It has been an interesting week that has just passed by.  I have finally succumbed to the iPhone age and acquired the latest version that will keep me connected to the Internet and my emails as well as work and friends – not sure if this is all a good thing but at least I know where the “off” button is!

Post Office Horizon Accounting System

On Monday I was asked by the BBC Inside Out program to give my views on a current issue that appears to have been raging on and off over the past few years – a criticism by postmasters that the Post Office accounting system is flawed! Apparently there are reports where Postmasters say they are finding black holes in their accounts and being forced to pay large sums of money back to the Post Office.

I understand that there has been a long running battle between postmasters, who are essentially franchise holders of a Post Office branch, and the Post Office. When a postmaster buys a Post Office as a business to run, he will invest money in the bricks and mortar (or rent) the premises and ancillary business such as newsagency, confectionery, grocery etc. The Post Office business is a separate business activity and is kept distinct from any other sales that might be going on. An agreement is signed with the Post Office that includes a clause whereby the postmaster is responsible for all the funds and must account for any losses that occur.

The business is recorded on the Horizon accounting system which is networked within all the branches as well as the head offices of the Post Office. The Post Office business within a branch is reconciled daily to ensure that the amount of business it records on the Horizon system agrees with the amount of money, stamps, postal orders etc that are locked away in the safe each night. Any errors are investigated immediately and overs/under reported to the Post Office. This is typical practice for any bank.

The allegations are that the Horizon accounting system is flawed and throwing out errors that the postmaster has to make up. I do not know if this is the case – it would need a team of forensic computer systems analysts to check the system. My involvement was in two cases in around 2004-2006 where postmasters were being accused of each stealing about £50,000 each.

That this amount of money was missing was undeniable. That the missing money had accrued over a period of a year or so was evident. That the defendants had personal money problems or gambling habits were facts…I could go on. The point is that if an error arises, the postmaster must report it to the Post Office, not simply ignore it! If the errors keep on coming, sticking your head in the sand won’t help. If you let the errors rise to £50,000 and know you have signed an agreement agreeing to make good any losses – then there is little to mitigate your position!

Loft Insulation Scam?

I do not know if this is a scam – if not it demonstrates my fraud investigator’s suspicious mind! I have now received several calls from an Indian call centre offering me a government grant to insulate my loft. Normally I politely say that I am not interested, but this week I let the caller speak for a while. I was asked seemingly innocuous questions about the length of ownership of my home and the thickness of the insulation already in place. Then I was told that I was eligible for a government grant to renew the insulation. I would be telephoned by a local agent and he would arrange to inspect my loft and provide the papers for making my application. I was asked for a piece of memorable information as a password so that I would know the agent was bone fide! This is where my antennae really started twitching – recalling the support publishing scams that I had investigated in the past for the DTI where exactly the same modus was used. I declined, but the caller didn’t seem to mind.

Finally the caller asked me to visit “their” web site at http://actonco2.direct.gov.uk. I did this and could find no information about a current grant scheme.

Now this might all be above board. In this financially austere climate there might be public funds available for insulating lofts that are already insulated. I would question why a public organisation in the UK would use an Indian call centre though. I have passed the information to my contacts at Companies Investigation Branch within the Department for Innovation and Skills (DTI). If I am able to get to the bottom of this one way or the other I will post the details on my blog.

It appears that June was my last posting on this blog and much water has flowed under the bridge since then. Holidays have come and gone and a couple of major trials settled.  However, the most important event has been the setting up of my own specialist forensic accounting service in October. Those close to me will know that this is something that I have wanted to do for a long long time.  The thought of working for yourself can be very daunting, and the security of employment within a big firm can be difficult to give up.  however, there are some very good reasons for believing that fraud specialists such as myself can provide a much better service working as a dedicated niche provider.

