Out-Law / Your Daily Need-To-Know

New ways of working linked to rise of insider fraud

Out-Law News | 26 Jul 2022 | 10:28 am |

Andrew Herring tells HRNews about spotting the signs of insider fraud within an organisation

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  • Transcript

    Employee fraud is on the rise. Businesses have been adapting to new ways of working but many have left weaknesses in their internal controls and some have paid a price. So what can HR do to help minimise the risk and help protect the business? We’ll consider that. 

    Back in February KPMG published its biannual UK Fraud Barometer. It takes account of the major fraud cases reported in the media and heard in the UK’s Crown Courts, where charges are in excess of £100,000. They found 298 alleged fraud cases meeting that threshold, up from 180 the year before. The number of frauds committed by employees rose from 44 to 66 and from 21 to 66 at management level. KPMG say the trend is potentially linked to weaknesses in internal controls driven by the impact of Covid-19, while businesses were implementing new ways of remote working. We agree, based on what we have seen across our own client base during that time.

    Insider fraud - fraud committed by people within the company - is estimated to cost businesses on average 5% of their annual revenues globally according to the latest study by the Association of Certified Fraud Examiners. Before the pandemic, it is estimated that around half of insider frauds were successfully uncovered by internal controls. However, in the last two years new ways of working, hybrid and flexible working particularly, have left weaknesses in those systems. The message is HR needs to be aware of that and take steps to help protect the business. 

    So, let’s hear more about insider fraud. Andrew Herring is one of the lawyers in our litigation team, specialising in complex litigation and fraud-related investigations and he joined me by phone from the Birmingham office to discuss it. I started by asking Andrew about the warning signs, the red flags that HR should be alive to?

    Andrew Herring: “The first one from our perspective is people that are working excessive hours, or who don't take the right levels of annual leave that you might expect. There have been some very high-profile cases over the years, where people have been committing fraud and they don't leave work because they need to be in control of the situation in order to ensure that they're not found out, and that things carry on in the way that they would like them to, and they don't get caught. So it's always worth just making sure you know if people are working excessive hours, or working odd times of the day, and from a pastoral perspective, you're checking that everything's okay with them but then, also, that it's not a red flag of other things going on. For example, on the holiday point, in some regulated sectors businesses will ensure that people take a mandatory two-week holiday during the course of the year just so that if audits do need to be undertaken about what work has been undertaken, those can be carried out safely. Then there will be other things that that might be warning signs, for example, people using unnecessarily complicated working practices. If something can be done simply and openly and transparently it's very likely to be a quite a rigorous process whereas if people are making it overly complicated, then that just creates potential situations that can be exploited and we see that quite often in the finance teams within businesses. You know, the invoicing procedures, the authorization procedures, if it's too complicated it gives people the opportunity to commit fraud. I think also, and this is difficult one because there is this huge emphasis on data protection and protecting confidential, commercially sensitive information within organisations but, again, if people are taking steps to keep what they're doing secret in a way, which is not appropriate within the business, that might be a marker that they're doing something wrong that they're trying to hide from their fellow employees or management so that's something to keep an eye on. Obviously, people living beyond their means is usually a big marker. I have dealt with multimillion pound frauds where the thing which has caught the suspicion of the board has been the flash car in the car parked outside the office when everyone else is driving very modest vehicles. So anything that suggests that - the holidays or anything out of the ordinary like driving flash cars, overly expensive jewellery, that sort of thing. There might be absolutely perfectly justifiable reasons for that, but if it doesn't add up then it's worth just then thinking well, do we need to take a closer look at this individual? Then in terms of when you're thinking about well, is someone, you know, maybe doing wrong doing, we all have very stressful jobs but,  actually, a change in someone's personality can sometimes be a marker for people that are doing something wrong because, quite often, the stress of trying to have multiple lives at the same time can actually cause people to behave differently in the workplace and again, from a pastoral perspective, that's something that needs to be looked at and to check that people are okay, from mental wellbeing perspective, etcetera, but it might be the red flag. Then the classic in that area where we have dealt with cases in the past is where employees have a gambling habit and, actually, they start turning to defrauding their employer in order to generate the money they need to maintain their losses on a gambling account and, unfortunately, that is something we've come across a number of times and people's personalities and their behaviours have changed because they're trying to juggle their financial affairs outside of work.”

    Andrew and the team have produced a guide for clients on Insider Fraud designed to help raise awareness of the risk of insider fraud and the steps HR professionals can take to minimise the risks to the business. We have included a link to that in the transcript of this programme.

    LINKS
    - Link to Fraud Guide
    - Link to AFCE Report to the Nations 2022