Page last updated on Tuesday, September 6 2005 at 1657 UK

Fraud (inc. computer fraud)

Fraud prevention is all about protecting business security and ensuring stabilty

What is it all about?

Investigating instances where the dishonest activites of an employee, Board member or third party may be adversely affecting company finances, reputation or legal compliance.

Why is it important?

Fraud directly affects the profitability of a business and jeopardises its continued existence. Fraud can damage the reputation of a company, destroy investor and client confidence and leave an organisation open to criminal charges.

Reported fraud in the United Kingdom increased by 116% in the first six months of 2004 to GBPŁ435 million, compared with the same period in the previous year and this trend is echoed around the world. This growth is fuelled in part by the reduced physical danger and less severe penalities which fraud attracts compared with other forms of crime.

The proceeds of fraud are rarely recovered in their entirety and even a successful conviction against the perpetrator can leave the victim financially ruined. Criminal prosecutions can take in excess of two years and the complexity of fraud over such a long period of time can be difficult to communicate in a courtroom.

The Problem

Part of the problem is that there is no strict definition of what constitutes fraud. Broadly, it is any situation where deception is used to gain an advantage to which the perpetrator is not entitled. More specifically, fraud usually falls into one or more of the following categories:

False accounting involves dressing up company figures to hide losses, exaggerate or hide profits and thereby attract investors and win contracts. The recent Enron and Parmalat scandals are examples of false accounting.

Asset misappropriation occurs when company employees, managements and Directors - possibly in collusion with third parties - conspire to steal assets from a business. This could mean the theft of stock, intellectual property, client lists, price lists or money through payroll fraud or inflated expenses claims. Kickbacks or bribes which lead an employee to act against the best interests of a business and the preferential award of contracts to third parties where there is an inside interest are other examples of this type of fraud.

Trade fraud involves the fraudulent use of import / export documentation and letters of credit such as happened in the case of the trader Milton Kounnou, who defrauded ten Middle Eastern banks to the sum of GBPŁ105million in a scheme involving fictitious metal shipments and was later imprisioned for two years.

Investment fraud relies on persuading investors to contribute to investment schemes with are either inaccurately described or non-existent.

Computer and e-fraud is a relatively new mechanism by which to carry out old-fashioned fraudulent schemes. Computers can be used to electronically steal funds, intercept financial transactions and divert intellectual property in a way which requires new detection and investigation techniques.

The Symptoms

More than likely, the perpetrator of a fraud is known to the company involved. In a recent survey in the UK, company employees were found to be responsible for 30% of fraud and management were responsible for a further 55 - making a total of 85% of fraud the result of inside jobs. Opportunity is a key factor in committing fraud. The more trusted members of a company, such as bookkeepers, Directors and senior management - all of whom may work long hours with time alone in the office and access to privileged information - are the most likely to commit fraud.

There are some key warning signs of fraud and spotting these early can reduce the impact of fraud and the damage to a business:

lack of complete management accounts
poor recovery rate from debtors
uneven turnover
unusually high stock levels
lavish corporate entertainment and high standards of living
a dominant individual controlling a submissive Board
high turnover of legal and accounting advisers
excessive working hours and reluctance to take vacations
inadequate credit checks on customers who later turn out to be uncreditworthy
poor response to queries from management, colleagues, suppliers and auditors
excessive payments to ‘consultants’
management preoccupation with share price

The Solution

Prevention is better than cure and there are ways of making a business less vulnerable to fraud. Careful screening of employees, staff training, the use of ‘whistle-blowing’ procedures and the structured deployment of technology can all help to reduce the opportunities for committing fraud and make it more detectable.

No matter how many safeguards are in place, fraud can still occur and when it does, the key to damage limitation is early detection. An early investigation of any of the above symtoms can save time, money and reputation. By the time you are absolutely sure that fraud is taking place, it is often too late to control the damage.

In constrast, fraud investigation can be a delicate matter. The most revealing and conclusive investigations are those where the perpetrators are unaware that they are being examined until it is too late to hide the evidence. Inconspicuous investigation has the added advantage of being invisible to the media, investors, share holders and clients.

Completing an investigation which is both low-key and thorough relies on TKM’s blend of highly experienced ICT and financial expertise. With early involvement, TKM has already helped a number of businesses and public sector bodies to avoid the damage to finances and reputation which fraud can cause; if you recognise any of the symptoms above, contact TKM right away.

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COMPUTER FORENSICS NEWS

Fraud (inc. computer fraud)

Fraud prevention is all about protecting business security and ensuring stabilty