised its IT budget had grown suspiciously large and the IT manager was dismissed.

“It was a clever scam,” says Mr Smart, who was brought in to investigate the fraud. Amazingly, he discovered the IT manager had performed the same scam at the company he worked for previously.

That suggests a major failing in the transport company’s recruitment procedures. But Mr Smart says the weak link is often the references provided by former employers.

Even if an ex-employee was sacked for fraud, HR departments worry about the legal repercussions of disclosing that to a third party, particularly if the employer kept the fraud quiet and there was no criminal prosecution.

Mr Smart says future employers should always verify information on applications and they should try to speak to former employers directly, particularly if the position applied for comes with a lot of responsibility and trust.

Not even the most comprehensive systems and controls can prevent a rogue employee from perpetrating a fraud.

“It does not matter how strong you make the controls because if someone really wants to, they can evade them,” says Kroll’s Mr Cooper.

But a lot of fraud is opportunist and relatively easy to minimise by enforcing authority limits, holding regular audits and, perhaps most importantly, creating a corporate culture in which fraud will not be tolerated.

Top Tips to Counter Staff Fraud

• Training

  Train employees to spot ‘red flags’ that betray common types of fraud. Ensure they understand the consequences fraud can have on the business.

• Policies and procedures

  Put in place clear policies and procedures dealing with fraud, bribery and whistle-blowing, with examples of behaviour that is and is not permitted.

• Pre-employment checks

  Always confirm a new hire’s employment history, education and referees. Don’t forget to also carry out checks on temporary staff and consultants.

• Authority limits

  Set thresholds for obtaining approval for expenditure, limits on gifts and expense claims, and restrictions on employees’ access to IT systems.

• Zero-tolerance culture

  Ensure that employees and management all understand that even minor types of fraud, such as inflated expenses claims, will not be tolerated.

• Employee performance

  If employees feel their accomplishments are not adequately recognised, they are more likely to turn a blind eye to a fraud — or commit one themselves.

• Compensation

  Be careful designing compensation schemes based on achieving targets as they can encourage employees to ‘bend the rules’ to meet monthly sales targets, for example.