Your client thinks their employee is the guy on the left – but could he actually be the guy on the right, betraying their trust and defrauding their business?
Fraud is reported to be the most common crime in the UK. Fraud by an employee is particularly damaging to your client’s business. The impact is not just financial – it’s also emotional and immediate. It is deeply disturbing in the workplace for one of the employees to be found to be a fraudster. Trust evaporates – nothing may be as it previously seemed. Uncertainty and suspicion are everywhere. Appropriate action needs to be taken quickly to establish the nature and extent of the fraud and to identify and correct misleading financial records and information.
In the longer term there may be a criminal investigation and legal proceedings which can drag on for years.
Detecting employee fraud is not a primary function of external accountants, bookkeepers, tax advisers and auditors. But employee frauds often continue for years undetected – and when the fraud does eventually come to light you may be asked how it was that you failed to detect it, year after year!
So both from the point of view of protecting your client – and to protect yourself – it would be wise to give some thought to the possibility of employee fraud affecting your clients, how you might increase the chance of detecting it where it has occurred, what advice you might give your clients around the possibility of employee fraud, and how you should react to a fraud which comes to light.
Increasing the chance of detecting fraud
It is very often the case that fraud by an employee continues year after year, with the employee using the same method. Indeed the fraud may have started as a temporary ‘borrowing’ to cover some unusual financial difficulty experienced by an otherwise honest and respectable employee. But money ‘borrowed’ may prove difficult to repay, and if the misconduct has gone unnoticed why rush to reverse it?
So ‘isolated’ misconduct which goes unnoticed may become habitual and the amount involved increases. This is particularly true where the initial financial difficulty arose from gambling or an addiction of some kind (which the employee may keep hidden from family, friends and colleagues) – when losses can snowball.
Where fraud is habitual then one of the key tools of the accountant’s trade – analytical review and the comparison of the current year with figures from previous years – may fail to detect that ever-present fraud.
More obviously, repeating the same accounting procedures which failed to detect the fraud last year will fail to detect similar fraud again this year. Meaning that the fraud comes to light only when the amounts involved become so large they cannot fail to be spotted.
Reviewing the segregation of duties (or lack of segregation of duties) in place in the client’s business and doing some testing related to a different aspect of that each year can dramatically increase the prospect of identifying employee fraud, without dramatically increasing your accountancy fee.
Advising the client
At the same time reminding the most senior people in the client’s business of their responsibility to deter, detect and prevent fraud could be time well spent.
They can do this by, as far as reasonable, ensuring some segregation of duties, having senior staff themselves occasionally review key financial records (such as bank feeds), and being alert to discontent amongst employees which might motivate or ‘justify’ fraud to compensate for some perceived unfairness in the workplace.
When employee fraud is discovered
When employee fraud is discovered action needs to be taken swiftly, but carefully and sensitively.
If you have discovered an actual or suspected employee fraud in your client’s business you need to consider carefully to whom should you report this?
Then, how can further losses be prevented? There may be employment law issues here – and you are not an adviser on employment law.
If a key employee is being removed steps may need to be taken to cover their work.
How can the fraud losses be quantified and over what period have they occurred? What corrections need to be made to financial records and accounts? Are there any tax implications?
Has the client any insurance cover for such losses? Does the client wish to report the matter to the police?
You will also have to consider whether the client might wish to make a claim against your firm for failing to detect the fraud earlier (however unmerited such claim might be). You may need to contact your professional indemnity insurer.
In terms of AML compliance, almost certainly you will have an obligation to submit a Suspicious Activity Report to the firm’s MLRO or the National Crime Agency, and you will need to review your AML risk assessment for the client.
If you are concerned that your firm’s AML compliance is inadequate, or even non-existent, get in touch now using the link below and we can work together to fix this. The hardest part is getting started.
[The image above was generated using AI, the text was not.]
