How to Mitigate Fraud

Reported fraud in the UK hotel and catering sector saw a “dramatic increase” in 2009 to losses of £207m, according to the Fraud Team at accountancy firm BDO.

Cases included a £500,000 organic food scam which saw various products falsely described as organic being supplied by One Food Ltd.  The director of the company received a 27-month custodial sentence.  Another fraud saw a businessman duped into thinking he could buy the London Ritz for £250m and handing over a £1m deposit.

Adam Smith, forensic accounting director at BDO, highlights two main areas of risk: the procurement and accounts payable departments.

In the first case, a crooked procurement manager will make serious dents in your profitability if he is taking kickbacks from preferred suppliers during a period of major expenditure such as a hotel refurbishment or the purchase of new equipment.

In the second, if your IT security is lax a corrupt accountant could access the bank details of suppliers and re-direct payments to a private bank account.

 “The person who will de-fraud you is often the person who you trust the most,” Smith warns. “We must remember that fraud can never be 'designed out' but can be mitigated against.”

How to Mitigate Fraud

• Regularly review who you spend money with.  Reviewing the top 20 suppliers to a business can reveal surprises and 'new entrants' to the top 20 which may (or may not) be suspicious.
• Examine system transaction outside the norm - eg outside normal trading hours or outside a person's authorisation limit.
• Undertake due diligence with new suppliers - one should know exactly who one is dealing with.
• Question the good news as well as the bad. Satellite offices and subsidiaries may be reporting good news - but is that news correct or are figures being massaged by local management who wish to hold on to lucrative bonuses?
• Rotate staff in vulnerable areas - for example in the payments team of a business.
• Deal with whistle blowing allegations rather than prevaricating and sitting on bad news.

Ask 'why?' questions

• Why is our gross margin decreasing?
• Why is the property we took as security worth only 50% of what we thought?
• Why is our bonus structure linked to revenue not profit?
• Why are we making so much apparent profit – are we being hoodwinked by management at a remote location
• Why didn’t I see this sooner?
• Why didn’t I check the procurement director’s CV in more detail?
• Why didn’t I have better controls?
• Why did I put so much trust in someone I knew nothing about?
• Why do certain potential suppliers not reply to our requests for tender?
• Why are we spending so much more on marketing?