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In-house fraud

03 June 2004
In-house fraud

The problem With the headlines recently full of major financial statement frauds, company directors and senior managers in the hospitality sector should remember that it is procurement fraud that the majority of their companies will suffer from.

What makes matters worse is that many companies fail to investigate or report procurement fraud, preferring to throw a Harry Potter-style invisibility cloak over it.

The common scams involve an employee acting either alone or, more likely, in collusion with a third party. The usual scenarios involve purchasing goods at an overvalue, purchasing goods that are not delivered or are of an inferior quality, or purchasing goods that are not required but are used by one of the employees for their own personal use.

Even where goods are purchased at market value, it may be that the supplier used is not the normal one.

Although, on the face of it, there is no immediate loss to the company, there has been a breakdown of internal controls that can lead to future losses.

Check list
Although difficult to detect, procurement fraud can be spotted before it takes root in a company. There are also some other warning signs that can help directors and managers spot that it is taking place.

However, prevention is better than cure and, if a company takes action to strengthen internal controls in certain areas, this will make it harder for any would-be procurement fraudster. For example:

  • Adopt proper purchasing procedures.

Contracts for the supply of goods or services above certain values should be awarded only after a company has obtained at least three quotes or requests for tender. If quotes or requests for tender are not returned, an independent person from the company should follow these up to find out why.

  • Have adequate segregation of duties.

Certain members of staff may be responsible for a range of tasks, from ordering goods to receiving delivery and authorising payment. If the individual is in any way dishonest, they will be able to manipulate the process to their advantage.

  • Implement a whistle-blowing policy.

Anonymous letters should not be ignored - it may be human nature to want to ignore bad news, but it makes bad business sense, as there are advantages to fronting up to fraud. Every company should have procedures in place so that staff can report their suspicions confidentially, without fear of retribution. The policy should make it clear that allegations will be investigated and appropriate action taken, including criminal prosecution.

Telltale signs Apart from specific issues in relation to procurement that may start the alarm bells ringing, there are also more general "red flags" that could cause concern about particular individuals.

  • Lifestyle issues - if someone is living at the top end of what they can afford, or beyond, directors and managers should query how the member of staff can afford it.

  • Are employees taking all their holiday entitlement? Fraudsters will not want to be away on holiday, as there is a chance that they will be discovered.

  • Are employees working overtime? It takes time to cover up a fraud, so a fraudster will need to work long hours.

  • Look out for strange behaviour. The stress of carrying out and covering up the fraud may show itself.

  • Look out for high staff turnover. Other staff may be aware of what is going on and, rather than continue to work alongside a fraudster, they may resign to find new jobs.

  • Look out for low staff morale - this is similar to the point above. If they can't move to a new job, morale falls.

Beware!
Companies and their managements must be willing to take action when it is needed. But take heed: when fraudsters think that they are likely to be discovered, the first thing they will do is destroy the evidence. Make sure you do not alert them to your suspicions, and secure any potential evidence immediately.

If you don't have experience in this area, call in fraud investigators immediately, as the first few hours and days of an investigation are crucial.

Contacts
Andrew Durant, BDO Stoy Hayward
020 7893 2562
andrew.durant@bdo.co.uk

Andrew Witts, Lawrence Graham
020 7759 6728
andrew.witts@lawgram.com

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