Thousands of companies are under attack from fraudsters every day of the year. But despite the overwhelming evidence that suggests no company is a fraud-free zone, finance directors appear reluctant to rid their organisations of the cancer that cuts profits and saps reputations. Fraud statistics abound. Take two examples: an international survey by Ernst & Young suggested that 75% of companies worldwide admitted to having suffered at least one fraud in the last five years. The businesses between them lost $780m, but got back only $70m. Another survey, this time by the Association of Certified Fraud Examiners, put losses for US businesses in 1995 at $400bn … yes, billion.
Empirical evidence tells us that fraud is big and getting bigger, but directors are reluctant to face the fact that although the vast majority of people are honest, some employee, manager, supplier or customer will at some time try to rip them off big time. The only logical conclusion from the available facts and figures is that fraud has reached epidemic proportions in business life in the western world, Britain being no worse or better than most of its fellow developed nations in this respect.
Yet despite the general evidence, companies ignore their own fraud threat until it is far too late. The thinking appears to be that fraud is one of those things which happens to other people’s companies and therefore the best course of action is to do nothing. But when it does happen, fraud removes chunks from the bottom line. Think how hard FDs work to make assets sweat, to keep costs down and jump through the metaphorical hoops laid down by the latest management fad – all in a bid to make their company just a little bit more profitable and competitive every year. And then all that effort is tossed away because the prevention and detection of fraud is not pursued as vigorously as it could be.
We are not talking about a failure to install and maintain complex and expensive controls. Often it is a failure to do the basics properly – such as checking the references of new employees to ensure you are not hiring a fraudster let go by your competitor because fingers had been caught in pies. No whistle was blown because the directors didn’t want to deal with the bad publicity that would ensue. Fraudsters are good at taking advantage of companies’ failure to do the basics right, tackling the weakest points of any industry. Simon Bevan, who heads Arthur Andersen’s Fraud Services Unit, has spent well over a decade chasing fraudsters.
From his analysis of the pattern of serious fraud over the last few years, he reckons there are going to be a few big cases crawling out of the woodwork before the turn of the century. In particular, the banking sector could once again fall victim to the well-organised fraudster looking for the line of least resistance. To be fair, banks have been putting huge resources into tackling credit card fraud, but while they have been shoring up that side, the fraudsters have been helping themselves through fraudulent loans.
Dodgy loans are now costing the main banks several hundred million pounds each year. According to Bevan, the success which the banks have had in fighting credit and cheque card fraud (which, according to the Association for Payment Clearing Services, has plunged by more than a third from a peak of #166m in 1991 to #97m in 1996) is in stark contrast to their approach to fraudulent commercial loans.
Between 1991 and 1996 the UK’s six major banks made provisions of #23bn to cover bad debts. Bevan reckons that in excess of 10% of bad debts are due to commercial lending fraud. This means the larger banks lost more than #2bn through loans to fraudsters over five years. Foreign banks and the smaller UK banks have also been hit hard by loan fraudsters. But it is not only banks which must try harder, every sector is at risk.
With fraud so prevalent, you would imagine that FDs would welcome the Fraud Advisory Panel. Launched last month with George Staple, former head of the Serious Fraud Office, as its chairman, the members of the panel read like the great and the good of government and business. The aim of the panel is to raise awareness of the threat of fraud, to co-ordinate the current disparate efforts in fighting fraud and to come up with some legal and business solutions.
One cynic has described the panel as one committee set up to set up three other committees – a remark based on the fact that the panel has founded three working parties to look at particular aspects of the fight against fraud, namely, trying to collate as much reliable information as possible, looking at ways that the law could be improved and providing advice on establishing methods of prevention and detection.
The panel may turn into a talking shop, but there is a chance that it could be the launchpad of a successful bid to raise awareness among the business community that the time is long overdue to tackle fraud properly. And where are the FDs in this lot? Basically, on the sidelines cheering. It seems the 100 Group of Finance Directors has so far failed to persuade any of its members to turn up for any panel meetings. Instead the Group sent the panel its best wishes. When law or guidance comes out in the next few years that FDs find unpalatable, they will have no grounds for complaint.
Now, you could argue that a failure to sit on a committee with 50 other chaps in suits hardly represents a lack of interest in reducing the risk of fraud. Maybe not, but a reluctance has been noted and thought worthy of mention. Gerry Acher – head of accounting and auditing at KPMG, who worked hard to set up the panel in his capacity as head of the English ICA’s Audit Faculty – called upon businesses to take fraud more seriously.
After the usual PR guff about being delighted that the panel was up and running, he added: “But we need business itself to start playing a bigger part if the cost of fraud is to be reduced.” If attitudes don’t change nor will the incidence of fraud.
Peter Williams is a freelance journalist.
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