Insider fraud: lessons from International Fraud Awareness Week

Asset misappropriation

Misuse of company resources by an associated person. Examples include:

• Billing schemes: creating false invoices or manipulating legitimate invoices/supplier accounts to take funds from an organisation.
• Payroll schemes: manipulating the payroll scheme to receive improper payment eg ghost employee/overtime/enhancements.
• Expenses claims: submitting false/inflated expense claims.
• Skimming: redirecting cash before it is recorded or underreporting revenue by giving customers a receipt for a lower amount.

It is the most common form of occupational fraud, accounting for 89% of the total fraud cases reported in the ACFE’s global 2024 report.

Financial statement fraud

Intentionally misrepresenting financial information to deceive stakeholders, such as:

• Inflating revenue: artificially increasing reported sales.
• Understating/overstating expenses or liabilities: reporting lower or higher costs or debts to make the financial wellbeing seem more sustainable.
• Manipulating asset valuations: reporting lower or higher valuation of assets to make the financial health seem more sustainable.
• Improper disclosure: omitting or misrepresenting financial reports.

Corruption

• Conflicts of interest: conflicts of interest arise when the various interests, duties or commitments that a person may have – family, friends, work, voluntary work or political interests – come into conflict (or are very likely to). These conflicts do not necessarily involve improper or corrupt behaviour, although they can lead to it.
• Bribery: under the Bribery Act 2010, bribery is defined as giving someone a financial or other advantage to encourage that person to perform their functions or activities improperly or to reward that person for having already done so, in order to gain an advantage, whether personal or commercial.
• Illegal gratuities: rewards or gifts given to a person of authority after they have made a decision or taken action, as a token of appreciation.
• Economic extortion: demanding money, goods or favours from an individual or organisation by threatening consequences.

The impact of fraud is wide-reaching in any organisation, through financial loss, breakdown in trust, legal costs and reputational damage. Preventing fraud is considerably more advantageous than detecting fraud once it has occurred and dealing with its aftermath. The Institution of Chartered Accountants advise that investing in fraud prevention can yield a return on investment (ROI) of up to 12:1.

As the ultimate experts in your processes and systems, your employees are essential to the operation of your business. When this goes wrong, and an employee abuses their position to steal from you, it is the ultimate betrayal.

Whenever a fraud or near miss occurs, organisations should take the opportunity to learn all they can from it. Any areas of weakness should be immediately strengthened, and awareness raised across the team.

The Public Sector Fraud Authority (PFSA) has established five principles that can be adopted across all sectors:

1.There is always going to be fraud
It is a fact that some individuals will look to make gains where there is an opportunity. Organisations need robust processes in place to prevent, detect and respond to fraud and corruption.

2. Finding fraud is a good thing
If you don’t find fraud, you can’t fight it. This requires a change in perspective so that the identification of fraud is viewed as a positive and proactive achievement.

3. There is no one solution
Addressing fraud requires a holistic response incorporating detection, prevention and redress, underpinned by a strong understanding of risk. It also requires cooperation between organisations under a spirit of collaboration.

4. Fraud and corruption are ever changing
Fraud and counter-fraud practices evolve very quickly. Organisations must be agile and adapt their approach to deal with these evolutions.

5. Prevention is the most effective way to address fraud and corruption
Preventing fraud through effective counter-fraud practices reduces loss and reputational damage. It also requires fewer resources than an approach focused on detection and recovery.

Fraud can occur in any organisation, especially when engaging with new suppliers. To protect your business, it's crucial to implement thorough checks and controls. Here are the key steps to ensure your supplier processes are secure:

Supplier requirement

Before engaging a new supplier, ensure you have the necessary authorisation and a valid business case. Follow the correct procurement process based on the anticipated spend.

Supplier due diligence

Verify new suppliers with these checks:

• Ownership: are they linked to any of your staff?
• Addresses: do their registered and trading addresses match the details provided?
• Incorporation date: how long has the company been trading; for instance, were they established only recently?
• Trading history: have they submitted financial returns?
• Registered addresses: are they appropriate for the type of business (eg not residential or a PO box)?
• VAT check: are they listed on the HMRC checker?
• References: can they provide assurance that they can deliver the goods/services?
• Accreditations/registrations: are they registered with any professional body, and can this be independently verified?
• Bank confirmation of payee checks: does their account name match the company details?

New supplier set up

Who reviews the results of the above searches? The four eyes principle should be in place to ensure independent review of the above searches.

Declarations of interest

Require staff in decision-making roles to declare any outside interests that may conflict with their role. Consider reviewing Companies House records to independently verify that employees are not linked to your suppliers.

Accounts payable

Implement strong controls, including:

• User access management on your accounts system.
• Segregation of duties between goods receipting and invoice payment.
• A “No PO, No Pay” system.
• Regular budget reviews between the finance and contract manager and annual aggregate spend checks to ensure authorisation was in line with Standing Financial Instructions limits.