Member of BTG Global Advisory
Kevin Howells

Corporate Finance

| January 5th 2010

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Sly tactics emerging in credit crunched firms

While profits and sales plunge amid the economic doom, fraud within companies is soaring.

It is estimated that 80 per cent of all fraud is committed by employees, who, in increasingly desperate times, are resorting to theft.

John Humphreys, associate director at Tenon Forensic, said: “With bonuses and salaries being slashed and short-time working being introduced across a variety of industries, many individuals are suddenly finding their take-home pay at its lowest in years. And with company directors and employees under the same or increased pressure to meet targets, the temptation to ‘fiddle’ the books may prove overwhelming.

“The opportunity to commit fraud is also on the rise, with cutbacks resulting in fewer staff dedicated to monitoring internal controls.”

Helen Besant-Roberts, head of business risk at accountants Hurst, said there are two types of fraud – fraudulent financial reporting and misappropriation.

She said: “The latter is usually undertaken by employees and includes staff that have misappropriated cash through so-called ‘teeming and lading’ of customer receipts or supplier payments – this is where cash deficiencies are concealed then later misappropriated.

“Another fraud is where staff take company IT equipment and stock for their own use or re-sale.
“Other examples include staff and directors claiming erroneous business expenses, misappropriation of petty cash, and staff being paid more than they should.

“Fraudulent financial reporting is often the result of a desire to manipulate results.

“The reasons may include the need to meet banking covenants or raise additional financing, the need to fulfil regulatory or legal burdens – or because bonuses or performance related pay is based on results.”

There are however a number of things companies can do to protect themselves, many of which, according to Kevin Howells, manager at BTG Intelligence, can be fairly cost effective and straight forward to enforce.

He said “You should have clear financial regulations in place which set out standards of conduct and financial limits. Segregating the finance duties of placing orders, invoicing and paying suppliers is a simple but important measure to prevent fraud. The same principle applies to people who authorise purchase orders and purchase invoices.

“A solid IT policy and security system will help prevent hackers attacking the company’s resources and of course, having sound password controls in place and encouraging regular changes is extremely simple but very effective.

“A growing number of companies carry out due diligence checks on those they are about to do business with to ensure they are legitimate, and the same goes for vetting potential staff.”

John said it is also important that companies introduce transparent whistle-blowing policies.
He said “In the vast majority of fraud cases, it is discovered after the incident that someone was concerned there was a fraud but did not know how to put a stop to it.

“Employees should feel confident to blow the whistle if they notice fraudulent activity being committed, without fear of adverse repercussions. It should be made clear to staff who to approach and how.

“The key issue to bear in mind where corporate fraud is concerned is that it tends to start off small before snowballing.

“Prevention rather than cure, therefore, is key to limiting the occurrence of fraudulent activity within a business.”

Kevin Howells

About the author

Kevin Howells


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Kevin is an experienced audit and fraud management professional having worked extensively in the public and corporate sectors since 1992. He currently acts as the Manager for Begbies Traynor Group's Intelligence team and is an Accredited Counter Fraud Specialist. At his previous company, his role was focussed on pro-active and reactive anti-fraud work and developing crisis management, business resilience and security management solutions for clients, principally in the further education, higher education, Local Authority and Registered Social Landlord sectors.

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