By Daniel Hunter

As many staff members enjoy a summer break away from the office, now’s the time to detect fraudsters in the workplace, claims Chris Lane, Head of Entrepreneurial Businesses at top 20 chartered accountancy firm Kingston Smith LLP. Fraudulent employees generally avoid taking long breaks away from work so as not to leave their work open to the scrutiny of colleagues.

A company director who suspects something is not quite right should follow the money — starting with an effective analysis of the business’ profit and loss and cashflow statements. 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.

Common failings in the financial governance of companies can leave them exposed to potential fraud. Lane advises directors to look out for the following signs:

1. 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;

2. Where debtors are unsupported by any third party evidence;

3. 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;

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

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

6. 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;

7. 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;

8. 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.

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.

“In order for a fraud to be successful,” explains Lane, “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 not stopped working for the past thirty years and is more than happy with her modest wage packet may one day surprise you.”

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