Why it is unfair to expect accountants to take responsibility

April 2018 | PROFESSIONAL INSIGHT | FRAUD & CORRUPTION

Financier Worldwide Magazine

April 2018 Issue

Accountants are often the ones who come under scrutiny when fraud is suspected or identified. There are assumptions that even if the accountant is not the perpetrator of the fraud, they should have at least known about it and raised the alarm.

Accountants are the ones with the most comprehensive overview of the company’s financial activities and, therefore, often end up facing the most pointed questions when fraud is suspected. Such a situation is not a rarity. Figures vary, but research has indicated that companies lose an average of 7 percent of their annual turnover to fraud. It is estimated that around 85 percent of companies are victims of fraud each year, with some researchers claiming fraud costs the UK economy £190bn a year.

Since 2016, businesses with a turnover below £10.2m or assets of less than £5.1m no longer have to have their accounts independently signed off by an auditor. Until 2016, an auditor had to sign off the accounts of all businesses with a turnover of over £6.5m and gross assets of more £3.26m. This change means that thousands of businesses no longer have to be independently audited.

The Institute of Chartered Accountants in England and Wales (ICAEW) was quick to warn that the relaxation will make businesses more vulnerable to fraud, money laundering and other financial offences. This may also place more pressure and responsibility on a company’s accountants.

Fraud

The situation accountants find themselves in means that they need a working knowledge of the law that affects the finances of the company or organisation that employs them. Familiarity with the money-laundering aspects of the Proceeds of Crime Act, knowledge of the Money Laundering Regulations as they affect financial institutions and an understanding of the legislation regarding company accounts and tax matters are all essential, not only for ensuring they carry out their functions appropriately, but also as a safeguard against unwittingly becoming involved in wrongdoing.

This is arguably most important when it comes to the Fraud Act. Since coming into force on 25 January 2007, the Fraud Act has changed the landscape of fraud in the UK. It repealed a number of other Acts, widened and simplified the law on fraud, made fraud much easier to prosecute and carries a maximum sentence of 10 years’ imprisonment.

The centrepiece of the Act is the creation, in Section 1, of a new single offence of fraud. This offence can be committed in one of three different ways.

Fraud by false representation – where a person dishonestly makes a false representation with intent to gain or cause loss to another, or to expose another to risk of loss. This offence can be used to charge those involved in so-called ‘boiler room’ frauds and is often used when prosecuting alleged mortgage fraud.

Fraud by failure to disclose – where a person dishonestly fails to disclose to another person information which he or she is under a legal duty to disclose, in order to make a gain or cause a loss, or risk of loss to another.

Fraud by abuse of position – where a person occupies a post where they are expected to safeguard, or not act against, the financial interests of another but then dishonestly abuses that position intending to make a gain for him or herself or to cause loss, or risk of loss to another. This can cover staff who use their position to make personal gains, who grant unauthorised discounts or deals to friends and family or who are involved in bribery.

Precautions

The Act is wide in scope and carries heavy punishments. Accountants, therefore, have to take precautions, regardless of the company, organisation, financial institution or private client they work for.

To minimise the chances of them being suspected of involvement in wrongdoing, accountants must adopt a few simple practices.

Whether working for one company or a variety of clients, accountants have to keep clear, detailed records of all contact they have with those employing them. This may seem excessive but it could be of immense value if, at a later date, the nature of the accountant-client relationship is investigated. It is also important that an accountant finds out as much as possible about their clients, including the exact nature of their business, the patterns that can be seen in their finances and the explanations given to an accountant’s questions about those finances, which can all be important indicators of the legality, or otherwise, of the enterprise.

If a whole company has been set up with the intention of making fraudulent gains, as with boiler rooms, or a legitimate company has become the target of staff or associates who are looking to commit fraud, investigators will be looking to find out exactly who knew what. Accountants have to be able to show they had made all possible checks.

Prevention

While it is true that the accountants are the ones who ‘do the books’ and see all the figures, this does not make them solely responsible for the prevention of fraud in a company. Fraud prevention in any organisation has to be the responsibility of everyone – or at least the senior decision makers. The view that nothing needs to be done to prevent fraud because anything untoward will be spotted by the accountant is incorrect.

Companies need to be on the lookout for signs of fraud. Missing documents, incomplete records, unexplained or unusual transactions, duplicate payments, abnormal levels of business (on paper at least) and any contradictions in the financial records must all be treated as a cause for concern and investigated thoroughly.

Any financial institution, company or organisation must devise and implement procedures that will enable it to prevent – or at the very least identify – fraudulent behaviour. An absence of procedures is a dangerous and unrealistic way to proceed. It has to assess its potential vulnerability to fraud, create policies that minimise that risk and ensure that staff are fully aware of their responsibilities to report any suspicions.

Overview

Devising anti-fraud strategies requires everyone involved taking a detailed overview of a firm’s workings. It involves closely examining potential employees, trading partners, third parties and consultants. Failing to do this makes it highly unlikely that the risks of fraud will be identified and the company will remain vulnerable.

Devising an anti-fraud strategy may even help the accountant know what to look for when it comes to spotting signs of potential wrongdoing. But without such a strategy, it is ridiculously optimistic to expect accountants to have some sort of in-built sixth sense to spot fraud.

That is the case, regardless of how large the fraud is. Take Tesco as an example. The supermarket giant paid £129m last year, under a deferred prosecution agreement, to settle allegations that it overstated its profits by £326m in 2014. Three of the company’s senior figures are charged with fraud by false accounting and fraud by abuse of position.

The size of Tesco’s overstatement creates questions concerning how wrongdoing on such a scale could have gone unnoticed, or at least unreported. If anything, the Tesco case is a perfect example of how a company or financial institution’s shortcomings when it comes to identifying and reporting wrongdoing can enable problems to flourish.

It is important, therefore, not to leave fraud detection to the accountants. Proper procedures must be put in place.

Aziz Rahman is the founder of Rahman Ravelli.

Aziz Rahman

Rahman Ravelli