David Alexander explains what to do when you suspect an employee may be involved in fraud.
In the past few years there have been several high-profile cases of fraud in professional services firms. However, these headline-grabbing cases are probably just the tip of the iceberg – most fraud in professional practices is likely to go unreported.
The sluggish economy of recent years has put increased pressure on the professions, and partners are not immune to the temptation to 'put their hand in the till' by inflating results to protect profit share. In its 2012 survey, the Association for Certified Fraud Examiners identified manipulation of results as the most financially damaging type of fraud suffered by any business. This, together with the increasing regulation of UK plc, has put the spotlight on fraud in professional practices.
Spotting fraud
A successful fraudster can often perpetrate the crime for years without being detected. However, more often than not, the fraudster will become greedy and/or start spending his or her ill-gotten gains. Fraudsters are often then caught because someone close to them questions their sudden wealth or growing addiction to gambling or a chemical dependency.
As an investigator, when I visit a firm that has suffered a fraud the indicators are often quite obvious. But, of course, this is with the benefit of hindsight. The challenge for professional services firms, as with any business, is to recognise any indicators as early as possible. It's not uncommon for businesses to exhaust every other explanation before finally admitting that an apparent discrepancy in the financial records might be fraud. By that time the loss may have multiplied and the survival of the practice may be at risk.
Put your fraud hat on
When faced with an unusual discrepancy, a complaint from a client or supplier, or an unexpected financial variance, there may well be an innocent explanation. However, you'll only identify fraud if you're looking for it. You can then test your theory by looking for other fraud indicators to prove or disprove your hypothesis. Smith & Williamson is often called in to carry out this triage process, which allows practice managers to move on if further investigation is proved unnecessary.
Fraud response planning
When fraud does occur, it's important to mitigate the loss and bolster the confidence of clients by showing that the partners are still in control. How you handle the situation is as important as the underlying event that caused it. A well-thought-out fraud response plan is the key to ensuring your attempts to limit the damage do not have the opposite effect.
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Key elements of a fraud response plan
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With the introduction of the UK Bribery Act in 2011 and the new corporate criminal offence of failure to prevent bribery, professional practices need to make sure they have these robust anti-financial crime procedures in place.
We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2014. code 14/518 expiry 30/11/2014
