FRAUD BREAKS THE 2 BILLION POUND BARRIER
Set to treble over next three years
Reported fraud in the UK exploded in 2009 and broke the £2billion barrier for the first time according to new research from accountants and business advisers BDO LLP. The amount lost by businesses and the public sector to larger frauds increased last year by a startling 76 per cent during the recession, with both the number and size of frauds increasing dramatically.
BDO LLP (one of the UK’s largest teams of specialist fraud investigators) predicts that, unfortunately, this 76 per cent rise is just a precursor of things to come, and warns that annual reported corporate fraud could be as high as £5billion in a couple of years, as more fraud is discovered – both through management being focussed by the recession on questioning costs, and because tighter cashflow and credit makes fraud harder to hide.
Simon P. Bevan, Head of Fraud at BDO LLP, commented: “2009 saw the steepest increase since our report began seven years ago, with the average value of each fraud now over £5million compared to £1.8million in 2003.
“Based on my experience of the two previous recessions, I expect that reported fraud will treble over the next two years. There has always been a lag effect, with reported fraud continuing to rise for at least a couple of years after businesses start to come out of the recession.
“A large part of this will be a tidal wave of fraudulent borrowing that has only just started to appear, particularly through use of over-valued properties as security for loans, while the property market was booming. Currently many of these frauds are yet to be recognised by the banks, which still have them classified as non-performing loans.
“It is only when specialist recovery departments start thorough investigations and eventually litigating against alleged dishonest borrowers and their complicit advisors that the true nature of these potentially horrendous fraud losses will come to light. It will take many years for the excesses of the past years to work through the system.”
Advice for business owners – Question the good as well as the bad
Bevan explains: “Fraud has always been a risk to businesses, but during the good times often management fails to question good news. We see it time and time again, with businesses being cavalier with regard to risk in boom times, but wondering where it all went wrong when the rug is pulled from under their feet by a recession.
“For instance, in several cases we have investigated this year, we have seen seemingly profitable enterprises falling flat when questions are asked about a particular deal or contract. Sadly, the best salesman may turn out to have been the best fraudster - in collusion with the best customer - to bill fictitious sales which are reversed after the accounting year end.
“I often find that management’s most powerful defense is continuing to ask the question 'why?'. Managers and business owners need to keep asking why something is happening, especially when it sounds like good news, and they will sadly often unearth a much more unpleasant truth.”
‘WHY’ questions for businesses
Below is Simon P. Bevan’s ‘Top Ten’ of the most pertinent questions for businesses when it comes to identifying fraud:
1. Why are we spending so much on marketing?
2. Why is our gross margin decreasing?
3. Why is the property we took as security worth only 50% of what we thought?
4. Why is our bonus structure linked to revenue not profit?
5. Why are we making so much profit – are we being hoodwinked by management at a remote location?
6. Why didn’t I see this sooner?
7. Why didn’t I check the Financial Director’s CV in more detail?
8. Why didn’t I have better controls?
9. Why did I put so much trust in someone who I knew nothing about?
10. Why do certain potential suppliers not reply to our requests for tender?
Other findings of the research (which looks at reported frauds costing £50,000 or more) include:
- While many managers are running their businesses well and legally, there are others that are looking after ‘number one’ and are likely to be ‘cooking the books’. BDO’s FraudTrack has identified that the cost of management fraud has shown a whopping 48 per cent increase to £503million in 2009, from the previous year.
- Our findings show that fraud by mid-level managers is frequently not for direct personal gain, but just to keep their jobs and income stream. However, the consequences of this can be dire, with Boards making investment and divestment decisions based on false data. Ultimately the lost money needs to come from somewhere.
- Greed continues to overwhelmingly be the number one motive for fraud in the UK, accounting for over 80 per cent of frauds in 2009. Fraudsters will go out of their way to embed themselves in a business for personal gain, and they also make sure that they won't stand out from the crowd. From investigating hundreds of frauds in recent years, BDO finds that, sadly, it is often the most trusted people in an organisation that might defraud that business.
Industry sectors
- According to FraudTrack financial sector continues to head from bad to worse, with a massive 70 per cent increase on last year’s figures to £1.340billion. Fraud against the finance sector now accounts for 64 per cent of all reported fraud (by value). It is our experience that well over 90 per cent of larger frauds do not get reported to authorities (civil actions are more common, but even with these there is usually a settlement before the case concludes).
- It may have become more difficult for the person on the street to secure a mortgage in the UK, but the mortgage fraud industry is booming! Mortgage fraud alone is 18 per cent of all reported fraud this year (and accounts for 27 per cent of all fraud in the finance and insurance sector). These frauds typically work through a large loan being taken out on an overvalued property, with a crooked buyer in collusion with a corrupt valuer and/or lawyer. When these frauds hit here, they hit large, since the same team will work on many properties in succession.
- Frauds involving the ‘misuse of assets’ (typically other people’s investments, property and savings) has increased 325 per cent from £58million to £250million. Whilst the vast majority of people who handle other people’s assets are honest, there are people out there who cannot resist using them for their own gains. Bevan warns: “People should be on their guard against fraudsters, especially in positions of trust, and the old maxim is true: if it looks too good to be true then it often is.”
- We have seen fraud boom in the retail sector with fraud increasing by 730 per cent to £123million. Retailers are being hit hard but fraudsters remain undeterred and continue to target them. Bevan states: “Fraud and insolvency often go hand in hand. If you need a margin of 17 per cent to survive but are losing 3 per cent due to collusion between your buyers and your suppliers then it is hard to recover from that position.”
- There has been a particular increase in the hotel and catering sector – something which we have not seen before. Fake villas, fake organic food and someone trying to sell a world renowned hotel (even though the fraudster didn’t own it!) are all coming out of the woodwork. It’s interesting to see how fraudsters will turn their hands to anything.
Fraud, by region
- The trend continues to be for larger frauds to predominate in London and the south east, which experienced a rise in fraud of 117 per cent, from £745million to £1,619million – accounting for 77% of all reported fraud in the UK last year (up from 63% last year).
- Other areas of the country are much smaller by comparison (see chart on page 5). Another region worth mentioning though, is the north east with a 111 per cent increase (to £280million), although that was a result of one particularly large case.
About BDO LLP
Simon P Bevan is BDO‘s head of the BDO’s Fraud Services Team. He has over twenty years’ experience of investigating fraud both in the UK and other international locations.
FraudTrack is prepared by BDO and is based on all reported fraud cases of over £50,000 from 01 December 2008 to 30 November 2009. The sources for the database are publicly available and include the UK’s national, regional and local press.
BDO LLP operates across the UK with some 3,000 partners and staff. BDO LLP is a UK limited liability partnership and a UK Member Firm of BDO International. BDO - Belfast, a separate partnership, operates under a licence agreement. BDO International is a world-wide network of public accounting firms, called BDO Member Firms. Each BDO Member Firm is an independent legal entity world-wide and no BDO Member Firm is responsible for the acts and omissions of another member. The network is coordinated by BDO Global Coordination B.V., incorporated in the Netherlands with its statutory seat in Eindhoven (trade register registration number 33205251) and with an office at Boulevard de la Woluwe 60, 1200 Brussels, Belgium, where the International Executive Office is located.
The combined fee income of all the BDO Member Firms was $5.14 billion in 2008. The global network has 1,095 offices in 110 countries and more than 44,000 partners and staff provide business advisory services throughout the world.
BDO LLP and BDO - Belfast are both separately authorised and regulated by the Financial Services Authority to conduct investment business.
BDO is the brand name for the BDO International network and for each of the BDO Member Firms.
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