Cash-flow pressures cast light on fraud

Ian Corfield, director of restructuring for KPMG in East Anglia, explains why many cases of fraud are only now being discovered

Ian Corfield, director of restructuring for KPMG in East Anglia, explains why many cases of fraud are only now being discovered

CHEAP money and the economic bubble concealed many problems.

One of these was fraud. Fraud was there during the boom times, but no-one had a great incentive to look for it. However it has eroded the ability of many viable businesses to survive the tide turning.

Now, when every penny counts and people are using a more sceptical eye to view transactions, frauds come to light.

The latest KPMG Fraud Barometer found that over 160 cases of serious fraud with charges in excess of �100,000 came to UK courts in the first half of this year - the highest number of cases in a six month period in the 21 year history of its research.

These figures are bad, but the worst could yet be to come. It will be a number of years before the impact of the recession fully feeds through into the fraud statistics.

Most Read

With the increase in economic stress and distress, many more companies are consulting restructuring practitioners. Where possible, they seek to avoid an insolvency process, but irregularities and fraud may hinder this.

Cash flow is the lifeblood of companies in distress, so any unnecessary bleeding must be stopped. However before a detailed examination takes place, some more general questioning of the patient is usual:

n How much fraud has occurred in the past? (None is the most worrying answer!)

n Does the company have an effective whistle-blowing line? This is the most common way of detecting fraud.

n What is the Board's policy towards fraud? What controls were put in place and are they working?

n Is procurement organised centrally or is it treated as “shopping”?

Areas of concern could be:

n Is there one very dominant individual who can enforce his will on the company? Forensic accountants can review transactions if they seem irregular.

n Creditor payments - are all creditors genuine? Of particular concern is where they supply something intangible, such as unspecified “services” or are connected to the company's personnel. Is there collusion between staff and suppliers?

n Does the finance director work long hours with no support?

n Does the cash flow make sense? Why does profitable trading not generate incoming cash?

n Are the auditors appropriate to the company and sector? A sole practitioner is unlikely to be appropriate for a global group.

One should also, of course, be alert to convicted fraudsters and directors involved with previous insolvencies, although one may need to be careful in respect of directors of private equity or venture capital companies, where a proportion of investments regularly fails.

When a company is stressed or distressed, the techniques of forensic accountants can help to provide the Insolvency Practitioner with relevant information for the benefit of creditors. This is a valuable option in the toolbox of any restructuring or insolvency practitioner.