We have recently witnessed some extraordinary images of rioting, arson and looting across some of the major cities in the UK. Whilst much of the media coverage linked the riots to gangs, there have been many reports of looters just helping themselves to goods from shops whose windows and entrances had already been destroyed by rioters. Reports have suggested that some of the looters identified were previously law abiding citizens that, when presented with the opportunity of acquiring “free” goods, simply could not resist.
There are parallels between the opportunity which leads to the looters’ criminality and the opportunity that leads a company employee to fraud. In many of the fraud cases that we investigate, we identify individuals in a position of trust who have been presented with an opportunity to commit fraud, where the risks of detection appear remote, and where the temptation to steal from their employer simply becomes compelling.
Where a company does not have sufficient controls and procedures over its accounting function, it may be providing employees with the opportunity to steal and with minimal risk of being detected, this may encourage them to continue to steal over a long period of time.
Good examples of this can be found in a number of recent fraud cases that we have investigated. They have started with something as simple as stealing cash receipts before the cash is counted and banked. In these circumstances the person responsible for collecting cash receipts is also responsible for banking the cash. In such a situations, who would notice any cash going missing?”
Frauds will often start with an opportunity and a very simple method. If the fraud goes unnoticed it often expands to involving additional methods and routes of extracting money. In one case, a trusted Finance Director who felt he was owed money by the company, began helping himself to a bit extra each month. Due to a lack of controls and procedures he was able to continue to do so through many different methods over a period of ten years before being identified. The additional payments he made to himself accumulated into an eventual theft of over £1 million.
The key weakness in this company was that the Finance Director was trusted by the shareholders, he had control over many of the systems, and his activities were never questioned.
Segregation of duties in a company’s finance department is essential and should be constantly monitored and evaluated, even in the case of trusted and long serving employees. Ideally duties should be split between employees and no one employee should hold responsibility over any two of the following factors in the same area:
- Authorisation of transactions
- Inputting data onto the accounting system
- Reconciliation of accounts and balances
- Processing payments / receipts
It is not always possible for a small company to segregate all the tasks; in such cases, a strict process of controls and monitoring should be implemented to ensure that there is some independent review of the employee(s) who is responsible for key duties. Controls and procedures will minimise the opportunities available and will also help to identify any fraudulent activity as early on as possible.
If you would like to know more about fraud, BDO is hosting a seminar on Fraud and Financial Crime in October. Click here to register your interest.