How to detect business fraud

Blind trust can open the door to fraudsters, warns forensic accountant Moira Hindson


An ancient Muslim proverb instructs us: “Trust in God, but tether your camel first.” When it comes to protecting corporate assets, it is all very well to trust in the divine human attributes of truth, honesty and integrity, but stewards also have a duty to tether their camels by taking intelligent steps to control and supervise the environment in which business is transacted.

In practice, that means striking a balance between control so tight that the business becomes hamstrung and so much freedom that staff and business partners may be tempted to take advantage. As the recent trading fraud at Societe Generale illustrates, the consequences of not getting the balance right can be huge.

For management, this kind of incident represents a double concern. Not only do managers have a duty to safeguard the company’s assets and good standing in the business community, but developments in both statute and case law render individuals far more vulnerable at the personal level – to the extent that losses are attributed by the court to managers’ negligent disregard of internal controls. Never before has the spotlight on corporate governance been so searching, with the usual legal action seeking recovery from advisers and auditors inevitably bringing the directors’ own conduct under intense scrutiny.

A case in point

The work carried out by our team at Kingston Smith provides a unique insight into the games, both physical and psychological, played by a variety of fraudsters with a common aim: to steal as much money as possible without being detected or destroying the company!

For instance, a subsidiary of a major UK plc furniture manufacturer had a comparatively modest annual turnover of around £30m. Over a six-year period, its finance director, who had faked her qualifications when recruited, brazenly stole over £2m. Her methods included paying herself, or her personal creditors, using company cheques and entering false payee names on the counterfoils.

Her highly creative recourse to the company’s journal enabled her to make the necessary ‘corrective’ entries. Over the years, she ‘recruited’ members of her own family into key positions in the accounts department, rewarding their tacit complicity by bringing them into the loop of fraudulent payments. She opened a ‘private’ cash book to record payments to directors and used this to clear her substantial personal expenses, including transatlantic flights, Fifth Avenue shopping and ‘weekend breaks’ hotel bills. She disabled the audit function by having a vigorous affair with the senior audit manager, who accompanied her on most of the breaks! In addition, she made unauthorised ‘loans’ to herself and family members in her accounts department and paid thousands in bogus wages.

Dependency culture

So why was she not found out? It is obvious that her industry and efficiency inspired confidence in the minds of co-board members. She anticipated any potentially compromising query and met it with such self-assured plausibility that those whose jobs she made easier just relaxed and let her ‘take the strain’. The lull of complacent dependence simply blinded board colleagues to their own responsibilities for supervision and control. Listing the lessons of this painful saga would amount to a recital of the obvious. Yet, in our experience, this blunting of management’s critical faculties by the trustworthy façade dissembled by the corporate linchpin, whose loyalty is beyond question, accounts for the majority of instances when high-level misdemeanours remain undetected for so long.

For further information about the forensic services offered by Kingston Smith LLP, including forensic IT, asset tracking, and fraud prevention consultancy, contact Moira Hindson or Daniel Djanogly on 0207 566 3631 or visit the website www.kingstonsmith.co.uk .

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