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Commercial Angles' Newsletter - May 2001

Fraud Prevention - Part 1

Fraud is a big subject: too big for a single newsletter to cover. Therefore the subject has been split into manageable pieces. This first part concerns identifying the types of fraud. Subsequent parts, to be published in the next months' newsletters, will discuss detection and prevention of fraud.

In a UK company the responsibility for the security and protection of business assets rests with the board of directors. It is they who are responsible to the shareholders for assessing the risk and identifying the controls that should be put in place to prevent fraud. But detection of fraud is made more difficult by today's modern business practices where transactions are processed remotely and electronically and operations are geographically separated from each other.

Fraud can be perpetrated by many groups: third parties, a company's employees, the company's management, suppliers or customers. Because of the risk of embarrassment and resulting reduction in the level of customer or shareholder confidence, much fraud is not reported. Consequently it is difficult to estimate the losses to business caused by fraud, but it is estimated as several hundred million pounds each year in UK alone. And of the reported frauds, a majority of the worst kind are committed by a company's own employees or managers.

The start of any programme to prevent fraud is first to identify the types of fraud, then to identify the risks of it happening in a particular organisation and next to devise control procedures to prevent it or detect it.

Types of fraud

The following table illustrates some of the various types of fraud. As can be seen, several types apply only to publicly quoted companies but when they occur they may cause thousands of people to lose millions of pounds. The other types of fraud listed below can and do affect any type or size of business.

It is often thought that only small businesses suffer from fraud because the opportunities for fraud are greater in small businesses. This is absolutely not the case - it is just that large business frauds are more difficult to detect and when detected are less likely to be made public.

Type of Fraud Examples Type

False accounting

Obtaining external financing by falsely improving the results
Raising the share price by false means to aid acquisitions or to help a new issue of shares
Obtaining more business by appearing more successful or less indebted
Obtaining performance bonuses for managers by inflating profits.
Covering up internal theft by altering, adding, falsifying or deleting bank/stock/purchase or other records
Hiding losses in the hopes that fortunes may reverse
Internal

Theft

Direct theft of cash, stock or assets
Theft of intellectual property - customer lists, contract prices etc.
False expense claims
Payroll fraud - payments to ex-employees
Usually internal

Third-party

Customers ordering goods on credit with no intention of paying - includes some credit card frauds.
Supplier kickbacks for awarding contracts to them
Undisclosed financial interests in a transaction taken on at unfavourable terms to the company
Collusion with customers to charge lower prices or raise spurious credit notes
Collusion with suppliers to accept under-deliveries of stock items
External,
or
external with collusion from internal parties

Computer Fraud

Hacking/unauthorised access to bank accounts to transfer funds
Setting up as a legitimate internet business and obtaining payment for goods that are either never delivered or are of lower quality than advertised
Theft of intellectual property, e.g. engineering drawings, by unauthorised access to a computer
Publishing malicious claims about the company on anonymous bulletin boards, thus affecting the company's reputation
External or internal

Next page.

Articles from previous newsletters