Scam Busters: The Sheer Embarrassment of Falling Victim to a Swindle Makes Companies Reluctant to Report the Crime, While the Perpetrator-Nearly Always an Employee-Often Evades Justice to Reoffend Elsewhere. Peter Bartram Charts the Growth of Commercial Fraud and Describes the Telltale Signs of Foul Play to Look out for. (Cover Feature Fraud)

By Bartram, Peter | Financial Management (UK), May 2002 | Go to article overview

Scam Busters: The Sheer Embarrassment of Falling Victim to a Swindle Makes Companies Reluctant to Report the Crime, While the Perpetrator-Nearly Always an Employee-Often Evades Justice to Reoffend Elsewhere. Peter Bartram Charts the Growth of Commercial Fraud and Describes the Telltale Signs of Foul Play to Look out for. (Cover Feature Fraud)


Bartram, Peter, Financial Management (UK)


They do everything bigger in Texas--even the bankruptcies. Enron's crash has demonstrated to the markets that size is no impediment to failure. And, more significantly, it shows that the presence of hotshot auditors is no guarantee that the bottom line won't be hiding a rat's nest of nefarious dealings.

The Enron affair is a timely reminder that double-dealing may lie at the heart of even the most solid-looking enterprise. But there is a danger that it will distract financial managers in other parts of the world from the fact that most sharp practice doesn't happen on such a grand scale. The reality is that fraud is an increasing problem for businesses of all sizes. KPMG's most recent Fraud Barometer--which tracks Crown Court cases concerning scams worth more than 100,000 [pounds sterling]--shows that the cost of commercial fraud nearly doubled last year from 82 million [pounds sterling] to 162 million [pounds sterling]. More than 40 per cent of the companies that responded anonymously to a survey by PricewaterhouseCoopers last year said they had been affected by some kind of economic crime over the previous two years.

But these remarkable statistics tell only part of the story. Most fraud goes unreported because the victims either don't know it's happening or are too embarrassed to disclose the fact when they find out. The perpetrators often slink away unprosecuted because the injured party fears that the consequent unwelcome publicity will cause customers to lose confidence in them and place their orders elsewhere.

Of those organisations admitting to PricewaterhouseCoopers that they had been victims, 43 per cent had been hit by embezzlers, 27 per cent by a breach of trust, 14 per cent by cyber-crime, 7 per cent by money laundering, 7 per cent by "general corruption" and 2 per cent by extortion.

The researchers found that the scale of the incidents exceeded companies' perceptions of the risk, particularly when it came to breaches of trust. "Surprisingly, despite the development of sophisticated risk management procedures in some organisations, management continues to underestimate fraud threats," the survey report notes.

The most pernicious threat lies within the organisation. Employees were behind 89 per cent of the crimes reported, according to the survey. As Robert Goldspink, lawyer and editor of the standard textbook International Commercial Fraud (Sweet & Maxwell, www.smlawpub.co.uk), says: "It would be a triumph of hope over experience to think that a high proportion of firms will not be defrauded by someone they themselves know and currently employ."

All this is bad enough, but there's worse to come. If an employer suspects foul play and does try to get the police involved, the chances are that they won't want to know. Despite sterling work by the Association of Chief Police Officers to promote best practice, most forces have scaled down the number of officers attached to fraud squads. As a consequence, employers who suspect fraud are increasingly turning to the likes of David Kearns. A police intelligence officer turned private eye, Kearns employs former members of the National Crime Squad at his agency, Expert Investigations.

"A fraud might take half a dozen police officers weeks to gather evidence," he says. "It's not surprising they're reluctant to get involved in smaller thefts."

Kearns has seen his agency's caseload increase by 50 per cent over the past year. "A lot of the time we're called in by managers who suspect something is going on but don't know how to get the evidence," he says.

Advances in technology have enabled investigators to conduct surveillance more effectively, but catching a fraudster is costlier than creating an organisational culture that offers neither the motive nor the chance for them to do the crime. Mark Prentice, assistant director of forensic services at Ernst & Young, says an employee needs to jump through three hoops to become a swindler.

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Scam Busters: The Sheer Embarrassment of Falling Victim to a Swindle Makes Companies Reluctant to Report the Crime, While the Perpetrator-Nearly Always an Employee-Often Evades Justice to Reoffend Elsewhere. Peter Bartram Charts the Growth of Commercial Fraud and Describes the Telltale Signs of Foul Play to Look out for. (Cover Feature Fraud)
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