The impact of fraud can affect company growth, reputation and staff morale. So how do directors spot it and what can they do to protect their business?
When the Association of British Insurers announced in July that fraudulent claims cost its industry an estimated £2bn a year, it highlighted examples of the types of cases it came up against. One involved a woman's claim for facial injuries that, she said, had resulted from a falling toilet roll holder in a fast-food business – a plea rejected when it was revealed that the holder would have had to have "fallen" upwards to injure her.
On the other end of the scale, it was revealed that Macmillan Publishers was ordered by the Serious Fraud Office to pay £11.3m for "unlawful conduct" or bribery payments related to its education division in East and West Africa. Macmillan's chief executive Annette Thomas said the business deeply regretted what had happened, adding: "The company has learnt from the experience and has emerged stronger." But what of the reputational damage, not to mention customer and staff confidence in the firm?
Whether it's large-scale fraud organised by rings with links to drug trafficking; employees or customers claiming to have slipped, tripped or been injured at work; high-value stock walking out of the door; executives accepting kickbacks from suppliers or sub-contractors; or e-crime, where websites are hacked for confidential information, all of it is criminality, says Glen Marr, director of the Insurance Fraud Bureau (IFB). And all of it hurts the bottom line. As research by KPMG reveals, UK firms lost £1.1bn in profits in 2010.
Technology helps fraudsters
We're in a difficult economic environment, says Marr, which means that more people, including employees, are willing to carry out fraudulent activities – whether that's insurance claims or actually trying to take money out of a business.
The other problem, says John Smart, who leads the fraud investigation team at Ernst & Young, is that companies have been cutting back on what would have been "control functions" as they try to save money. "The middle management that carried out a control function in the past has been removed, which means there's more opportunity within the business for people to carry out fraud," he says.
Fraud is as old as the hills, says Jeff Katz, chief executive of corporate investigation firm Bishop International, but the crime changes from decade to decade as the working environment evolves. So a rising trend is the use of technology as a weapon. He recalls one case where 250 heavy-duty pieces of kit disappeared from a large Midlands manufacturer. The person discovered to be behind it was a former employee who had set up two businesses – one to make the kind of machines that his former employer manufactured and the other to ship them.
"What was interesting was the way he managed this, because it was related to technology," says Katz. "He knew the computer systems well and was probably given greater access than he should have been. That sort of fraud is new – it was carried out by manipulating systems."
Spot the warning signs
So how do you spot fraud and are there any common telltale signs? You've got to keep
a careful eye on the books, suggests Katz. "That particular fraud was discovered by an end-of-year audit where the number of parts that the company had used and had in its stocks didn't add up with what had gone out. You must keep a close eye on products going in and out, and with a service company, invoices going in and out."
Smart agrees. If you're talking about SMEs or even smaller firms, he says, if the financial housekeeping isn't happening as quickly, or as thoroughly or as frequently as it should do, there may be a problem. "For instance, if cash isn't being reconciled as frequently or accurately, or if debtors are getting slightly out of control, or if there are unreconciled balances in the accounts. All of those are warning signs that something may be going on that the business doesn't understand," he says.
The other thing that directors should look out for is if there's a difference between cash the business generates and profitability. That's a clear warning sign, says Smart. "If profits look fine and cash is not going up then it's being used for something else. Now that might be growing inventories, but it might be fraud. It's not a good sign unless it's fully understood."
But it's a particular challenge for smaller firms, admits Marr, because fraudsters go for the path of least resistance. If they feel a large company is too formidable to deal with, they'll focus their attention on where the fewest risks lie. That means picking off the more vulnerable SMEs. "So they may target, for example, a firm that's got a small fleet of vehicles and cause an accident in front of them. What the industry calls 'cash for crash'," he says.
His advice to directors is to educate employees. "Much of the success around tackling fraud doesn't have to require lots of investment," he says. "Let's say it's that small company with a fleet of vehicles
– they can educate drivers about what happens if they get into this cash-for-crash situation; how to report things; where to report things; and what fraud is. It comes down to simple, preventative measures."
Fighting fraud
Marr believes the best way to tackle fraud
is if the board is behind a clean-up – "their intolerance drives it", he says. Katz reckons a chief executive or managing director must keep a close eye on the movement of the product or service. And it doesn't have to be a difficult balancing act between trust and supervision, or even that complicated. "The combination of record-keeping and stocktaking needs to be good. That doesn't really imply anything to the employees except good management," he explains.
So what else can directors do? If the business is big enough it should carry out an internal audit or hire somebody to conduct a full vulnerability review to look at the high-risk areas of the business, suggests Smart. Completing a check on a new employee is a must, adds Katz. "Even small companies can do minimal checks by doing a bit of internet searching. And if they make it a matter of policy, they could ask prospective employees to do a Criminal Records Bureau check on themselves and show them the results before committing to the hire. That's 80 per cent foolproof."
On a wider scale, Marr says collaboration has worked well in the war against fraud in his industry. He advises that companies share information and intelligence. "It makes life a bit more challenging for fraudsters," he claims. "We share data every day to combat fraud and it works incredibly well. Why not engage with other sectors?"
And don't forget due diligence, say Katz and Smart. As businesses look to invest in emerging economies, understanding the background or reputation of the principals involved is essential. "People often do financial due diligence, but they forget that the key to any business are the people," says Katz. "Do some focused due diligence, not just on the numbers but also on the people you're dealing with," adds Smart. "Look out for any sign that you might be dealing with somebody who could commit a fraud on you or might carry out bribery and corruption on your behalf."
As the Macmillan case proves, if you're working in a region where officials are poorly paid, the economy is fragile or taking backhanders is an established practice, overt or covert bribery may thrive and your business is at serious risk of falling foul of the law.