The main reason is because as a small firm specialising in fraud, white collar crime, money laundering etc it is possible to provide a more focused and professional service within this very specialised field.  The trick is to get the balance right. Often in an accountancy firm an expert forensic accountant is encouraged to undertake much more work than he or she can handle alone or with just the help of administrative staff.  They must delegate sometimes high level professional work to junior staff in order to achieve the financial gearing typical of the business model within such a firm.  This is not to say that the work is not of a very high standard, but together with the city centre overheads involved it can mean that assignments can be very expensive.

Currently and for the foreseeable future the world is experiencing an economic downturn.  In the UK some strong measures are being implemented to counter this including substantial reductions in public spending.  In the arena of fraud regulation, funding has always been tight, now even more so.  If there were not enough funds previously to deal with fraud how will we cope over the coming few years?

For example, before the 2010 general election the Legal Services Commission planned to cut its expenditure on expert witnesses used within criminal defence cases by 20%.  Now this reduction could be even more.  Already undertaking essential forensic accounting work on behalf of the defence team was becoming unprofitable within any leading forensic accounting team within the market place and rates were under continual pressure all the time.  For example, my own rates that I was able to achieve if I had any hope of winning work through competitive tenders had reduced by 40% over a 10 year period (let alone the need for any inflationary rise!).  The Legal Services Commission had always said that they expected the work to be carried out by retired accountants and one man bands in future years at rates half of what they had been paying.  Of course this situation is unacceptable and threatens access to justice for many – however for me it means that I am able to work at the reduced rates comfortably without city centre overheads and only undertaking work that I have extensive specialised experience of doing.

The same funding problem goes for police and other fraud regulators.  In the past I have been unable to service police clients who have required the services of a forensic accountant – as they ought to be doing more often.  Using an independant forensic accountant within financial crimes that are being investigated can add substantial strength to any fraud prosecution or asset confiscation under the Proceeds of Crime 2002 case and avoid the opportunity for unreasonable or unopposed attack by a defence expert (potentially such as myself!).  However, the police fraud squads and economic crime units are always strapped for funding and the current cutbacks will not help.  Again my niche services can provide them with the high quality and properly accredited forensic accounting service that they need at acceptable rates.

Finally there are the victims of crime.  I have extensive experience of investigating fraud. When working within the major accounting firms my assignments ranged from medium sized cases to very large ones.  Increasingly I was aware that small and medium losses to fraud (say £10,000 to £500,000 or even more) could not easily be dealt with at a cost proportionate to the losses. Very often the victims would be individuals or smaller companies who could not afford the further costs of investigating their losses.  The trouble is that investigating fraud can be a time consuming job, and employing a fraud investigator with an open ended cost can mean costs mount up alarmingly.  The very large losses experienced by the major corporations, banks and insurance companies will continue to use the very high quality services of the top forensic accountants within the top tier firms – but it is possible to investigate smaller frauds economically using independent experts who can also collate the efforts of the victims and their staff, monitor the effectiveness of any legal advice needed and generally provide a solution to fraud problems at acceptable prices.

Mark Jenner & Co recognises that there is a need to provide very high quality of service to a manageable number of clients – I enjoy being part of any team that enlists my services and strive to add value by recognising where value can be added. Helping with stragtegy can also assist with keeping costs down especially if involvement is early on in any matter.  I always say that employing a a forensic accountant who is also an expert in fraud at the start of any case for a few hours or even a day or so in a large case, can save substantial costs down the line. I always make an initial review of any case on a no obligation basis in any case and I can indicate where and when expert accounting or fraud investigation input might be needed, what results might be achieved and how much the cost/benefits will be.

Please visit my business web site for Mark Jenner & Co for a number of articles written about various different aspects of fraud.

I have always liked the various regional fraud forums (or should it be fora?). They provide a great networking event for me as a forensic accountant specialising in fraud to attend. Since meeting with Northumbria Police ‘s Phil Butler prior to the inaugural North East Fraud Forum event – must be as far back as 2003 – I have been attending these events – including the North West Fraud Forum and the London Fraud Forum. I spoke at the very first one and have given talks at them subsequently. There are other fora around the country, but you can only attend so many networking events!

