Business owners have been warned to beware the enemy within at an advice session designed to equip them with the knowledge of how to act on suspected fraud or theft.
Experts from BHP Law, Tait Walker accountants and the police highlighted how organisations may be at risk from loss, in particular by not keeping a tight enough grip on access to their organisation’s finances.
The audience at Wynyard heard that, according to Action Fraud statistics, one in five businesses have been defrauded by an employee, a figure that experts believe is only the tip of the iceberg due to fears about repetitional damage if a fraud becomes public.
Leigh Ferguson, an associate at BHP Law and a specialist in dispute resolution, said: “We know fraud is pervasive and can go undetected for a very long time, on average two years. We also know that the risk increases in an economic downturn or period of instability.”
Leigh told the audience: “The employees within your business are the ones who can cause the most damage.
Theft or fraud can destroy an organisation. That’s not to fill you with fear, in fact it’s the opposite because by working collaboratively we can help you protect your business.”
Drawing on real life examples, the experts advised how to prevent or stop a loss, where to begin when theft or fraud is suspected, the options for trying to recover loss and what happens when a criminal case is brought.
The usual threats to businesses include individual employees having too much autonomy combined with access to key assets and having sole signatories signing cheques, collusion with suppliers and customers, the falsifying of invoices and data theft.
In one case a seemingly affable commercial director was able to plunder a not-for- profit organisation because he had sole authority to sign cheques up to £1,000. A speedy response led to a freezing order being imposed, shutting down all his bank accounts. “It’s nuclear, a very powerful weapon” said Leigh.
Maria McKenna, forensics services manager with Tait Walker, explained what happens when a fraud is reported, emphasising that speed and secrecy were key.
“Once you suspect a fraud it’s very important how it’s handled particular in relation to access and not alerting the fraudster so they can get rid of any evidence” she said.
Maria explained that owners should resist the temptation of instantly sacking a suspect. “Although it might be heart rending to continue paying them, once they’re no longer your employee you can’t interview them. If there is money there you might be able to get it back if you act quickly and take the right steps.
“The first thing forensic accountants will do is try and quantify the loss. We carry out a full review of a organisation’s systems and unfortunately that can often reveal that the problem goes much deeper and is much bigger than owners first thought.
“A small discrepancy can be the thread of something bigger, and often people will say they were concerned about a colleague’s actions but didn’t say anything” she said, adding that a report will be produced that is appropriate to court procedure
In one case, a CEO was found to be raising invoices for suppliers the company had not done business with for years due to a 3p discrepancy on one VAT calculation. His fraud amounted to £900,000.
Investigations typically lead to the “victim” organisation being liable for further VAT and corporation tax and incurring a fine.
“If HMRC considers that your systems and checks were inadequate they will impose a fine, which can in turn lead to cash flow problems. People often believe they have good systems but it usually relies on trust” said Maria, adding that accountants can help formulate a payment plan.”
In recovering losses the experts highlighted an example of a husband and wife-owned business whose finance director had been stealing.
“In the recession they had to reduce his hours to be a consultant and it was the financial controller stepped up that he noticed irregularities in the VAT account. He could see money going out to the wrong places, suppliers he didn’t recognise, false VAT returns and missing money everywhere” said Maria.
The fraud totalled £285,000 and the company started a civil action against the thief, who then offered to pay back £250,000 in exchange for the case being dropped.
Three years later the owner was contacted by police to say he had been caught again, stealing £700,000 from another company. This time the victim left it to the police and the fraudster was jailed for nearly four years, but the business got no money back.
Maria explained: “This highlights two very different outcomes. It could be argued that if a criminal case had been pursued the first time the man would not have reoffended, but it meant the first business saved the expense of a court case, got most of their money back and it was resolved much more quickly.”
Leigh added: “Judges are very aware of the issues facing businesses. The civil court will often provide a speedy alternative and there’s usually a lower standard of evidence, but what the police do is vitally important too because they protect and they prosecute.”
The delegates also heard from Detective Sergeant Martin Wilson, of Durham Police Special Operations Unit, who warned about cyber crime.
He said: “If you are connected to the Internet, it could affect you. Criminals are looking for open doors, vulnerability in your online security.
“We live in a world where we are more connected than ever before, which is good, but there are those elements in our society who seek to take advantage. The motivation for criminality is not new but now using they are using IT infrastructure. It’s anonymous and easier for them.”