By Chris Lane, Head of Entrepreneurial Businesses, Kingston Smith

With so many employees on holiday or away from the office during the summer period, there may never have been a more opportune time to spot fraudsters in the workplace, as they generally avoid taking long breaks away from work so as not to leave their work open to the scrutiny of colleagues.

A good starting point for any company director who has a feeling that something is not quite right is to follow the money, writes Chris Lane, Head of Entrepreneurial Businesses at top 20 accountancy firm Kingston Smith LLP.

Effective analysis of a company’s profit and loss and cashflow statements will generally flush out the demons. Sooner or later all reported profits, if genuine, properly measured and not misappropriated, must convert into cash. Reported earnings unmatched by cashflow are, by definition, suspect.

There are a number of common failings in the financial governance of companies that can leave them exposed to potential fraud. A thorough audit, or proper look at the company’s books and records, should raise the alarm on these practices, before it’s too late. It is advisable to watch out for the following signs:

- If VAT records and sales records do not correspond — this could be because the sales are fraudulently inflated to impress the bank and obtain finance on fictitious invoices;

- Where debtors are unsupported by any third party evidence;

- If stocks in the balance sheet include goods held on consignment belonging to suppliers. Since the value of goods held in stock at any particular time is not a product of double-entry bookkeeping, the manipulation of stock records is one of the easiest methods by which to uplift the value of a company’s assets;

- Where sums paid to the directors personally are concealed by write-offs to other companies under common control via a labyrinth of intercompany accounts;

- Where a journal is creatively used — always the most lethal accounting record;

- Senior management may conceal the misappropriation of company assets by overstating assets or income; or they could achieve the same effect by omitting to record costs or liabilities;

- Alternative methods used by staff to disguise the misappropriation of company assets is to record the misappropriations in the accounting records, albeit disguised as legitimate expenses, so that reported results actually reflect the consequences of the fraud;

- Where senior finance staff or directors falsify the company’s accounts by creating false sales and debtors to get more funding from its bank through an invoice discounting facility.

In order for such a fraud to be successful, it is generally necessary for the perpetrator to be in continuous close contact with the company’s accounting books and records on a day-to-day basis.

Therefore, be wary of the director or employee who never falls sick, never takes more than a long weekend as holiday (albeit to the most exotic of destinations) and whose top-of-the range, latest model sports car is always the first to arrive and the last to leave the company car park.

He or she may well have won the lottery, or inherited a fortune from great-aunt Mabel, but don’t bank on it. Not that fraudsters necessarily publicise their wealth — the timid little mouse in the corner who has worked like a slave for the past thirty years and is more than happy with her modest wage packet may one day surprise you.

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