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Accounting and Fraud

26 January 2016

How to prevent fraud

After lengthy deliberation, the Serious Fraud Office (SFO) has dropped fraud charges against Japanese camera maker Olympus and its UK subsidiary Gyrus Group. The charges related to an accounting scandal that came to light four years ago. Since then, the SFO has been looking closely at what happened with a view to securing convictions. Now, however, the SFO has given up on the prosecution. In explaining why, the SFO said that the case involved employees of the two firms making misleading comments to auditors. The SFO said that the Court of Appeal had ruled in a 2014 case that English law does not criminalise the misleading of auditors by the company that is the subject of the audit; effectively removing the grounds for a prosecution against Olympus and Gyrus. The SFO also stated that it was also struggling to bring prosecutions against individuals because Japan does not extradite its nationals.

Olympus and Gyrus were originally charged by the SFO two years ago over material that had been made available to auditors in 2010 and 2011. The charges followed wider revelations of a $1.7bn (£1.1bn) accounting scandal which has since resulted in fines and prosecutions in Tokyo. But the saga has now come to an end. A judge at Southwark Crown Court has formally ended proceedings after the SFO said it would not offer evidence.

Lesson

Depending on your outlook, the outcome can be seen as another embarrassing result for the SFO or welcome proof that the authorities do not always have it all their own way. Yet those in business would be best to view it as a warning about the importance of making sure there is not even the slightest whiff of fraud about their accounting. And this has to be seen as the responsibility of more people than simply the accountants.

When it comes to fraud, the accountants are often the first to have the finger of suspicion pointed at them. Either they were the ones carrying out the fraud (or at least complicit in it) or they have let their employers down by failing to identify it. There is arguably some merit in this claim. After all, it is the accountants who handle all the numbers and have the financial overview of a company’s workings. This overview, it is often claimed, means that accountants should be the first ones to face the investigators’ toughest questions if and when fraud is suspected. The assumption tends to be that if the accountant didn’t know something was wrong then they must have been “in on it”. What other reason could there be for them not identifying a problem?

Having represented many accountants accused of a variety of offences, we can say with authority that the cases are not often as black and white as the authorities like to claim. The fact that the accountants are the ones looking at the numbers certainly does not mean that they are the only ones capable of committing fraud – or the only ones who should take responsibility for identifying it.

Arguments

There is little doubt that accountants would be in favour of any arguments that take away any perceived responsibility they have for identifying and reporting fraud. But these arguments are not about letting accountants “off the hook&rdqup;. They are about making sure companies are starting from a knowledgeable position when it comes to identifying fraud.

Whatever line of business a company is in, if it is genuine about wanting to prevent fraud then it has to create and introduce measures that make the chances of it happening as small as possible. All staff – not just the accountants - must be made aware of their duty to report any suspicions of wrongdoing. Preventing fraud takes a concerted effort. Expecting the accountant to take care of this is neither fair nor practical.

Recent research has indicated that companies lose on average 7% of their annual turnover to fraud. It is estimated that about 85% of companies are victims of fraud every year. Such figures indicate that fraud is a major problem. But that does not mean it is easy to identify. If it was, no one would get away with it.

Knowledge

For this reason, no accountant is ever likely to have knowledge of any possible fraud unless it has been outlined to them by someone with well-founded suspicions. And such suspicions are only ever likely to be formed and discussed if there are appropriate procedures in place for staff to flag up any concerns that wrongdoing is being committed.

Creating procedures to combat fraud involves carrying out a thorough examination of the way a company functions. By then devising an anti-fraud strategy – which we have helped many companies do – there is a greater possibility of an accountant knowing what the indicators of illegal behaviour are. Expecting an accountant to have any chance of highlighting fraud without having such a strategy in place is asking the impossible.

This is not to say that accountants cannot do anything to reduce the likelihood of them being accused of fraud. Simple and obvious things such as keeping clear, accurate and detailed records of all activity with their employers – whether they work for one company or many – can help if any accusations are made at a later date. Well-maintained records can go a long way towards establishing innocence. Similarly, accountants must learn as much as they can about their clients’ businesses: what type of work is involved, what changes occur in the finances, explanations for when and why things happen in the accounts and what may be happening in the future. Answers to these concerns can help an accountant form an opinion about the legitimacy of a business' activities. This can then help the accountant decide whether or not they want to be working for a company.

Accountants should certainly be familiar with legislation regarding issues such as proceeds of crime, money laundering, fraud and taxation. This will help them avoid legal problems stemming from the activities of their employers. But many of these problems – as Olympus would surely testify – could be prevented if a company has a sturdy anti-fraud strategy in place that ensures the accountant is not the only one expected to spot wrongdoing.


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