In my own area, Yorkshire and Humber, I had been attempting to get a local fraud forum galvanised for some time. I remember working with a leading fraud lawyer from DLA Piper to interest some of our public sector colleagues to spark off a similar regional forum. This was back in 2004/2005. My lawyer friend was tasked with getting the Leeds City Council interested and I was to do the same with the local West Yorkshire Police force. Unfortunately neither of us had much success – perhaps we were not very good at lobbying or working the “politics” of the matter. My own response from the then acting DI of the WY Fraud Office was negative – and that I should seek to attend the North East Fraud Forum for any networking I wanted to do!

Thankfully that officer has moved on now and there is indeed a Yorkshire and Humberside regional Fraud Forum in operation – set up by the sterling efforts of others I must say, though I continue to be a strong supporter. It does get a lot of support from the police forces, not just West Yorkshire but North Yorkshire, Humberside and South Yorkshire forces as well as various other leading organisations and bodies.

In fact Paul Welton of Humberside Police Economic Crime Unit called me last week and asked if I would like to speak to BBC Humberside about why I attended the forum and I said that I would be delighted to help. I was to chat to Andy Comfort on his breakfast programme on Monday morning of the 7th of June – the same day as one of the forums events “Tackling Business Fraud” (that I was attending later that day).

So this morning – eight o’clock approaches and I am sitting nervously waiting for my phone call – a list of prepared responses as to why I attended Yorkshire and Humberside Fraud Forum’s events.  Of course once the call comes all preparation goes out of the window – we chat about fraud live on radio for well over 10 minutes and how it is an increasing problem today. It certainly focuses the mind – what are the problems that fraud poses for us today and how do we tackle it? The fraud forums are only a small part of the answer, but they do go a little way to illustrate the importance of the public and private sectors working together – something that all seem to voice but few ever look practically to see how it can work.

The police will tell you that they are under-resourced when it comes to dealing with cases of fraud – it is not surprising as fraud investigations are extremely labour intensive. I understand that there are only something like 400 – 500 full time police officers working in the various fraud squads around the uk. Compare that to a typical fraud, maybe worth around £250,000 in losses to the victim – might take up the full time of at least one if not more police officers – for 6 months, a year or even longer. Then consider that the level of fraud is estimated to cost the UK some £30.2 billion per year (as estimated by the National Fraud Authority and probably a vast underestimate) and you will see why the police alone can only chip at the surface of the fraud problem.

Other agencies investigate fraud of course – we have the Serious Fraud Office – that the new government is considering combining with the Financial Services Authority and Office of Fair Trading’s fraud investigation wings – to form a more powerful Economic Crime Agency.  We have  investigators from the Department For Business Innovation and Skills and from HMRC as well as from other agencies – all investigating fraud.

But what we really do need – and this is exactly in tune with David Cameron’s fight against public sector waste of recent years – is a much closer involvement of the private sector in the fight against fraud generally. I would like to see this achieved by the utilisation of private sector investigation resources and financial fraud specialists – using transparent tendering methods based on obtaining the best quality of services at the most reasonable prices.

It is difficult to believe that we are already into month 6 of 2010. It only seems like yesterday that I returned from my holiday in New York to the minus 15 degree centigrade weather at Manchester Airport at the beginning of January! Now five months later and we have a new Conservative government (Liberally tempered of course) in power and the promise of some sense being brought to the UK. Sense that is after some massive cuts in all the areas of public spending that generally pay my bills! Time for some radical thinking or what?

Actually I do not see the pressure on public spending as a problem. As somebody who has always operated on a “value based” approach instead of the professionals’ normal “hourly based fee” I find that I still remain competitive in all areas of publicly funded fraud activities. This includes working for the fraud regulators and undertaking expert witness work funded by the Legal Services Commission.

