Mark Jenner & Co Limited – Forensic Accounting Services

First Stage Investigation Service (FSI)

Experience has shown that there are a vast number of smaller frauds being perpetrated which are not being investigated or dealt with in any satisfactory way.  These are frauds such as employee thefts or “rip offs” by suppliers such as builders where the financial loss may only be several £thousands.

Such losses can still be serious for individuals or small businesses but often do not command the attention of the fraud investigation regulators who simply do not have the resources to deal with every fraud that is reported to them.  Very often they will ask for more proof or a better prepared case summary. Such a report need not be very long or involved to be persuasive enough to stimulate the authorities into action. Mark Jenner & Co are able to provide a swift appraisal of the circumstances, including the documents involved, and prepare a credible short report aimed at supporting an initial claim for losses – this can be sent to an errant supplier accompanied by a solicitors letter or used to encourage involvement by the authorities. It can be a cost effective solution to fraud in many cases.

An alternative solution is to investigate the loss and commence civil litigation against the thief.  However, this is generally only efficient when large sums have been lost as the legal and accounting costs are almost certainly going to be prohibitive.  It has been said that formal civil asset recovery through the courts is only worth while when sums of over £1,000,000 are being chased!

So what is the solution when your bookkeeper steals £10,000 from your business or your builder says you owe him another £20,000 to finish off the job after he has spent the agreed price?  At Mark Jenner & Co we recognise that these cases need a cost effective solution – to ensure a sensible and proportionate chance of getting your money back or ensuring that the authorities investigate so that you can make a claim for recompensing your loss.

A First Stage Investigation can achieve the following:

• By discussing the case with you and acting as a sounding board we can help you to focus your thoughts and understand what options are available to you;
• All information sources will be considered and correlated as we asses the case, establishing the method and extent of the loss;
• The case assessment will be a presentation of the evidence in a format based on forensic accounting principles that can be presented to the authorities.  This is often all they require to commence a formal enquiry which can lead to prosecution, asset confiscation and open the avenue for you to make a victim compensation claim;
• The case assessment can be persuasive in achieving a negotiated settlement – thus avoiding expensive and lengthy litigation.

Example 1 – Employee theft

The case is evaluated and an assessment presented.  With your agreement a letter is sent to the fraudulent employee and another to the police.  The situation is safely contained and it will be possible to dismiss the employee with enough evidence for gross missconduct without fear of employment tribunals.  Negotiations may retreive the losses as a result of the fear of a pending criminal investigation (the police may decide not to pursue the matter if recompense has been made as it would not necessarily be in the public interest).

Example 2 – Minority Shareholder at a Disadvantage

The directors wind up a business in which you have a minority interest.  Your minority shares become worthless.  You then discover that the directors have started up in business again from the same premises and using the same assets selling to the old customer base.  The case is investigated and evaluated resulting in an assessment which will include a overview of the valuation of your shares and indications of any insolvency offences that may have been committed - with your permission letters are sent to the Insolvency Service and the directors.  The assessment can be used as pressure and quantification for your loss of share value.

Important Note – Using Specialist Fraud Solicitors

A very good solution if you are a victim of a fraud is to approach a solicitor.  However, as all forensic accountants are not fraud experts, not all solicitors are capable of dealing with a fraud.  In many cases the right result may be achieved – but at great cost.  It is a legal lottery and in most cases it is better to only appoint a lawyer who is specifically experienced in the work required.

Mark Jenner & Co does not give legal advice.  For this reason we often work alongside lawyers investigating frauds and recovering assets.  As part of our First Stage Investigation we will review your need for legal advice if you have not already appointed solicitors.  Then, we will help you with your choice of firms and individual solicitors and ensure that your instructions to them are as specific as they can be to ensure that the costs are minimisied.

As a typical financial investigation by a forensic accountant can cost anything upwards of £10,000 and often much much more, we feel that First Stage Investigation offers the possibility for a cost effective solution in certain cases where formal legal, investigative and accountancy instructions would simply be too expensive.  If such an investigation becomes necessary, the initial work in a First Stage Investigation will of course count within a full blown asset tracing and recovery excercise which would be provided at our normal extremely competitive rates.  Please contact us to discuss whether or not this service is appropriate for your case.

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.

A forensic audit is an investigation conducted by forensic accountants. It is almost certainly going to be a fraud investigation – either investigating a suspected fraud, checking to see if an organisation may be suffering from fraud or even just examining the risk of it becoming a victim of fraud in the future.

A forensic audit differs from a statutory audit because there is no prescribed outcome – in a statutory audit, sufficient checking and verification work is carried out to ensure that a set of financial statements is “true and fair”. In practice this means that the financial statements comply with accepted accounting methods and principles and are not materially wrong. This does not meant that they do not contain errors and instances of fraud – just that their appearance is good enough for the reader to understand the general financial position and results from them.

Many organisations suffer frauds that have been taking place during many years of apparently successeful audits – a specialist forensic audit will give a better chance of detecting frauds, or weaknesses that will allow frauds. A fraudster might be spending all of his time looking for the weaknesses in a business – to exploit. Therefore, a forensic audit must be more thorough and susbtantive than a statutory annual audit, and must be carried out by a more experienced forensic investigator.

