How to spot fraud’s red flags

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Think something dodgy might be going on in your client’s business? 

Here are the signs to watch out for, and what to do about it.

Samantha Perkin FMAAT ATT has been running Zamu, her Cornwall-based accountancy practice, for almost eight years, along with her husband, Gary. But, four years ago, she got the chance to apply her skills to a very different field. Perkin moonlights at Matrix Forensic Accounting & Investigations, an accountancy firm specialising in fraud cases. In her time there, she has investigated everything from fraudulent benefit claims to large-scale corporate fraud.

“We worked on quite a big case that has just come through the courts system, a £20m fraud,” she says. “We were working for the prosecution. We had access to all of the documents pulled from the company’s computers, and we worked through all of them to identify figures that didn’t seem quite right.”

That is typical of a forensic investigation – the team follows up any discrepancies in financial documents and searches through all the information, including witness statements, to try to make sense of it all. “For example, they might say something that tells you that a figure is as it is because that’s what they wanted it to show,” Perkin explains. “They haven’t taken the real figure.” A fan of knotty problems, Perkin really enjoys the work, though it sometimes puts her in morally difficult situations.

She recalls working for the defence team of an individual who ended up in prison for benefit fraud. The person had 700 bank accounts that they were using to move funds around, and would often withdraw money as cash and then physically deposit it in another account. As a result, the money was being double-counted. “We had to go through and… un-double-count it,” Perkin says.

“Firstly, that’s not very exciting and, secondly, they were guilty anyway, so part of you just wants them to hand over the lot. But you can’t bring your personal feelings into your work. You have to do a good job, even if you feel the person doesn’t deserve it.” Perkin’s time at Matrix has informed both her work at her practice and her role as chair of AAT’s Cornwall branch. And her friendship with the local investigator for the Department for Business, Energy & Industrial Strategy means she’s been able to call on him to deliver talks at her local branch. “I reported a disqualified director to him.

He saw my address and realised that we’re only in the next village, so he popped round for a cup of tea,” she recalls. Most importantly, Perkin’s forensic experience has given her a good eye for the signs of fraud. Here are the steps to take to confirm your suspicions.

1. Trust your instincts

The first sign of a potential fraud is a gut feeling that something isn’t quite right, Perkin explains. People often don’t trust their instincts in these situations, she says, but it’s worth doing so. In fraud cases, there’s a common pattern in witness statements: “They often had a feeling something was wrong, but they didn’t know for sure, so they did nothing about it. You need to listen to your gut feelings.”

2. The acid test

You can’t build a case on gut feeling alone, so the next thing to do is review the client’s documents for signs of anything unusual. A good starting point is the company’s acidtest ratio, which often shows up any discrepancies, Perkin says. “We usually only look at these at year end, but that doesn’t mean we can’t look at them mid-year,” she notes. “That would show up anything out of the ordinary. For example, the inventory holding might have gone down, but we’re still displaying as much income. So how are we getting the income without having the stock?”

3. Look for meaningless codes

Look for any new nominal codes that don’t have a clear meaning: “In the £20m fraud case, there was a nominal code within their records that was used as a sort of slush fund; when the bookkeeper had a transaction and she didn’t know what it was, she put it in there.” The other common hiding place for mystery transactions is the director’s loan account. If the pattern of payment changes in that account – a large amount appearing in the account or lots of small amounts, say – it might be time to ask some questions.

4. Talk to the client

This is the moment to get a reasonable explanation from the client, but you don’t want to go in all guns blazing. If you’re thinking The first sign of a potential fraud is a gut feeling that something isn’t quite right about reporting them, don’t tip them off beforehand. The best approach is to arrange a visit and chat through how things are going. Let them explain what they’re doing. They might explain how they’ve changed their focus, which may explain away your concerns. “I’d always be quite cautious about what I’d say, but there’s no reason why you can’t go to the client and have a catch-up,” says Perkin. “You can always find an excuse to visit a client.”

5. Watch out for shadow directors

Perkin makes an effort to visit every client when she takes them on, to see how they operate. This can highlight who actually has control of the company. “You don’t know who’s got significant control until you’ve seen how the business works,” she says. “Who do the staff ask a question of? That’s a really clever thing to watch out for to spot shadow directors.” Still, these days, it’s very easy to do checks on individuals from the comfort of your office.

Companies House offers a list of all company directors and whether they’ve been disqualified. Do some online searches on Google and LinkedIn to identify who is involved with the company at a senior level, and then look them up on Companies House. If one of them has been disqualified, they may be operating as a shadow director. Even if all directors are clean when you take a client on, it’s worth checking up on them at least once a year, to see if anything’s changed. “They often know what’s going to happen with that business about six months beforehand, and they will often set up another company that they won’t tell you about,” notes Perkin. “If you do a director’s check, it comes up with all of the companies that they are a director of.”

6. Look for patterns in staff turnover

When a company becomes fraudulent, its good, honest, reliable staff will often leave in droves. “If somebody who has been faithful to the company, someone you thought would be there to their dying day, suddenly leaves, I would do some checks,” says Perkin.

Next steps

Once you’ve looked for the signs and are satisfied that there is enough evidence to make a report, you have two options: you can go to the authorities or, if the fraud has been committed by someone other than the owners, you can go to the owners themselves. Often, company owners feel betrayed when fraudulent activity has been happening under their noses.

“There is a bit of hand-holding involved – more than you’d like, sometimes. But, at some point, the issue has to be addressed. I’d always try to work out ways to stop it happening in the future,” says Perkin. Even if you aren’t 100% sure about your concerns, it’s still better to report them to the authorities. If the suspicious activity turns out to be legitimate after all, you won’t have put your client relationship at risk. “It is anonymous,” says Perkin, “and they’re really, really good at keeping it that way.”

Mark Rowland is a journalist and former editor of Accounting Technician and 20 magazine.

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