FraudTrack – Myth and Misconception
So reported fraud fell by a quarter
last year. While 2009 saw an overall figure of £2bn, 2010 totalled a
mere £1.4bn. It's encouraging, yes?
Well, no, actually, it isn't. BDO's team of specialist fraud investigators, headed up by Simon P Bevan, are warning that annual reported corporate fraud will continue to rise significantly over coming years. It's more important than ever for companies to understand where the risks arise, and how to put in place procedures to guard against them.
'The figures from the latest report are skewed by the trial dates of some very large frauds which will take further time to settle,' Bevan explains. 'Figures for 2009 included one fraud at £400m, but 2010's highest figure was £170m. The downward trend should reverse next year as the major cases reach their conclusion and figures are reported to the regulators.'
And there's another worrying reason why the figures are lower than might be expected. 'In economic downturns, whistleblowers tend to be less active,' says Bevan. 'At a time of cutbacks and increasing unemployment disenchanted or insecure employees are less likely to stick their heads above the parapet to blow the whistle. This has a particular impact on the detection of large scale fraud.'
Finally, bribery has recently become a priority for risk departments, which means attention may be diverted away from fraud. That's not to say that bribery shouldn't be taken seriously, but Bevan warns that risks should be kept in perspective: 'Although you may have a theoretical loss if one of your agents is bribing a customs official in Shenzhen, you will have a crystallised bottom line loss if your UK supplier is overcharging you because of collusion with a member of your purchasing department.'
As well as giving detailed figures for reported fraud in 2010, BDO's latest FraudTrack report focuses on some of the practical ways in which companies should be looking to protect themselves given today's hazardous environment.
The most effective thing any company can do to combat fraud is to have a clear understanding of where they are vulnerable, and not to fall for the common myths surrounding the subject.
'The most common myth we hear in our fraud risk work is "It wouldn't happen here",' Bevan states. But by extension that reasoning would imply that fraud only happens to companies which expect it, which is clearly ludicrous. Blind faith of this kind will do no companies any favours.
He continues: 'Another frequent refrain is "He's worked here for years – we trust him".
'It’s very easy to nail this myth. Firstly, most large frauds are committed by long-serving employees. Secondly, it is the people you trust that defraud you. If you didn’t trust someone, you’d put controls in place to make sure they didn’t do anything untoward.
'It’s when trust is your only anti-fraud control, and you trust the wrong employee, that your organisation suffers a large fraud.
'Rather than relying on subjective views about who you believe to be honest, you should have control systems in place based on the "inherent risk" someone’s position holds,' he concludes.
FraudTrack 8 goes on to expose a dozen other myths that every business should get to grips with, along with some striking illustrations of how the truth can be very far from what is expected.
It looks as though 2011 will be as busy as ever for BDO's experienced Fraud Services people. They're well used to scrambling a team to be on site and dealing with critical data within a few hours, or jumping on a plane at a moment's notice as part of an international investigation – but is it too much to hope that companies will learn to do more in the way of prevention, so drastic cures are less frequently required?
Time will tell. In the interim, if you or your clients would like to discuss any fraud-related issues, then the Fraud Services team can help.
If you'd like to receive a copy of the latest FraudTrack report, please click here.
