The financial cost of fraud

Originally published by AAT.

The terms “corruption” and “embezzlement” will be familiar to anyone who enjoys a good crime drama.

Even casual viewers know that stories of con artists often end with the fraudster getting caught in the act. But when it comes to real-life financial crimes, outcomes are rarely so neat and tidy. In fact, a large number of frauds are successful — and they’re costing businesses in the UK an estimated £125bn each year.

Reducing fraud losses by 40% would free up an extra £50bn annually, according to accountancy firm Crowe Clark Whitehill’s Financial Cost of Fraud 2017 report. To put this in perspective, the UK’s central government spent £44.8bn on defence last year. Preventing fraud is not just good for individual businesses, it’s important for the economy as a whole.

Of course, detectives and private investigators aren’t the only ones capable of stopping fraud. Accountants also have a vital role to play in helping their clients protect themselves, though they won’t need to pull out a magnifying glass or dust for prints. Sound financial advice and good control processes are the best weapons in the fight against fraud.

Stopping sticky fingers

No one wants to accuse a team member of being dishonest, but it’s important to know that internal fraud is very common. Almost one in five small businesses are defrauded by a staff member in its trading lifetime, according to Action Fraud, the UK’s reporting centre for fraud and cybercrime. Workers can deceive their employers in a number of ways — from pocketing money out of a cash register to falsifying financial statements. Businesses must therefore put controls in place to make it difficult to take liberties with company money.

“We had a client whose payroll person very generously gave herself a pay rise and nobody knew about it until it came to the end of the year,” says Steve Collings, audit and technical partner at Leavitt Walmsley Associates. “When we looked at the payroll expense and profit and loss accounts, we found the numbers had gone up beyond the client’s expectations.”

By the time an accountant has identified fraudulent behaviour in year-end statements, it’s often already too late to recoup the losses. Business owners must focus on preventing fraud, rather than spotting it in action. This is where accountants can step in and help their clients implement control systems. Both parties should work together to determine what a firm’s high-value assets are and what they’re currently doing to protect them. For example, do purchases have to be signed off before they’re made?

Once a company’s vulnerable points have been identified, accountants can offer advice on how to shore them up. This typically involves setting up managerial oversight systems to make sure employees are accountable for their spending. Such controls don’t have to be complicated: sometimes fraud prevention is as simple as getting multiple pairs of eyes on financial statements.

“If you have one person doing the payroll, another person checking it and a director reviewing it before it gets finalised, then there are review stages which will reduce the scope for fraud,” Collings explains.

Cutting cybercrime

Businesses should also be aware of the growing financial threat lurking in the realm of cyberspace. Action Fraud found that businesses lost over £1 billion to online fraud last year. However, the actual number is likely to be higher, as data is only collected on firms who report cybercrimes to the police. The good news is that, like internal fraud, online fraud can often be prevented by deploying the right strategies.

Cyberattacks come in many forms — from fraudulent emails to malicious software that blocks access to computer systems until a ransom is paid. Accountants can help clients by informing them of the latest cyber threats and recommending good security practices. Tech-shy firms will be pleased to know that cybersecurity can be as simple as setting a good password.

“Accountants should advise clients to think carefully about the strength of passwords for online banking and on servers they use to hold sensitive data,” says Collings. “No matter how secure a password is, it’s still important to change it on a regular basis. Some servers prompt you to do this at least monthly.”

In a perfect world, every company in the UK would have rock-solid control systems and cyber defences in place. But the best fraud schemes are difficult to detect, and financial crimes can still slip through even the strongest of safety nets.

Financial fraud is a growing problem for companies of all sizes. As the amount UK companies lose to fraud increases each year, accountants must ensure they’re doing everything they can to protect their clients.

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