Corporate Fraud
3rd December 2019
Hello and welcome to our blog for November. This month we are talking about corporate fraud in the UK and discussing why the crime is committed along with the affects it has on accounting as a profession.
What is fraud?
Fraud is wrongful or criminal deception intended to result in financial or personal gain. The penalty for committing fraud in the UK is a certain number of years in prison, depending on the type of fraud committed (CPS, 2019).
The Annual Fraud Indicator 2017 estimates the cost of fraud to the UK is £190bn a year (ActionFraud, 2019). The Office for National Statistics (ONS) say that people are more likely to fall victim to fraud or cyber offences above any other crime.
Between October 2017 and March 2018 there were:
• 332,570 crimes reported to Action Fraud.
• £706 million lost by victims.
• £190bn annual cost of fraud in the UK.
• 62% of reports were from businesses and 39% from individuals.
According to Association of Certified Fraud Examiners (ACFE) the average perpetrator would usually not have any previous fraud convictions and tends to commonly be around the ages of 31 – 45; more likely to be male rather than female. Fraud is more damaging and costly when committed by owners/executives, which is more challenging to detect for auditors, forensic accountants or any other regulatory body associated with financial reporting.
“…more than 80% of the frauds in the study were committed by individuals in accounting, operations, sales, executive/management, customer service or purchasing”
(Association of Certified Fraud Examiners, 2010)
In the corporate world, there are many types of fraud, including falsifying accounts. An example of a company falsifying its accounts is Serco; a British provider of public services who were fined £22.9million for an electronic tagging scandal. Serco billed the taxpayer for electronic tagging of criminals who were not qualifying individuals to be tagged (Press Association, 2019). The subsidiary understated the profits it made from its tagging operations to conceal the fraud. Therefore, although Serco was the parent company of the contract, it was the subsidiary that committed fraud.
Why do companies commit fraud?
Companies commit fraud due to unforeseen pressures and when a corporation moves into a new market, they aren’t used to how it works and their system isn’t up-to-date/adaptable; thus they fail to adapt to the current operating levels, due to company incompetencies on how they operate within the market. In addition to company incompetency, cyber-crime e.g. hacks can affect the integrity of company data and cause leaks/damage to accounts, therefore causing inaccuracy in the data.
Opportunity to commit fraud may occur from individuals internally involved with the company, who may be experiencing financial difficulties and see the opportunity for personal gain; especially if they feel unappreciated. Therefore, many companies usually pair people when setting tasks as it reduces that opportunity to take advantage.
Consequences of falsifying accounts?
– Committing fraud could result in prison sentence
– Be disqualified as acting as a company director
– Lose licence to operate
– Potentially being required to account for any losses caused
– Potentially being required to pay the cost of any investigation and prosecution
– Potentially being struck off if you’re part of a regulated profession
It’s arguably not worth the risk of committing the fraud as it leaves the company in a difficult position, losing credibility and integrity. Enron is a perfect example of a company falsifying accounts, the scale of which they overstated their performance by concealing their debt leading into billions of dollars.
Opinion of our bloggers: Our thoughts surrounding the criminal activity of fraud questions why individuals would waste all their hard work in gaining professional qualifications through either an apprenticeship, a University degree or work experience for it to be lost very quickly by just any act of fraud. It does have a negative impact on the profession as a whole by affecting the wider community not just the individuals who commit the crime, and as a result can potentially discourage students wanting to enter the profession in the future out of fears of being caught up in fraud and being prosecuted. Due to the negative impacts, we collectively agree that the punishment for committing fraud that involves being struck-off with a suspended licence and a sentence is justified. Furthermore, we suggest that there should be more guidance and support in avoiding committing fraud and being the victim of it, which includes whistle-blowers who face tarnishing of their reputation and their overall livelihood if they are known to be whistle-blowers. More guidance in these areas would almost certainly reduce the occurrence of fraud happening in the corporate world.
The Financial Review team
References
Association of Certified Fraud Examiners, 2010. Who is most likely to commit fraud at your company?. [Online] Available at: https://www.acfe.com/press-release.aspx?id=1677 [Accessed 28 November 2019].
Journal of Accountancy, 2001. Why employees commit fraud. [Online] Available at: https://www.journalofaccountancy.com/issues/2001/feb/whyemployeescommitfraud.html [Accessed 2019 November 2019].
ActionFraud (2019) What is fraud? Available at: https://www.actionfraud.police.uk/what-is-fraud (Accessed: 28th November 2019)
CPS (2019) Fraud Act 2006. Available at: https://www.cps.gov.uk/legal-guidance/fraud-act-2006 (Accessed: 28th November 2019)
Press Association (2019) ‘Serco fined £22.9m over electronic tagging scandal’, The Guardian, 3 July. Available at: https://www.theguardian.com/business/2019/jul/03/serco-fined-229m-over-electronic-tagging-scandal (Accessed: 28th November 2019)