Mark Jenner & Co Limited – Forensic Accounting Services

WHY PROTECT AGAINST EMPLOYEE FRAUD?

According to the Association of Certified Fraud Examiners, businesses lose on average 7% of their revenue from fraud.  In a recent survey of over 2000 employees carried out in the UK, 20% of them admitted to fraud – 70% of respondents said that they would commit fraud if they knew for sure that they would get away with it.  Much of this fraud may be modest inflation of expense claims, but much will be more serious.

It is possible to take out employee fraud insurance, in which case you may be replacing one cost with another. You would however be guarding to some extent against major fraud attacks by serious fraudsters who target your company, but the day to day losses may individually fall below your policy excess.  It is better to protect against different types of employee fraud by making sure your business has considered its fraud prevention and fraud controls properly.

INDICATORS AND EXAMPLES OF EMPLOYEE FRAUD CASES

1. When a work force has a very high work load and may be experiencing high levels of stress, this is the time when frauds might occur. This can be because the staff involved feel put upon, or because the added activity means that normal fraud controls are being overlooked and somebody sees an opportunity.
2. Staff who work late regularly or do not take any holidays may be guarding a little empire within the business that is acting fraudulently.
3. Staff that suddenly show the trappings of wealth for no apparent reason may well have obtained a source of money fraudulently.
4. Similarly any change in lifestyle may indicate that a member of staff has acquired wealth or is earning his living by different means.
5. Unusual customer complaints may indicate the presence of fraud. For example if customers are suddenly complaining that their payments have not been recognised on their statements it is possible that somebody is diverting receipts fraudulently.
6. When staff arrive and then leave a few months later for no obvious reason, they may have been targeting your company for fraud opportunities.
7. Relationships between members of staff and suppliers or with customers should be professional – no one customer should be dealt with solely by one member of staff. The chance of bribery and fraud increases in these cases.
8. Unusual cost rises or missing money (black holes) may be indicators of fraud and not just bad accounting or a depressed market place.
9. Employees with external business interests need to be managed as this could indicate fraudulent intent.

EMPLOYEE FRAUD PREVENTION

The best advice that Mark Jenner & Co can give is for any business, large or small, to have a FRAUD POLICY. A fraud policy, or fraud prevention policy, is simply the formalisation of the intent that the organisation will not to tolerate fraud. It is a statement that the business considers fraud to be a threat and that it will make every effort to prevent it happening. It will state that it expects its employees to have the same intent. The risk of frauds increases in organisations that are complacent about the problem of fraud.

A fraud policy can be a full blown glossy publication circulated to all staff – or it can be a printed sheet posted on the staff notice board. The important thing is to communicate the required message to all staff, for example:

1. The business considers fraud to be a criminal offence
2. The business will not tolerate fraud
3. The business expects its staff to be of the same mind
4. The business will deal with any fraud discovered
5. If a fraud is suspected staff are to contact…[a convenient and appropriate number is given - with assurances that whistle blowing is supported by the business]

The precise details contained within the policy document will vary from organisation to organisation. Once the culture of the organisation is set by the example being set by the management, it is easier to implement more effective detailed controls over the activities of the rest of the business.

DEALING WITH EMPLOYEE FRAUD CASES

If you discover or suspect that your organisation has been defrauded by a member of staff, it is important that you get your approach right from the start. You will want to secure your assets and prevent any further losses. This might involve suspending any signing authorities or mandates for the bank accounts and suspending any alleged perpetrators while you carry out an investigation. Evidence must be secured, this will include electronic evidence on computers, mobile phones and other storage devices. You may need to notify your insurance company and the regulators. A listed company may need to make a market announcement.

The most appropriate route for dealing with a fraud will depend on your organisation and the circumstances of the fraud. It is very easy to get it wrong and if, for example, you rush an investigation inappropriately there is a chance that you may even find yourself on the receiving end of an expensive claim for wrongful or constructive dismissal!

It can be a good idea to plan for the eventuallity of a fraud. By determining procedures to be followed and appointing responsibilities in advance you can avoid the panic decisions that might otherwise arise. A FRAUD RESPONSE PLAN will set out the persons responsible for coordinating any action, and those responsible for investigating. Such a policy document may insist that outside experts are called in to advise.

REPORTING EMPLOYEE FRAUD TO THE POLICE

There is no obligation to report a fraud to the police unless you have suspicions that money laundering is taking place. However you may wish to report the fraud to the police if this is part of your fraud response plan. The first port of call will be your local police station who will provide you with a crime number. However, the matter would then be transferred top an appropriate fraud or economic crime unit.

Many victims of fraud are surprised at the lukewarm response they are given by the police. Sometimes they are referred to another agency, such as the Department for Innovation and Skills (formerly DTI). Sometimes they are told to go away and come back with a clear case supported by evidence.

The reason for this is because the police do not have adequate resources to investigate all frauds that are reported. The scale of fraud is immense and the police fraud squads and other agencies investigating fraud are under increasing funding pressure. The answer is to provide an adequate report of the fraud to the police, that both allows you to pursue your own internal remedies (such as the safe sacking of the employee without fear of counter claims being made) and provides the police with a clear picture of the fraud that they can then investigate.

Mark Jenner & Co are happy to provide you with no obligation advice on the way to proceed when a fraud is discovered, and will assist you with dealing with your fraud – often it is possible to utilise your own resources to investigate fraud and thereby keep costs to a minimum.

It appears that the toy retailer Toys R Us is the latest big business to demonstrate how easy it is for the fraudster to attack if simple anti fraud prevention methods are not observed. Embezzlement master Paul Hopes stole some £3.7 million from the toy giant in 14 sums ranging from £101,000 to £350,000 at a time.

Over a period of around three years beginning in 2005, Hopes raised fictitious invoices for Far East toy suppliers so that he was able to arrange payment into accounts that he controlled. Yes it was as simple as that! He was a company accountant of some 23 years and the company had complete trust in him. They did not expect him to be a fraudster and therefore clearly allowed him to override any semblance of controls that should have prevented the theft.

Hopes wife of 36 years did not suspect anything. She has been devastated by the revelation that her dull dependable husband had stolen money from his employers to fund a lavish lifestyle including prostitutes and high living in the City.

Hopes will probably spend up to 8 years in jail and have a criminal confiscation of assets order made against hime that will wipe out everything he owns. In addition, Toys R Us is now attempting to recover any money that hasn’t been spent through civil asset recovery. This will mean targeting the family home and assets that Hopes may have transferred to his unsuspecting wife.

The American company has more than 1,500 stores in 33 different countries, with its New York outlet being the biggest toy shop in the world. It is surprising that such a large organisation did not have the basic anti fraud controls in place to stop this simplest of thefts! How much would it cost to implement a system of supervision and review, account vetting and credit limit monitoring? The cost of implementing and regularly reviewing such a system would be a lot less than the final bill to Toys R Us for this escapade. It was not even the company’s systems that discovered the fraud, which merrily escaped both the internal and external auditors for three years running. It was the attention drawn by one of the prostitutes used by Hopes and lavished expensive gifts upon that acted as a whistle blower on the embezzlement.

There is a mature and capable anti-fraud industry that is underutilised by corporations world wide. For a reasonable sum, experts in fraud protection and fraud detection can review systems of the smallest to the largest companies. However, it appears that these concerns would rather spend 10 times the amount investigating even larger losses when the fraudster strikes.

Most fraud experts, myself as a forensic accountant specialising in fraud included, will provide initial advice free of charge that could save you huge amounts in the long run – even if we hope to get your business!