Fraud is the most commonly experienced crime in the UK, with the number of reported cases rising by 18% in 2023 to a three-year high. It is also costing the UK economy £219 billion annually, according to the Annual Fraud Indicator 2023.
Corporate fraud is a real and growing problem for companies of all sizes in the UK but it can have a particularly catastrophic impact on SMEs, who may not have the resources to spend as much time thinking about due diligence, internet controls and risk management as larger companies. The effects of corporate fraud can include lost money, reputational damage, and legal trouble.
What is Corporate Fraud?
Corporate fraud involves illegal or unethical and dishonest actions committed by a company or an individual acting in their role as an employee of the company. This kind of business fraud is often designed to give an advantage to the perpetrating individual or company. It is considered a white-collar crime.
In this instance, corporate fraud victims are consumers or clients, creditors, investors, and other businesses. When it is finally discovered, the company carrying out the fraud is often left in ruins and obliged to declare bankruptcy.
Alternatively, a business can fall victim to the fraudulent activity of one or more of its employees in the form of corruption, bribery, financial statement fraud or asset misappropriation (stealing from the company). A lot of the money unlawfully acquired through corporate fraud is forever lost, having been spent long ago by the perpetrators.
Corporate fraud can be difficult to prevent and tough to catch. However, you can limit the extent to which it can take place in your organisation by creating effective policies and a system of checks and balances.
Types of Corporate Fraud
Corporate fraud can take place in several ways.
One example of corporate fraud is altering a company’s financial accounting records to present an image of high revenue and profits, often hiding the reality of financial results which may include shortcomings such as a net loss, declining sales or huge expenses. One prolific example of this was the deceptive accounting and business practices that led to the downfall of Enron, a large US-based energy, commodities and services company. The company used loopholes and other disguising tactics to hide debt of billions of dollars. In this situation, those responsible also pressed their auditors to conceal their deception, through the destruction of financial documents.
Similarly, corporate fraud also occurs if a company or individual claims that it is putting some of its funds towards investments or monetary reserves that are intended to gain in value but in reality, have spent or diverted those funds elsewhere. Another form of corporate fraud is where a company seeks to misrepresent a service or product that the company is developing or has in service, therefore hiding its flaws or shortcomings. Both of these types of fraud have a significant impact on a business, ruining its reputation and trust.
Fraud can also happen when a trusted individual within the organisation takes advantage of confidential information or access to sensitive information and then leverages that knowledge for financial gain.
Asset misappropriation, which is when an employee of the employee uses company assets for personal gain, is also a common type of corporate fraud.
Other forms of corporate fraud include:
- Wrongful or Fraudulent Trading
- Corruption and Bribery
- Money Laundering
- Insider Trading
- Tax Fraud
- Insurance Fraud
Why Does Corporate Fraud Happen?
The main reasons behind the increase in corporate fraud cases are economic pressure and market competition. The impact of the economic downturn, which has left many companies struggling with money problems and lower profits since the pandemic, has meant that the business or individuals within the business may be tempted to deceive stakeholders into believing that a company is more profitable than is to attract or retain investors. Similarly, the cost of living crisis increases the risk of fraud and deception among employees.
Another cause of corporate fraud may be problems or defects with the company’s products, which are just too costly for the company to rectify. This has happened in the past when pharmaceutical companies have attempted to hide certain side effects or dangers associated with using certain medicines they have manufactured and sold.
Technological advancements, while presenting opportunities for growing business and discovering new markets, have also brought more avenues for fraud through the use of web crimes, data hacks and e-fraud.
How Can You Prevent Corporate Fraud in Your Business?
To develop effective preventative measures, you will need to identify where the risks of corporate fraud exist. To do this, you need to know your business inside out as well as its systems and the controls over those systems. This will allow you to identify the gaps and therefore what procedures are needed to fill them.
Small businesses sometimes feel immune to fraud but one of the greatest fraud risks that a business can face is through its employees. So, it is important to develop an anti-fraud culture in your business, which involves talking to staff about fraud and ensuring that there are robust prevention measures in place.
Some measures to prevent fraud include:
- Securing your sensitive data by using firewalls, antivirus software and strong passwords. Regularly update your systems and conduct security audits.
- Physical controls, such as security cameras or limited access to assets, equipment or stock
- Segregation of duties so that the staff responsible for initiating a transaction or recording a transaction differ from those reviewing and authorising that transaction.
- Recruitment checks for potential employees to confirm that they are who they say they are
- Carrying out regular checks on stock and inventory and reconciliations, such as between bank balances and the company’s cash books
- Maintaining clear and accurate financial records. Shoddy bookkeeping makes it harder to detect fraudulent activity.
- Setting up an anonymous reporting system where employees can report fraudulent activity and feel safe raising concerns.
It is important to remember that preventing fraud is an ongoing process that requires vigilance and regular checks of your security measures. Adopting a proactive approach and implementing these measures can go a long way in keeping your small business secure.
If you are concerned about a corporate fraud matter or would like more advice on preventing fraud within your organisation, please contact our expert business fraud solicitors via email.
FAQ
What is the most frequent type of corporate fraud?
Asset misappropriation or skimming, which involves an employee stealing company assets or cash is one of the most common types of corporate fraud.
How do you detect corporate fraud?
It is important to have insight into how money leaves your business, how often and in what quantities. This includes how your business pays for things, which staff have the authority to make those payments and who checks the books each week. Awareness of your company’s finances will make it easier to detect any unusual spending or activity.
Employers should also be watchful for red flags among staff, such as significant lifestyle changes that exceed an employee’s means or a failure to keep appropriate or accurate records/receipts.
Corporate fraud may also be detected from an anonymous tip-off or an allegation from another employee or stakeholder in your business.
Lastly, the detection of corporate fraud often arises from internal or external audit findings.
How do auditors detect fraud?
Auditors play an important role in uncovering and preventing financial fraud. This is done by ensuring that the financial statements are accurate and that there are no red flags or indicators that something may be amiss in the financial statements or records, such as unusual transactions or discrepancies between the financial statements and the underlying documentation.
What are the most common types of audits?
An audit is a review and inspection of a company’s accounts and financial records. Its objective is to form an independent opinion on whether the financial records fairly and accurately represent the company’s results for that financial year and have been prepared following accounting standards.
The main types of audit are:
- internal audits completed by the company or organisation itself
- external audits carried out by independent professionals
- compliance audits that take place with a specific goal in mind. These are common in financial industries, where there is regulation on activities such as insider trading
- tax audits which are external audits, most commonly initiated by HM Revenue and Customs
Is my business vulnerable to fraud?
Particularly small businesses and start-ups that do not have a formal receipt process in place can be vulnerable to the disappearance of physical cash. It is essential to have a streamlined process to maintain essential supervision of cash within the business.
Similarly, the business cultures of small businesses are often developed around the concept of a ‘trusted family’ of employees. This may lead to placing trusted employees in positions without proper internal controls, which provides an opportunity for fraud.
Businesses that do not encrypt data, are careless with passwords and do not use reputable trustworthy software, apps and digital services are also vulnerable to fraud.
What are the common signs of corporate fraud?
Some common signs of fraud include:
- unusual cash transactions
- a staff member resisting new internal control systems
- an employee making expensive purchases that do not align with their salary
- circumstances where an employee wants to work extra hours, outside of regular business hours or refuses to share certain tasks.
Of course, there may be perfectly reasonable explanations for any of these scenarios, but it is important to follow up and take a closer look to investigate these situations further.
