Small firms urged to take learnings from new fraud rules

Small businesses in Birmingham and Solihull are being encouraged to adopt the principles behind a new offence which will make firms legally responsible for preventing fraud within their own organisations.

The new Failure to Prevent Fraud offence will place the onus on businesses to prevent fraud occurring within its own teams and comes into effect on September 1.

It will apply to large businesses – with a staff of more than 250, turnover above £36m or assets over £18m – but the principles it encourages are likely to become best practice for companies of all sizes, according to Prime Accountants Group, which has offices in Solihull, Birmingham and Coventry.

Experts at Prime are encouraging smaller firms to take learnings from the new offence to recognise red flags which could indicate fraud being committed within their business.

Forensic accountant Shannon Walden (pictured) said: “Businesses will protect themselves from being the victim of fraud if it’s due to the actions of a third party, such as a cyber fraud, or if it’s a recognised fraud, such as an employee stealing from the business.

“The type of fraud which this new offence looks to prevent is fraud which the business benefits from – for example, fraudulent misreporting which artificially inflates the company’s value.

“What we're seeing is that these are the types of fraud which actually bring businesses down.”

Shannon said that fraud can occur unintentionally for various reasons.

She said: “If the person at the top of an organisation is putting pressure on departments to meet targets, then those departments manipulate their numbers very slightly, it’s a snowball effect.

“By adding on a few extra thousand each year to meet targets, the holes get bigger year after year, and the business can be left with a huge gap in their accounts to plug. Where are they going to find that money?

“Another pressure scenario is if employees are used to receiving annual bonuses and, after many successful years, find themselves struggling. They may commit fraud by inflating performance to hit their targets and continue receiving their bonus.”

Shannon said small businesses could consider the Fraud Triangle model to assess the potential for a fraud occurring within their teams. This model lists three variables – pressure, opportunity and rationalisation – which must be in place for a fraud to happen.

She said: “A business has some control over pressure on employees and can look to limit that. With opportunity, the business can put controls in place to prevent fraud.

“But with rationalisation, businesses have very little control. The risk is that employees justify their actions to themselves because they think they’re doing it to benefit the business and potentially even save people’s jobs – they don’t think of themselves as being a fraudster, but their actions may be fraudulent.”

For more advice on Failure to Prevent Fraud, small business owners can visit the website.