Top companies have been left wide open to massive levels of fraud in the recession because they did not have enough safety measures in place, new research has claimed.
The Resilience to Fraud of UK PLC survey, published jointly by accountancy firm MacIntyre Hudson and the Centre for Counter-Fraud Studies, looked at the counter fraud systems in place within 135 public sector organisations and 32 FTSE 100 companies.
It gives a snapshot of firms’ susceptibility to fraud across the economy and indicates there were major fraud-prevention problems before the recession, leaving businesses vulnerable to the spike in fraud that followed the economic downturn.
The report revealed the largest FTSE companies were the most at risk, with an overall 55 per cent risk to capital among FTSE companies with a combined annual turnover of £180 billion.
Jim Gee, director of counter-fraud services at MacIntyre Hudson, and chairman of the Centre for Counter-Fraud Studies, said: “The current spike in fraud levels has a clear origin in the kind of weak preventative systems that this report lays bare.”
The report showed that weak fraud prevention was higher within the public sector, but this is largely explained by the poor systems in place among smaller departments where little capital was in fact at risk, whereas FTSE companies perform poorly in the study irrespective of their size.
In terms of preventing fraud, only a slim majority (56 per cent) had a counter-fraud strategy in place within the company, while less than half (47 per cent) had measures in place to review the effectiveness of this policy. And 37 per cent did not report fraud-related measures to senior management or an appropriate division within the organisation.
The public sector fared no better, with only 34 per cent of organisations surveyed having a dedicated counter-fraud function and 71 per cent failing to give any professional training to those responsible for counter-fraud activities.
Arun Chauhan, head of fraud and asset recovery department at Birmingham-based law firm Challinors, said: “I think the reason for the lack of counter-fraud systems before the recession is because when the economy was good, if there were losses they may not have been looked into because the time could have been better spent on a profitable exercise.
“In the good times you focus on gaining more money and overlook little losses.Whereas when we are in the grips of the recession, people are desperate to achieve income levels of the profitable years gone by, and some may turn to fraudulent avenues to do so.
“This is the reason why employee fraud has been on the rise recently.”
Mr Chauhan was keen to emphasise the need for fraud protection training in the workplace.
Reports produced by Challinors last year revealed that while 41 per cent of Midlands businesses do provide training, 48 cent do not.
An alarming seven per cent of Midlands businesses do not know what fraud protection training is.
He added: “I think it comes down to internal control – when you have a system in place you can drill down to see every transaction on every level, it gives cash-flow visibility and offers less scope for manipulation of figures and orders.”
While the report showed that businesses have weak fraud prevention policies, it did show that the companies do have a system in place for reacting to fraud.
More than 90 per cent of FTSE companies have whistle-blowing procedures in place and 84 per cent were investigating suspected fraud.
“Taking a reactive approach to fraud is like closing the stable door after the horse has bolted, leaving some of the UK’s biggest and most respected companies highly vulnerable to fraudsters,” Mr Gee warned.
“The choice is straightforward – organisations can either gain enormously from the benefits of counter-fraud work, or they can continue to suffer unnecessary financial and reputational damage.
“Now is the time for companies to engage seriously with the critical issue of fraud in what is shaping up to be one of the most protracted periods of economic difficulty we have witnessed in decades.”
Source: The Birmingham Post
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