UK: Protecting Corporate Britain from Fraud - Research Report 2005

Last Updated: 12 January 2006
Article by Gary Miller

Executive Summary

Introduction

In the last fiscal year, the Serious Fraud Office investigated cases estimated to have cost Corporate Britain more than £2 billion1. More worryingly, the Association of Certified Fraud Examiners estimates that companies lose 6% of their annual revenue to fraud2. Put in terms of the UK's GDP, that is equivalent to undetected and unreported fraud costing businesses over £72 billion every year3.

Major corporate collapses such as Parmalat, WorldCom, Enron, BCCI and Barings, arising out of a range of circumstances, should have been a wake up call for Corporate Britain to recognise that it is facing a serious risk of major fraud.When you combine this with the introduction of the most comprehensive worldwide anti-money laundering and corporate governance regime, you would expect Corporate Britain to be fully equipped to protect itself.

However, the introduction and strengthening of the regulatory, money laundering and corporate governance framework may have unintentionally increased the risk that Corporate Britain faces from fraud.Why? Because the in-house resources that a corporation has available to prevent, detect and investigate fraud, namely the internal audit function, is fast becoming so overstretched with the volume and complexity of financial auditing and reporting requirements, that it does not have enough time or budget to deal effectively with the fraud risk.

CEOs, CFOs, Non Executive Directors and Chairmen of Audit Committees of listed companies face a range of regulatory and legal sanctions if they fail to maintain a sound system of internal controls to safeguard shareholders' investment and the company's assets. It is in both their personal and professional interests to ensure that they are aware of, and extract the maximum benefit from, the resources available to prevent, detect and investigate fraud.The largest qualified resource available to Corporate Britain to help manage and minimise the fraud risk is the corporate investigation industry "Investigative Britain" – which includes corporate investigators, forensic accountants and forensic computer specialists.

In the face of increasing exposure to the risk of fraud, mounting pressure on the internal audit function and the explosion of sanctions and reputational risks faced by those whose job it is to safeguard the corporate coffers, Mishcon de Reya's Corporate Investigations and Asset Recovery Group wanted to examine whether Corporate Britain is making the most of the expertise offered by Investigative Britain.

We commissioned an independent survey of FTSE 350 companies to obtain independent data about the relationship between Corporate Britain and Investigative Britain. In particular, we wanted to know whether Corporate Britain understands what Investigative Britain has to offer and conversely whether Investigative Britain is responding to the needs of Corporate Britain.

Key Findings

The results of the survey demonstrated that the disconnect between Corporate Britain and Investigative Britain is more serious than we had anticipated.The results go a long way to explaining why so much fraud goes undetected and that even when fraud is detected, why Corporate Britain is unsuccessful in recovering the proceeds.

The key findings from our research raise some critical questions:

  • Despite 83% of companies stating that they had 'good to excellent' understanding of the value of information gathering, only half of them actually use external investigators.Why is this?
  • Notwithstanding the increases in corporate fraud and regulatory requirements over the last five years, over half of the companies surveyed saw no reason to increase their use of investigators over the same period. Why is this?
  • Is Corporate Britain suffering from denial on a massive scale? Nearly 90% of companies that do not use external investigators felt that there was 'no need' to do so.
  • Is Corporate Britain ignorant of what the investigative world has to offer? Almost one half of the companies surveyed admitted that they were not fully aware of how external investigators could add value to their business.
  • Is Corporate Britain failing to accurately evaluate and effectively manage the risk of fraud? Interestingly, over half of the companies surveyed felt that reputational damage was the greatest risk when it came to instructing commercial investigators, yet only 4% of those who did use external investigators were fully aware of the techniques that those investigators use.
  • Is Corporate Britain missing out on the benefits that can be derived from using external investigators? Over 90% of the companies that use external investigators reported a reasonable or good return on their investment.

Conclusion

Corporate Britain is under constant pressure to deliver value to shareholders and investors, but also to act as a good corporate citizen and implement the requisite safeguards and financial controls.This balance is difficult to achieve, but it can be done if Corporate Britain is willing to change its perceptions of, and habits in the way it uses, Investigative Britain. In order to change, Corporate Britain first needs to understand the benefits that it will derive from collaborating with Investigative Britain.

Investigative Britain needs to make a huge leap in the way in which it demonstrates how it can add value to the corporate bottom line. Only then will Investigative Britain take its rightful place at the table of professional corporate advisers, in the same way that lawyers and accountants have done over the last fifty years.

The objective of publishing this survey is to highlight the primary misconceptions and suspicions that Corporate Britain has about Investigative Britain and to initiate a dialogue between Corporate Britain and Investigative Britain to dispel them. By doing this, Corporate Britain will be able to derive the maximum benefit from the resources it needs to prevent, detect and investigate fraud.

Methodology

The research was conducted independently by The Survey Shop and consisted of two phases. The objective of the first phase was to identify directors and managers with responsibility for managing internal and external investigations within the legal, finance and HR departments of FTSE 350 companies.This was achieved through telephone research.The second phase comprised a letter of invitation to assist with the research followed by a telephone interview. Fifty-three interviews were conducted during the first quarter of 2005. 

Footnotes

1. Serious Fraud Office, Annual Report, 2003-2004

2. Association of Certified Fraud Examiners, 2004 Report

to the Nation on Occupational Fraud and Abuse

3. UK GDP figure provided by International Monetary Fund, April 2005

This article is only intended as a general statement and no action should be taken in reliance on it without specific legal advice.

To order a copy of the full report 'Protecting Britain from Fraud' e-mail pcb@mishcon.com or call +44 (0)20 7440 7421.

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