However, it is no good being simply “competitive” these days. Promise of results should be most important. In the field of dealing with fraud matters this can be very difficult and yet I believe that one of the fraud investigators’ biggest developing markets is the smaller company or individual who has lost money to the crooks. This is the sector that seems to have the hardest time sorting out the problems caused by the fraudster. Identity theft causes disproportionate distress to the victims compared to the financial; lo0ss they suffer. They also lose credit ratings and the ability to operate in today’s digital environment. Gone are the days that we were paid in cash and bought everything we needed using the same. The loss of a few hundred pounds by a family can cause huge hardship, and thousands of such victims together will provide millions of income for the organised fraudsters.

It is important that smaller losses are investigated. There should be little attention paid to proportionality where crime is involved, but when it comes to trying to get £10,000 back from an employee theft this does not seem to be the case. The only way I have been able to help victims in such smaller cases is to write a letter for them after a brief look at the case details and one or two documents – for them to take to the police. such a letter can cause the authorities to sit up and take note – it is sort of a mini- fraud investigation report that serves to illustrate the seriousness of the loss and show that further investigation will bear fruit. By spending a little on such a letter can stimulate interest and even provide a focus for other victims to band together and fund a worthwhile asset recover action. First Stage Investigation Services are intended to be a cost effective solution to the situation where the level of loss does not merit huge sums being invested in recovery action but can serve either as a catalyst for more substantial regulatory action (and compensation) or can even promote a negotiated settlement in some cases.

2010 opens with thick snow and ice. I was lucky as my trip to New York in the first week of the New Year went without hitch. Our flights and connections seemed to match the few windows in the weather and no delays were experienced. There was one small worry when blizzards started raging in York on New Year’s day – we were due to head over the Pennines at three o’clock the next morning and had visions of the M62 being impassable. Therefore late afternoon saw us rushing to pack and set off while the snow kept falling. We stayed the night in Manchester and had a comfortable flight!

Back to my desk after the break sees a number of cases to continue with in my fraud investigation portfolio and a couple of new inquiries via the Internet, one being from a police force economic crime unit and the other from a new firm of lawyers.

It seems that this year is heading off for a basket of criminal frauds and fraudulent trading – not much changes there then! It will be interesting to see if there are any pronouncements from the Legal Services Commission about their proposed cut backs in funding experts or will we all just experience a harder job getting our quotes agreed?  Without any cohesion amongst us forensic accountanst I can forsee many simply dropping their rates just to make sure they get the work. I am sure that the LSC will use market forces and the lack of perfect information to ensure that they get away with underfunding criminal cases.

A new investigation is kicking off into yet more bad business management and phoenixing of businesses. I guess that people like to make the money but hate to pay any of it back to the suppliers or tax man!

I read with some concern an article in this Sunday’s papers about the plans of City of London Police Economic Crime Unit for the coming year. Detective Chief Superintendent Stephen Head is on record saying ‘…as with the drugs trade, there is little point picking up a lot of small fry while the big operators get off free…I want to concentrate on maybe five very big fraudsters in place of 20 smaller ones…’

I agree that the big fraudsters should be targetted a lot more than they are. The whole concept of fraud is that it is a hidden crime and many organised criminals are currently getting away with various fraud scams big time. Yes, a lot of them get caught eventually, most having run for between three and five years. An awful lot of damage is being done to our economy in that time, which can ill afford it in the current climate. There are many fraudsters that do not get caught – or worse still, the authorities are unable to act fully or effectively, such is the complexity of the scam being perpetrated.

But there is a huge raft of smaller frauds taking place. Fraud is endemic in our society of high taxes and consumer excesses. If you thought that the ‘under table’ economy was restricted to third world countries or other less advanced administrations, you were wrong. Our society is as corrupt as any other, just that we are more circumspect.

Systematic tax evasion occurs, where workers are encouraged to claim benefits and not pay tax by their employers so that the wages bill can be less. These are the sort of companies that trade for a year or two, closing down and then starting up under a new name and very likely leaving a few unpaid bills behind them. These are the businesses that steer clear of any professional help, from lawyers and accountants who have a legal obligations to shop them to the authorities that overides any professional duty of confidentiality. In this way the Anti Money Laundering Regulations are missing a large proportion of the illegitimate cash that is being circulated and tax that is being avoided.

