Finance Teams Must Prepare for a 2020 Fraud Surge

Andrew Durant, the head of the Forensic & Litigation Consulting team at FTI Consulting, offers Finance Monthly an analysis of the impending challenge to finance teams and advice on how they can overcome it.

 Fraud was already shaping up as a big issue for businesses in 2020 before the COVID crisis struck. For instance, the  Resilience Barometer 2020 research from my company, FTI Consulting (involving 2,000 senior executives) found that fraud was perceived as the number one financial crime, with 24% reporting being exposed to it.

This would mean that an enormous £28 billion was lost to fraud in 2019 alone by FTSE 350 businesses (based on an average loss on 5% of annual turnover - see 2018 ACFE Global Fraud Survey, Report to the Nations). Even at 1% of turnover, this would still be sizeable for victim businesses.

On top of this ongoing problem from fraud, in times of most global crises a spike in fraud typically follows. Sadly 2020 is going to be the worst year many of us will experience!

Why do more fraud cases appear after crises? A variety of reasons, such as an increased opportunity available to fraudsters with senior management teams rightly focused on other things, such as trying to keep their businesses afloat and their staff in jobs for a start.

 Fraud was already shaping up as a big issue for businesses in 2020 before the COVID crisis struck.

What they will not be thinking about is the enemy within. And, in my experience, that is where the greatest risk lies. It is human nature to believe that threats arise from unknown individuals outside an organisation. However, it is more likely to be a fellow employee who knows the financial controls (and the weaknesses in them) and that you trust implicitly.

Crafty fraudsters will see 2020 as a ripe opportunity to pounce. In the current “lockdown” with increased home working, with corresponding less people at work overseeing finance, security and operations, fraudsters will have more opportunity, with less scrutiny, more freedom and fewer questions asked.

What can finance directors and their teams do to reduce the escalating risk of fraud? Here are three areas that seem simple but can actually make a huge difference to preventing and detecting frauds:

1. Encourage whistle-blowers to step forward

Most frauds are detected by tip-offs from employees, especially those who are involved in finance and procurement.  Despite protections in place, whistle-blowers still fear that they will become the victim and either be exposed and/or lose their jobs. And, I don’t blame them.  In many cases I have investigated, the immediate reaction of the company tended to be “who is the whistle-blower” or “they must have an axe to grind”, not “we need to investigate these allegations immediately and prevent further loss”.

2. Use of temps and contract staff should be monitored carefully

If a member of the finance department become unwell or need to take time off to care for a relative, it may be tempting to backfill with temporary or contract staff. Companies should ensure that they do not drop their guard and carry out fewer checks than normal. Fraudsters have been known in the past to target finance teams that have a higher propensity to rely on contract or temp staff.

[ymal]

3. Be diligent in your transaction approval process

The lockdown now looks likely to continue in some form until at least September, so it is important that finance teams remain vigilant and check all transactions carefully, especially scrutinising carefully any:

• ’Urgent’ transaction requests – in a recent case this modus operandi was used to pay away $5 million to an offshore account;
• Transactions just below an authorisation limit especially if there are multiple payments to the same third party – if you spot this pattern, check back to the contract to see whether there are any “red flags” around the identity of the supplier, the tender process or the approval process ; and
• Journal entries that may be requested, particularly around month or other period ends. This is a frequent method to disguise transactions or to “boost” results.

Despite taking all the precautions listed above, organisations will still suffer fraud. Once discovered, taking the right steps quickly ensures a higher chance of recovering missing funds and a lower chance of losses continuing.

Do not make emotional or hasty decisions

Fraud involves a breach of trust and, therefore, as an employer you may feel betrayed by what has happened. As a result, you may be tempted to take immediate action which may ultimately compound the situation.

Therefore:

Keep an open mind

There may be a logical explanation for the discrepancy that may not be immediately obvious.

Discuss this with as few people as possible

You may be unwittingly tipping off someone involved in the fraud. If you do need to escalate or discuss your concerns, speak to the head of internal audit or legal department. Do not discuss it with a colleague, even if you trust them implicitly (see above regarding the enemy within).

Plan a course of action

The actions taken in the first hours and days after a suspect comes to light can ultimately affect the successful outcome of any action. As the finance director, you will likely have a fraud response plan in place. However, I wonder how many of them are collecting dust, probably also years out of date? Also ensure that senior management in each teams or location knows about the plan, have tested it (akin to a fire alarm, the plan needs to be tested to ensure everyone knows what to do and when).

Finally, I would advise finance directors and their teams not to ignore that “sixth sense”. If you start to feel uncomfortable about something, there is usually a reason.