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Case For Sceptics

by msecadm4921

Businesses should become more cynical, sceptical about possible fraud – and maybe we in the UK should not be so complacent that we are above corruption, a fraud consultant suggested.

Businesses should be cynical about transactions, said Allan McDonagh, Managing Director of London-based fraud consultancy Hibis – if for example a warehouse that was to cost œ10m in fact costs œ15m. Any manager, he suggested, has to be sceptical about believing everything he hears in his work. It is difficult to estimate fraud losses – perhaps two or five per cent of turnover. A typical fraud may continue between three and four years, before it is uncovered, even despite audits in those years. He quoted the Transparency International league table of perceived corruption by public officials and politicians (last featured in our November issue) that found Nordic nations as least corrupt and Nigeria as one of the most corrupt. Allan McDonagh reported his experience as slightly different. That index was a good indication of whether you would have to pay a back-hander, say, to get your products imported into a country. Yet if a seemingly uncorrupt Swede or Dane went on business to the likes of Nigeria, he would report home that he would have to bribe local politicians to build a factory. In other words, ‘our’, European corruption is more subtle, in gentleman’s clubs, and we should not smugly assume that Europeans are more honest. Allan McDonagh asked where the European Union as an institution would rank in a world corruption index.
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Half and half
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Turning to an average workforce, he suggested that half are as honest as the controls allow; 25 per cent are totally honest; and 25 per cent are totally dishonest. A retailer, for example, will have controls in place – from the application form to pre-employment screening, an interview and training; and management controls on the shop floor; measures such as CCTV; and the culture of the organisation. While it is rare, there are cases of those drives towards honesty being turned upside down; at a distribution centre, for example, the bad guys taking over – they recruit their own kind (because HR does not have a grip on the realities of van driving in east London) and train them so that the workplace is 100per cent dishonest. A fraud once found is embarrassingly simple, Allan McDonagh told a recent Reliance Security seminar at Aston Villa FC, Birmingham, on internal crime. Once Human Resources or prosecutors get involved, or the company seeks its lost assets back, the fraud becomes complicated, he added.
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Blinkered thinking
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He gave an example of the danger of blinkered thinking about fraud. To take retail: a retailer will budget to spend x million to control stock loss – with an armoury of measures from guards to stock-taking and test shoppers. But what of the warehousing and stock-purchasing and other departments that make up the turnover’ Could the retailer for instance have spent œ155m rather than œ165m on stock purchases’ Intuition that something is wrong is important, he suggested – why was a contract not put out to tender’ why does a director look uncomfortable in the boardroom when put under pressure about how a contract was managed’ Why has that director changed his lifestyle?
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Blowing the whistle
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Whistle-blowing and helplines can be valuable, he added. In the case of an airline, a call pointed out a fraud to do with staff discount cards. That detail would allow an investigator to check records – whether a member of cabin crew repeatedly uses (or misuses) a discount card.
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Who decides
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Where segregation of duties breaks down, fraud can go on. Who draws up a specification; who decides which companies are to be invited to bid; who awards the contract’ Who supervises the work, signs for invoices and instructs payments to be made’ Where a department looks after itself – such as IT, but also security, cleaning and facilities management – such duties can be in one person’s hands. Quite often the fraudster is a petty dictator in their department, who cannot be challenged and who does not like someone from audit or security asking questions about contract awards. Or, the contract fraudster can be a one-man band in an organisation, even a lowly-seeming person – like the light-bulb changer. Allan McDonagh gave the case of such a man who awarded contracts to his wife. At night investigators put microdots onto light bulbs in the warehouse, then inspected the new shipment from the employee’s wife. Sure enough, the ‘new’ light bulbs had the microdots; the man was taking light bulbs home for his wife to ‘deliver’ them. A criminal court case led to a community sentence; in the civil courts, the defrauded firm recovered œ600,000.
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Anonymous letters
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An investigation, Allan McDonagh said, starts with a gut feeling, or an anonymous letter – maybe from a disgruntled mistress or contractor. If the chief executive rings the accused manager about the letter, surprise surprise! the accused man does not confess but says he has enemies. Rather than confront the accused, you should investigate, covertly; whistle-blowers usually are sincere. Some investigation can be done in the open – checks of conflicts of interest, expense claims, and job application forms. The last two are quite often a window to a person’s integrity, Allan McDonagh said. A discrepancy on a CV, fairly easy to prove, can allow a company to dismiss the suspect at an early stage. Kick-backs are not always in a brown envelope, he went on: if the fraud is to do with banking, there may be a soft loan; to do with building, additions to the suspect’s home; if catering, meat.
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Ways to detect
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So much for being wise to fraud; how do you detect it ‘By using IT – which most organisations have. Allan McDonagh said he was no computer expert; rather, it was a matter of knowing which questions to ask, to use computers to profile the ones you are after – whether in retail or airline cabin crew. In retail, you can make a ‘league table’ of refunds, of expensive refunds, and of refunds at the end of a day and at lunch – which may be suspicious if they happen when the boss is not around. You should keep checks simple: who are your top 20 suppliers ‘Does a mini-cab firm at number eight make no sense (it could a firm run by an employee’s father’!) In expenses, who are the ‘mileage kings’ and ‘overtime kings’ Are the miles or hours claimed by the ‘kings’ ludicrous’
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Right to search
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Allan McDonagh raised data protection and human rights. He offered the concepts of impact assessment and proportionality. The more serious an offence – like a fraud that could damage the business – the more powers an investigator has. But you should consider taking legal advice. An assessment will allow the investigator to consider whether to search a desk; or a suspect’s PC or laptop for deleted files. The fraudster may have become lazy and used the company’s property to type the fraud documents. What often goes hand in hand with fraud is weak management, Allan McDonagh concluded. Thus solutions to fraud are not only hands-on management, but a fraud response plan: ‘Let contractors know your fraud policies and that there are penalties for corruption written inside contracts.’

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