Business fraud – the forensic accounting challenge
November 7, 2023
The scale of business fraud in the UK
Research into business fraud between 2018 and 2020, published belatedly in May 2023 by the Home Office as its latest Economic Crime Survey, estimated that the annual cost of fraud may be as much as £8.4bn. Extrapolating the data forward to 2023, the report estimates that UK businesses will have suffered 4.5m incidences of fraud in the five years since 2018.
The research suggests that one in five companies experienced fraud and that only 32% had reported their most recent fraud to the police. The rate of frauds was 3,917 per 1,000 companies, indicating a high incidence of repeat victimisation.
How can forensic accountants help with business fraud?
Investigating fraud is an area for experts with specialist skills. Forensic accounting professionals can answer a range of questions vital to understanding and quantifying what has happened, recovering the lost value where possible and preventing fraud happening again. These core questions are simple, but the answers are often extraordinarily complex.
What has really happened?
Fraudsters are clever at covering their tracks, so the initial indications of the fraud can be misleading. For example, if there’s an unexplained inventory shortfall, have goods been stolen, or were they never supplied? In other words, is this is an internal security issue or a supply chain problem? Again, if cash appears to be missing, has it been misappropriated or is this an accounting fraud which generated fake cash balances?
How did the fraud happen?
Unravelling the full details of the fraudsters’ methodology will uncover vital information on any system faults or internal control breakdowns, which will enable a business to avoid further instances of fraud. There are many questions that need to be got to the bottom of to achieve this, such as: Were controls at fault, or had staff stopped operating them?, or, has the business changed but its controls not been updated? Answering these questions will help a business to move forward decisively.
How much was taken?
Quantifying the loss may appear simple, but it is often far from easy. Yet, the importance of establishing the true loss and fully documenting it will be vital, especially when an insurance claim must be made or if litigation is necessary to recover the funds. The police will also want to be given robust calculations and the best quality supporting documentation if a prosecution is to be brought.
Who committed the business fraud?
Was this an inside job or was it external actors, or collusion between the two? If it’s an inside job, how many people were involved and from how many different departments? Could they have committed other frauds that have not been detected? A business needs to be thoroughly audited to uncover the full story.
Where has the money gone?
This is the 64 thousand dollar question and often by far the most difficult one to answer, especially if the loss is a significant sum. The road to an ultimate destination can be long and winding, passing through all manner of obscure offshore ‘shell’ companies and bank accounts in unconnected names, sometimes in jurisdictions where recovery action is either difficult or impossible.
These days, cyberspace and cryptocurrencies can also be a feature. Nevertheless, good forensic accountants have remarkable asset tracing skills, extraordinary persistence and endless patience. These tracing assignments can take considerable time.
How can the money be recovered?
Experienced forensic experts will be able to work with legal advisers to match the recovery action to the particular scenario, based on the nature of the fraud, the perpetrators, the scale of the available recovery source and the location of the proceeds, whether onshore, offshore, terrestrial or in cyber space. These are dark arts, which would impress any Wizard at Hogwarts.
How can repeat business fraud be avoided?
This is a case of learning from what has happened including the methodology and the control weaknesses that are revealed through the investigation. This will enable management teams to plug the gaps and put measures in place to overcome and future attempts. This stage is about reviewing the systems and controls across the business to identify what other opportunities there may be for fraudsters to exploit other weaknesses and correcting them.
Acting promptly to overcome the continuing effects business fraud
The discovery of fraud can paralyse a management team, oscillating between outrage at the loss and guilt at being “caught out”. Sadly, this leads to only a small percentage of business fraud being reported to the police and an even lower number (25%) to Action Fraud, the national fraud reporting service.
This is where a forensic accounting team can bridge the gap, allowing management teams to objectively approach the fraud without blame and putting all of the evidence together to properly report the crime. They can help a business to find a sure footing again in the knowledge that despite the fraud, their business is now better protected for the future.
If you are seeking professional forensic accounting advice or you are concerned about business fraud within your organisation, Opus is here to help. You can speak to one of our Forensic Accounting specialists on 020 3326 6454, or email .