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Top tips to identify and prevent fraud

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21st January 2009

As businesses across the country prepare their year end reports, forensic experts at Smith & Williamson are encouraging financial directors and managing directors to be aware of the increased risk of fraud in a downturn and to act early.

David Alexander, director of Forensic Services at Smith & Williamson says: "There is no doubt that 2008 was a tough year for business. And challenging times for businesses do lead to increased levels of fraud. As economic conditions worsen, more businesses and people will feel the pressure to meet targets, pay bills or even keep their jobs. The most common frauds during a down turn include:

  • Falsifying management accounts to earn bonuses and share options
  • Falsifying income to gain funding
  • Subsidiary management inflating results to retain jobs"

Steps can be taken to reduce the risk of fraud in your business. Communications within a business are vital to ensuring that all employees know and understand the policies and procedures in place to protect the business as well as to support potential whistleblowers.

Top tips to beat fraud:

  • Set the tone at the top that fraud is unacceptable. It is up to senior management to create an environment where fraud is unacceptable.
  • Define fraud risk responsibilities. Identifying the risk of fraud in your business will enable you to spot the weak areas and put measures in place to reinforce your infrastructure. Also, by giving specific responsibilities to specific people or departments will ensure ownership.
  • Consider internal reporting lines. Are there enough checks and balances in your businesses reporting lines to prevent fraud from slipping by unnoticed?
  • Collate all information on fraud cases/issues. This will enable you to spot any patterns or consistent warning signs for your business. You will know what kinds of behaviour to watch for.
  • Develop fraud awareness sessions. Ensure your employees know exactly what is considered fraud, how to spot warning signs and what to do if they suspect criminal activity is happening. If they know what their rights are and what they are supposed to do, they are more likely to blow the whistle if necessary.

It is important for businesses to be aware of the risks and be on the lookout for suspicious activity. There are a number of warning signs that fraud may be being committed. While any of these signals on their own may be innocent, a business showing several should consider an investigation.

David continues: "Those who end up committing fraud kid themselves; they don't want to label themselves as cheats. They rationalise, telling themselves that they are ‘only borrowing'. Using an example of a subsidiary company that has to meet challenging profit forecasts, the accounts maybe bolstered with ‘expected' income from the next month or quarter, or expenses for the current period may be suppressed to put through next time, when things are a bit better. In either case, both falsely increase the income of the current period. And in the current climate, the temptation to ‘rely on next month's income' is enormous. "

Forensic accounting can determine how the fraud started and who knows about it. The sooner fraud is caught and stopped, the less it will cost your business.

For further information contact:

David Alexander, director of Forensic Services

PR enquiries:

  • Jess Koslow, tel: 020 7131 4264
  • Kate Harrison, tel: 020 7131 4228

Disclaimer

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

Note to editors

Smith & Williamson is an independent professional and financial services group employing over 1,500 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-to-large corporates. The group operates from offices in London, Belfast, Birmingham, Bristol, Dublin, Glasgow, Guildford, Maidstone, North London, Salisbury, Southampton and Worcester.

Smith & Williamson Limited

Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.

Nexia Smith & Williamson Audit Limited

Registered to carry on audit work and regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.