Protect Your Business from Corporate Fraud: Steps to Take Now

History has shown us that corporate fraud increases during an economic downturn, and there is even a theory that there is an inverse relationship between interest rates and dishonesty.

Recently, we have seen signs of the truth of that theory, as several high-profile imbroglios point to potentially fraudulent misdeeds.

In the last week, the UK-based software firm WANdisco suspended its shares after it discovered “potentially fraudulent irregularities with regard to received purchase orders and related revenue and bookings, as represented by one senior sales employee.”

This comes on the back of the news of the collapse of the UK arm of Silicon Valley Bank (‘SVB’). It now transpires that SVB Financial Group and two top executives are being sued in the US by shareholders, who accuse them of concealing how rising interest rates would leave Silicon Valley Bank particularly susceptible to a bank run.

Internal Threats

The WANdisco scenario is a prime example of the way in which businesses can be susceptible to accounting fraud. Accounting fraud is the intentional manipulation of financial statements to create a false appearance of corporate financial health.

The other major area of rising corporate fraud relates to 'greenwashing' claims and environmental social and governmental (‘ESG’) compliance. Misreporting the company’s actions to protect the environment is a breach of the company’s duty to disclose ESG compliance in a fair and transparent manner.

External Threats

As a consequence of the failure of SVB in the UK, businesses should be on their guard against scams such as payment frauds and fake invoices. Be particularly wary of requests to change bank accounts from portfolio companies and investors.

Steps You Can Take to Protect Your Business

In the environment of rising corporate fraud, what are the steps you can take to protect your business?

• Assess your culture: The pressure to hit financial targets can lead to covering up mistakes or the temptation to ‘tweak’ the figures. By creating a culture of honesty and transparency where mistakes are not vilified, your employees are less likely to conceal their actions.
• Review your whistle-blowing policy: Where people in high-powered positions have a propensity towards dishonesty, they may recruit other employees to help perpetrate a fraud. Create an easy pathway for whistle-blowers to come forward.
• Update your risk assessments: Prepare a thorough fraud risk assessment to analyse your risk of internal and external fraud. Put measures in place to minimise those risks.
• Training: Train your staff so they know what signs of fraud to look out for and are aware of the sorts of scams that external fraudsters might attempt; such as phishing, and requests to change bank details.
• Enhance your cyber-security: Phishing attempts are increasingly prevalent and more fraudsters are able to hack into email exchanges to intercept email chains and amend bank details. Conduct an audit of your cyber-security to identify any vulnerabilities.

Preparation For ‘Failure to Prevent’ Offences

Putting these measures in place now will not only shore up your defences against corporate fraud, it will also stand you in good stead for the upcoming introduction of corporate criminal offences for failing to prevent fraud.

It is possible that these ‘failure to prevent’ offences will become part of UK law later this year, if amendments to the Economic Crime and Corporate Transparency Bill (the ‘Bill’) are ratified. Further debate on the Bill is scheduled for 27 March 2023.

It is likely that a defence to the failure to prevent fraud offence will be that the company had “adequate” or “reasonable” procedures in place. What constitutes “adequate” or “reasonable” procedures remains to be seen. But taking steps to protect yourself from corporate fraud now will help your preparations for the upcoming changes.