Company directors in the West Midlands should be at the forefront of fighting business fraud, according to a leading financial forensic specialist.
Jonathan Middup, head of Ernst & Young's regional fraud investigations team, based in Birmingham, says high profile financial scandals such as Barings, Enron, WorldCom and Parmalat show that the damage inflicted on businesses by fraud has reached unprecedented levels.
While many companies have disaster recovery plans in place against events such as fire or major computer failure, few have established procedures for handling suspected fraud. Such an oversight could prove financially ruinous and damage a company's reputation, he warns.
The need for companies to have proven anti-fraud systems in place is highlighted in Ernst & Young's new antifraud guide, Fraud - Real Solutions To A Real Risk. It reveals that while most people think fraud is caused mainly by third parties, in fact 85 per cent of the worst frauds have been committed by company insiders.
Mr Middup said: " Corporate fraud has been around for as long as commercial enterprise has been in existence but as businesses have become larger and more complex, the scope for fraud has also grown. The ultimate responsibility for minimising fraud risk rests with the board of directors and it is essential that company directors appreciate this.
"Unfortunately, day to day responsibility is commonly delegated to operational management and, while many directors are familiar with management and operational issues, it is unlikely they will be experts on fraud. Whether they like it or not, however, directors must put themselves in the front line."
The guide reviews common types of fraud including false accounting, money laundering, intellectual property fraud, asset misappropriation, insurance fraud, and investment fraud - but discounts the idea of computer fraud per se. Computers are viewed as only an additional tool in a fraudster's armoury.
The anti-fraud guide covers ways of preventing fraud and offers practical steps to take once a fraud has been discovered. It emphasises that combating fraud should be a twopronged approach through minimising opportunities and attacking corporate culture problems that allow fraudsters to go unchallenged.
Preventing fraud involves spotting danger signals in the way companies operate, and symptoms of poor corporate fraud culture such as:
* Lack of segregation between the risk taker and the record maker.
* High finance staff turnover.
*Absence of checking processes, such as taking up references on employees, customers and suppliers.
* Signs that internal controls have been overridden by management.
* Unusual or complex transactions that have a significant effect on earnings or are too difficult for a layman to understand.
* Unusually high or unexpected levels of profits or losses compared to the industry norm.
* Management being dominated by one person or a small group with no effective oversight board or committee.
Mr Middup said: "When a fraud is discovered there is a need for clear, prompt and appropriate action. A fraudster has to know you mean business if he or she is to be deterred, this is a lesson every director must learn."