Is employee fraud affecting your clients - and what can you do about it?

Justine Ricommini By Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community)

29 May 2018

A recent report by BDO described soaring fraudulent activity in three key areas – that undertaken by employees, tax fraud, and money laundering. The report stated that in the last 15 years fraud has escalated by a staggering 538% and now totals £2.11bn. And this is just reported fraud.

What is the cost of fraud?

According to the CIPD, employee fraud cost UK businesses £40m last year – and the activity ranged from stealing cash and goods, making false expenses claims and inventing false customers. Previous research has shown that employee fraud directly correlates to economic downturns, but it would seem employers are not learning from history, because the same offences prevail throughout the years.

Tax liabilities arising from employee fraud

Employees rendering falsely stated expense claims is a perennial problem and can be extremely damaging to a business even though employees tend to see it as a victimless crime. It is also worth remembering that as far as HMRC is concerned, ITEPA 2003, section 62 charges any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth. In other words, in addition to obtaining money or goods by deception, the employer loss/employee gain can be deemed liable to PAYE and also to NICs.

Two- fold approach

All of this creates the need for a two-fold approach to be adopted if an employer wishes to curb losses or attempt to eradicate them altogether. First, employers should create a culture of engagement in the workplace so that employees do not feel inclined to “fiddle” in the first place. Employees need to understand that fraud is not, in fact, a victimless crime – if it is serious enough, it can cost everyone their jobs. Second, the employer must ensure it is not exposed to unwanted tax liabilities in the form of PAYE and NICs due on fraudulently obtained cash and goods. This can be done by policing procedures and systems to ensure they are failsafe, tackling workplace bullying and harassment and encouraging openness and whistleblowing without repercussions.

Magic Money Tree

Employees and office-holders all need to play their part. The culture of common responsibility needs to be fostered and nurtured within the workplace to engender a feeling of mutual trust, respect and job satisfaction. One of the biggest issues facing employees is not that of dissatisfied employees leaving – it is dissatisfied employees who stay that can do the most damage. Sabotage is also a real phenomenon despite its dramatic sounding title – everything from tacit sabotage (such as presenteeism) to active sabotage (such as fraud, reputational damage and other criminal activity) which affects many businesses. Employers should be aware of these aspects and never take their eyes off the ball.

Drivers of Fraud

According to BDO, greed, gambling and debt are the main drivers for fraud, with the South East, North West and the Midlands seeing the biggest increases. Ensuring employees are secure in their personal lives (without breaking privacy entitlements) and are not in serious financial difficulty can help. As such, regular appraisals and face time can be an opportunity for employees to open up – as are regular health and wellbeing assessments.

How can accountants and tax advisers help their clients combat fraud?

According to a report published in May 2017 by the Credit Industry Fraud Avoidance System (CIFAS), almost half (47%) of insider frauds were uncovered by internal controls and auditing, while just under a fifth (17%) were thwarted by line managers or whistleblowing. Around a fifth was discovered by customers – which is the reputation and branding stuff of nightmares. The CIFAS annual report should be essential reading for all boards and their advisers.

Summary

Clearly, if employee fraud is at a high level there is an important role for the accountants – for in-house accountants, and for external auditors and advisors - to be vigilant in this area.

Topics

  • Tax

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