Add to this the wide ranging stress and hardship that is caused by the smaller frauds that come to light. Old people are duped out of their savings by an unscrupulous carer, small businesses go to the wall when the bookkeeper embezzles the funds needed for next month’s wage bill and individuals risk their dwindling pension funds in an attempt to provide for their families future. The fraudster does not care about the hardship he or she is causing, and for every ‘big fraudster’ systematically skimming millions, there are a thousand con men and scam merchants earning much less but nevertheless causing immense harm to innocent people.

If the City of London is upping the size of the frauds it targets, I hope this is not the pattern around the country. Already the small fraud is too easy to commit, and the chances of the local police investigating are remote. Not only do they not have the resources to investigate, they also lack the will because their performance is measured by dealing with more ‘serious’ crime like murder, rape, burgelary and social nuisance. I agree that these are areas that need continued attention, but should rank alongside fraud when bidding for funding from central government.

Instead of attempting to budget a limited sum of money, and cutting back on fraud, attempts should be made to discover how much money would be needed to establish a comprehensive fraud resource and then worry about funding it! I know that if this resource was established, the level of asset recovery of criminal proceeds of crime would escalate substantially and not only provide self sustaining funding for economic crime units, but also contribute to compensating the victims of fraud for their losses! I just hope that there will continue to be funding for at least some work for forensic accountants - forensic accounting is the only efficient way to unpick the financial records behind some of the more complex frauds that are detected.

The first decade of this millennium has been characterised by quite a lot of substantial frauds when you pause to look back. We have seen massive accounting scandals in the form of Enron and Parmalat – who would have thought that a top tier accountancy practice could collapse as a result of such a scandal as Enron?

The decade has seen a massive raft of VAT frauds in the “Carousel” merry go round of Missing Trader Inter Community mobile phone and computer chip scams. Coming years may see this fraud extend to all forms of products, even including the trading of carbon credits!

The scale of the Ponzi investment frauds that started emerging in the latter part of the decade only reflect a business model that seems to have been flourishing for three quarters of a century since Charles Ponzifirst gave his name to such an obvious swindle. There will be more of this in the newspapers for years to come as I believe the culture of the Ponzi style fraud is ingrained in the financial systems around the world. A lot of it is sustained in the same way as the global economy is sustained – the illusion of a bottomless bucket of credit.

And throughout recent years we have seen the authorities try to get tough with the organized criminals by confiscating their assets. What has happened is that the career criminals have enough money to hide behind and the onerous asset seizure is routinely applied to those who fail to cover their tracks or are stupid enough to neglect filing even token tax returns!

So where will we be in the coming 10 years or so? I think the fraud regulators may start to form some sort of cohesive group but how far will they get? Given the public sector wastage of the past 12 years or so I suspect that the limited funding available as a result of propping up the banks will not go far.

Speaking of funding we are still awaiting effects of the public spending cutbacks on the forensic accounting profession. Will criminal fraud and money laundering trials become shallow bun fights without the financial issues being fully aired by competent accountants?

My own views are that there will be ample scope for the efficient fraud operator to assist private clients if they are efficient, hard working and not greedy for fees. A hard task perhaps? I do not think that the individual or small business who has been “ripped off” is properly catered for. Losing £10,000 or even £100,000 does not seem to excite the authorities these days, but they will spend tens of £millions on the big frauds.

By managing fraud cases on behalf of groups of individuals who have lost out to systematic sharp businesses or outright fraudsters - it may be possible to persuade those agencies with the powers available to them to get involved.

Having spend the best part of two days writing my latest newsletter, printing it, wrestling with getting a colour header (and failing), signing it and stuffing around 750 into envelopes with a covering letter, I did not feel like spending the last hour or two of today, the first day of December, doing any proper work! Actually I did have help with my mailshot so I shouldn’t grumble too much.

Writing the newsletter always makes me take stock of some of the current issues that affect us forensic accountants. This time I noticed that professional negligence of accountants and lawyers have been figuring rather a lot recently through a number of cases that I have been doing recently.

