Fraud - preparing for the inevitable

Date Published: 27th May 2009

We live in interesting times: massive Ponzi schemes revealed; intensified interest in protecting investors, consumers and other innocents from fraud; and the FSA and SFO both re-missioning to meet the perceived challenges of the (hopefully) post bank-meltdown world.

The UK is getting to grips with bribery and corruption with the Law Commission’s recommendations for bringing legislation into the 21st century.

Are all these events and initiatives relevant to most of us? The answer is ‘no’, unless you are involved in large-scale infrastructure projects, rms or power generation. If you have been following the herd, cheerfully exporting corruption to obtain overseas contracts, you might get your collar felt, courtesy of the SFO, and not before time.

Most of us are much more likely to be the innocent victims of fraud rather than perpetrators. We must pay attention to preventing, detecting and investigating the internal frauds of employees and third parties such as suppliers, customers and contractors, etc.

Even the best run companies can fall victim to fraud but proper preparation can help prevent it or minimise its consequences. Although most companies are highly unlikely to suffer a catastrophic, Barings type, business-ending fraud, it is amazing just how much time, money, energy and resources can be dissipated in dealing with even unremarkable frauds. Fraud can cause misery for honest employees and even end the careers of otherwise successful managers. It is a risk that warrants careful planning.

The first step is to create clear, concise and accessible policies regarding fraud, conflicts of interest, gifts, business ethics and the like.

Fully endorsed by the Board, written in plain English not unintelligible ‘corporate speak’, these should be widely disseminated internally and externally and compliance by employees reinforced with annual appraisals and regular sign-offs. Employees and third parties need examples of what is unacceptable and given the means to ask for guidance, or express concerns, outside line management.

“Fraud can cause misery for honest employees and even end the careers of otherwise successful managers.”

Breaches should be punished and sanctions applied evenly: there cannot be one rule for staff and another for senior management.

Controls and fraud awareness must be imbedded in the organisation and Internal Audit needs teeth and access to an independent Audit Committee.

As first line supervisors and junior managers are those most likely to encounter fraud, they need the requisite training and awareness to be able to spot and report its telltale signs. Controls erode over time so it can be very enlightening to task employees with thinking of how the organisation could be attacked or controls circumvented – this engages staff and always has a positive outcome. You may learn of something that needs attention or, armed with a broader perspective, see that attack scenarios envisioned by staff are unrealistic or can be defeated by controls already in place (no need to let on which ones!).

Companies also need a fraud contingency plan as investigations can be hopelessly compromised in the first forty-eight hours by management’s knee-jerk reactions: signing off to the plan helps prevent errors. It should address the composition of a fraud steering committee; those responsible for day-to-day control of an investigation; operational security; budgets and external resources.

Very simply, the purpose of a fraud investigation is to identify and punish culprits, get the money back, learn the lessons and move on.

Legal input is very important but don’t let lawyers run the show – they’re not investigators. However, they are priceless for keeping investigations within the law, maintaining both the moral high ground and the legal privilege of your work. The key is proportionality. There are robust and effective methods available to the investigator but their use must be proportionate to the threat. Legal input from experienced litigation lawyers is vital for this analysis.

A further consideration is the use of external investigators to complement internal resources. These can provide the additional manpower, experience and expertise that few organisations have in-house. They are useful for working in some foreign jurisdictions or where there is organised crime or special techniques are required. Go for the individuals – not the brand – the principals may appear impressive but who are they fielding?

Nobody can pretend that dealing with fraud is simple. But a few well-placed measures, the right resources and a cool head can help work wonders.

Contact us in confidence to discuss your circumstances in more detail on 0207 398 3800 or [email protected]

Detecting and Investigating Serious Corporate Fraud

Paul Keyton – Partner,

BTG Intelligence [email protected]

About the author

Julie Palmer

Regional Managing Partner

Meet our Team of Experts

Julie is a law graduate who qualified with Price Waterhouse in 1994. Julie joined Smith & Williamson in 1997 and became a partner in 2001. With Mike Stevenson, Julie set up Middleton Partners offices in Salisbury and Southampton, both of which are now part of Begbies Traynor.

Julie is a member of the Insolvency Practitioners Association and is a Fellow of The Association of Business Recovery Professionals. Julie deals with all aspects of Corporate Recovery and turnaround work and takes all form of personal insolvency appointments.

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