The best forensic auditor will be a seasoned forensic accountant specialising in fraud, and though he or she may be assisted by junior accountants in the routine checking work being carried out, they will rely very much on an intuitive approach and an awareness of the fraudster’s psychology and methods of operation.

A forensic audit will focus on certain areas that are vulnerable to the attention of the fraudster. This will include analysing the trail of money as it enters the organisation, is processed and then disbursed in various ways. It will look at the way in which payments are made to both suppliers and staff, and the way that any managers or directors may be in a position to abuse the trust placed in them or collude with others to defraud their employers.

Very often a forensic audit in very large companies can be efficiently run by employing a fraud expert to oversee work carried out by junior staff, though care is always taken to ensure that there is no possibility that the person committing the fraud could be allowed to unknowingly assist with the forensic audit! For example, it would not be prudent to allow the wages clerk to assist with the audit of the wages function! Such a sensitive area must be looked at solely by an independant forensic accounting expert.

A forensic audit is normally commissioned by owners of a business who are unhappy with the management, and want the running of the business checked by an outside expert. The regular auditors or accountants will be too close to the management of the company in any case and would not necessarily possess the required skills.

Knowing what is wanted from the audit is the best way to get the optimum results from an expert accountant employed to investigate fraud risks in an organisation. It may be that the owners or managing director have received a tip-off that the finance director has been stealing. They might have noticed that he was driving a flashy new car and was taking expensive foreign holidays too frequently. Focusing investigations in this way are much better and more cost effective than general fishing expeditions – but must be carried out sensitively and with due attention to contractual obligations and employment law restrictions.

A fraud can be uncovered in a number of different ways. A good example is by a whistle blower who who might inform his managers that a colleague has been fraudulently stealing from the company. Such a corporate fraud will need to be investigated in order to prevent further losses, find out how it happened in the first place and to try to recover the stolen assets. Other frauds come to light when business owners review results at the end of an accounting period and discover that something is amiss. Frequently a fraud will only come to light when a company enters insolvency proceedings and is subjected to the scrutiny of the Insolvency Practitioner. Sometimes it might be the fraud that has caused the company to fail.

A specialist fraud investigator is needed when financial anomalies are discovered and it is very common for the victim company to enlist the assistance of a qualified forensic accountant experienced in fraud investigation. Such a person will be accredited to investigate a fraud and may be a Chartered Accountant or a Certified Fraud Examiner with possibly other qualifications – together with many years of experience dealing with such fraud cases.

Every fraud is different. There are different characteristics to be found between bank fraud, supplier fraud and mortgage fraud. Even within these categories there are many possibilities because the fraudster is very resourceful in seeking out new and different weaknesses in a business. Therefore, one of then most important attributes a good fraud investigator can have is a flexible approach, an inquiring mind and a tenacious approach to the work he specialises in.

Rather than jumping feet first into an investigation the fraud investigator will approach the corporate fraud by first determining what the victim organisation wants to achieve. The last thing a publicly quoted company will want is adverse publicity as this might affect its share price badly. Therefore, there may be constraints on the scope of any investigation and the victim might be prepared to accept a lesser solution to its problem rather than receive the publicity.

Normally the priority will be to get the money back or the victim company might want to make an example of the fraudster as a lesson to others. If it only wants to get its money back it may not want law enforcement involved. A police fraud investigation might disrupt the business or cause its reputation to be damaged and there is no guarantee that the business will achieve any of its own priorities. For example a bank might want to sack the employee and stem the leak of losses, and not want the general public to know that it had allowed a fraudster to work in its midst.

The forensic accountant or certified fraud examiner (a member of the Association of Certified Fraud Examiners) will want to agree the desired outcome of the matter with management and develop a fraud investigation strategy based upon the organisation’s own fraud response plan. It may be possible to interview the whistle blower early on to get a quick “heads up” into what was going wrong before beginning a detailed analysis of the accounting records, interviewing staff and making other expensive enquiries often outside the organisation. In some circumstances it may be necessary to carry out a preliminary covert fraud review, in the evening or during the weekend when employees are not present.

For the actual mechanics of the investigation the forensic accountant will most likely want to follow the trail of the stolen money. “Follow the money” will be the primary goal in such a forensic audit as this will provide not only a chance of getting the money back, but also evidence of why and how the fraud took place.

The losses need to be quantified exactly, with evidence showing how they occurred. In a fraud, this evidence is crucial as the complexity of financial transactions can obscure what has happened and cause the matter to become protracted. If the victim is unable to demonstrate the loss clearly, the perpetrator is more likely to escape punishment or having to return what he has stolen. Any forensic accountant’s report must be able to distill the facts and demonstrate the problem in a simple and coherent way.

This is because the expert accounting evidence must be presented clearly, for use in negotiations, arbitration or otherwise used in litigation. It may also assist in any criminal action that might take place, either alongside the civil fraud investigation or in response to a report submitted after the forensic fraud investigation. Sometimes, the police will not investigate a matter unless there is a clear presentation of the situation such as normally produced during a forensic examination of the accounting records following a fraud.