Earlier this year KPMG published its annual Fraud Barometer. It points to record levels of fraud in the UK costing businesses almost £1bn with 226 separate crown court cases involving fraud of £100,000 or more.
Whilst the KPMG Fraud Barometer suggests fraud is most prevalent in the public sector, employees and managers stealing from their employers follow closely behind. It is increasingly hard to discover and can often have a devastating impact on a business.
It is also likely that the level of fraud highlighted in this report is just the tip of the iceberg with many more incidents of corporate fraud left undiscovered or unreported.
Fraud by employees can be notoriously difficult to spot and even more so when the individual with their ‘hand in the till’ is in a trusted position of authority and with access to company banking and accounting facilities. They are often good at covering their tracks.
In smaller businesses where business owners and directors are involved in all aspects of the business fraud is perhaps a little easier to detect. It can be much harder to spot when a business is rapidly growing and employing a hundred people or more, particularly where individuals have a high degree of autonomy. A successful business is, after all, built on trust.
Broadly speaking, businesses face two types of fraud: ‘extractive fraud’ where employees steal cash or assets from a business and ‘reporting fraud’ where employees manipulate financial records for personal gain.
In both cases, when an employee has a reason for committing fraud, gets a chance to, and can justify their behaviour, they’re more likely to commit the crime – it is often called the fraud triangle. Most employees won’t naturally turn to fraud, but given the right motivation, and with opportunity, they may.
Changing working patterns with increased hybrid and fully remote working alongside the continuing cost-of-living crisis are often cited as driving this increase in fraud, meaning directors and business owners need to remain vigilant.
Warning signs
Employee fraud can be difficult to spot, but there are some warning signs:
- A disgruntled employee with limited oversight – their motivation to ‘earn what’s due them’ can be a risk.
- Your business has weak internal controls to prevent and detect fraud.
- Business owners will have a good idea of salary levels within their company. But where an employee appears to enjoy a lifestyle beyond their means that might raise questions.
- If an employee is overly secretive, perhaps reluctant to share their processes or have work reviewed, that might be a sign of fraud.
- Corporate credit cards are intended for corporate expenditure. Whilst mistakes may be made, repeated personal use or abuse of corporate credits should raise red flags.
- Although not the most sophisticated or reliable method, keeping an ear to workplace gossip can sometimes uncover fraudulent activity.
- Look also for accounting irregularities. Excessive or unexplained transactions, increased expenses, untypical supplier payments and unreconciled bank accounts can all be signs of fraudulent activity. Having good management reporting is essential.
Fighting fraud
Prevention is the best way to fight fraud, but it can be costly. In an ideal world, business owners should:
- segregate the duties of those with access to the finances of a business, leaving no one individual with complete access or control; and
- implement internal controls to prevent and detect fraud in the business. These controls should be proportionate to the risks, designed to meet those risks, and operated.
We recognise that for many businesses, the opportunity to do everything is a challenge.
We also recognise that successful businesses are built on trust – founders and owners need to trust key team members to do the job they are appointed to do. When that position of trust is abused, it is both a financial and emotional blow.
So, what should business owners do when they suspect an employee of committing fraud? It is, unfortunately, not an easy question to answer. But here are a few things to consider:
- Do you raise suspicions straight away? If there is a risk that it involves more than one individual it may be prudent to take time to ascertain the scale of the fraud and identify those involved.
- If the case is more clear-cut revoke access to bank accounts and accounting software to ensure individuals cannot continue or hide their activity.
- Understand the extent of the fraud. Your accountant can help with this by interrogating the financial records.
The impact of fraud can be long-lasting and can leave businesses facing an unforeseen tax bill. Where taxes have been under-declared HMRC will expect taxes due to be paid, often with penalties that can reach 100% of the tax due.
HMRC can, however, be a little more sympathetic to those businesses that are open and honest about the scale and impact of fraudulent behaviour, with the flexibility to reduce or waive any penalties due.
In all instances of suspected and proven fraud it is helpful to have your accountant working alongside.
How can we help?
At Hillier Hopkins, we are here to support you. If you suspect or have knowledge of fraud in your business, we can support you through your forensic investigation and the tax implications.
We offer a comprehensive and cost-effective audit service. An audit, though not designed to detect all fraud, is designed to identify all material fraud. An audit is also designed to critically assess a business’s key accounting systems and controls to prevent and detect fraud and error, providing business owners with additional comfort their business is protected.
If you have any concerns about fraud in your business, you can speak in confidence to your usual Hillier Hopkins adviser or contact our expert below.
