Biggest fraud danger for firms is from within

Aug 22 2008 By Greig Cameron

Staff helping themselves to extras costing firms £700m

Fraud is thought to have cost UK businesses more than £700million in the first six months of this year.

However, it is the growth in internal fraud which is providing a headache to the executives of many companies.

Internal management fraud accounted for almost half of the rise in activity during the first half of the year.

So now might be the time to re-evaluate the procedures in place to make sure no one at your company is taking part in their own version of the famous Nigerian lottery email scam.

John Mason, a partner at French Duncan accountants, said: "We are all so busy guarding against the most obtuse and well-publicised frauds from afar that it is sometimes easy to forget the dangers lying closer to home.

"The challenge for senior management is to create an environment in which few opportunities are thrown up for fraudsters and in which effective controls and safeguards exist to prevent them being taken.

"One of the simplest ways to do this is to segregate the responsibilities each member of staff has. An obvious example would be preventing purchase ledger staff also raising cheques for payment."

While the difficulties of implementing such an approach in an SME environment may be difficult there are still steps which can be taken. Mason said: "For smaller firms such a departmentalised approach is often impossible. However, that does not mean robust processes cannot be put in place when it comes to creating new suppliers, signing off company cheques and generating electronic payments.

"It is also important to monitor how bonuses are generated and try to prevent potential abuses of any weaknesses in the system. Can, for example, sales staff log down fictitious sales to hit targets and then once their bonus has been paid put through credit notes to level the ledger?

Are sales being made to clients that don't exist or who have perhaps never actually ordered the goods in question?"

"A business may have run successfully for many years, but that does not mean there has not been some fraudulent leakage along the way.

Assessing the business processes in place and giving them a nip and a tuck where necessary will stop firms suffering at the hands of fraudsters and raise the stakes for any employees thinking of helping themselves to a little extra."

One of the classic ways of defrauding a business is fiddling expenses but that appears to be on the wane.

Duncan said: "Under the Proceeds of Crime Act 2002, business owners putting personal expenses through the company and not declaring them as benefits in kind can find themselves the subject of a money laundering enquiry, while accountants and auditors have a duty to report any activity it would be reasonable to have suspicions over.

"For employees who inflate their expenses, this remains one of the easiest and fastest ways to secure dismissal in a world where it is increasingly difficult to be sacked from a full time position.

"Given this new focus on the expenses paid out to employees and those put through the business by owners, anecdotal evidence would suggest that this is the one area of business fraud that is actually falling."