When looking at accountants’ obligations these days it is easy to see why they fall foul of the regulators’ interest from time to time. An accountant is the very veneer every organised criminal needs to assist with laundering his proceeds of crime! Criminal Proceeds and Money Laundering are of course very big now – especially since the Proceeds of Crime Act 2002. Some say it has draconian provisions – that allow an errant accountant to face up to 14 years in jail if they are found guilty of assisting in the laundering of the proceeds of crime.

This may seem harsh, a professional should have client confidentiallity surely? No, not so, the professionals must act as gatekeepers in the authorities’ fight against crime. Even a lawyer cannot claim legal priviledge if trying to conceal money laundering from the authorities.

Accountants are firmly within the regulated sector, as far as Anti Money Laundering Guidelines go. This means that they must carry out KYC – know your client – checks. Also, if they come across something untoward in their client’s records they must make a suspicious activity report (SAR). So accountancy is a regulated activity. However, much of forensic accounting is not!

If I provide expert witness services to the police, I hardly need to verify that they are the authorities that they say they are. I mean – meetings are held at the police station….! If I work for the defence, I hardly need to report the details of the fraud to the authorities who are already investigating it. In fact, the Money Laundering Regulations do say that publicly funded work is not a regulated activity.

But, if I should be asked to investigate for a private client I will most definately need to have regard to the KYC and SAR requirements like my normal accounting coleagues.

Back to work after a week off and my thoughts again turn to marketing my business. I am about to send out a newsletter in connection with my fraud expert witness work and have been musing about the current state of the investigation industry. While I am comfortably occupied with work, perhaps now is the time to develop the business and grow – when all others are pulling in their belts?

I listened with interest this morning as the newsreadergave a daily update on the worsening economic crisis in Dubai and the likelihood that there will be support on a selective basis by neighboring Emirate Abu Dhabi.

Hopefully Dubai will ride its crisis and emerge as strong and prosperous as ever. I do however think that they will probably become more aware of the risk of fraud and the effects it can have on various parts of their business and financial infrastructure as the months go past. This is because I recall a conversation I had last year with a couple of members of the board of Dubai Holdings, the Dubai Royal Family owned umbrella company controlling many £100 billions of assets not only in the Gulf but worlwide also.

I was being interviewed for potential services I could provide to them but recall being mystefied as to what was wanted from me. I did not know if they wanted me to look at a specific problem, advise them on their global fraud risks or trouble shoot one or more of their subsidiaries. I remember thinking that there would be no way forward when I was asked the question “…what will you do when you have finished investigating any fraud we might have…?”

Phew…a multi billion global conglomerate and I should entertain the idea of even finishing mapping fraud risk on my own…!

My very respected and able business minded interviewers were only falling into the trap many financiers and businessmen have encountered over recent years. Fraud is an insiduous and complex beast – it entwines itself into any organisation that fails to consider that it is a threat - in such a way that it is only when a massive loss comes to light that any notice is taken. My old supervisor at the (then) DTI used to call this a “banana skin”. She meant of course that it was when a business slipped and fell flat on its back – they don’t happen often but when they do…

Any business or entity or even economy is greatly at risk in this current poor economic climate. The pressures on idividuals, groups of people or even governments to committ fraud is stronger. Fraudulent trading is going to be rife and we are going to see a lot more high street names other than Borders giving up the ghost as the Christmas trading period does not answer all the problems. Many commentators say that we are only just beginning to enter the trough of this recession!

My advice is that it is never too late to review your business, to fix any hemoerages of cash due to fraud and to secure the future security of the bsuiness. Doing so may allow you to ride the coming storm – unless we really are seeing the “green shoots of recovery” which I doubt.

Although I have strayed off my subject of this post – being the right time to build a fraud investigation practice – my point is clear. Over coming months the level of distressed businesses finding that matters are worse than they feared due to fraud will increase – the floodgates of fraud have not opened yet and there will be much work to do.