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Checklist for Businesses to Avoid Fraud- 04/05/2010

With cases of business fraud on a seemingly inexorable rise, West Midlands’ law firm FBC Manby Bowdler LLP has prepared an Employee Fraud Checklist to help businesses recognise the signs.

“Employee fraud was a boom area before the recession started and it has grown, with the latest estimates showing the value of the fraud cases coming to court at more than £330 million.  But this is likely to be the tip of the iceberg as most cases do not actually get to court, and as hard economic times continue, the situation can reasonably expected to get worse before it gets better,” says Peter Collins, a partner in FBC Manby Bowdler's Employment Department.

“There are a number of practices which create a significant risk of fraud which we are warning businesses against in our Checklist,” says Mr Collins, who is based in FBC Manby Bowdler’s Wolverhampton office.

These include:
Leaving signed blank cheques for use when the signatory is away. The risks inherent in this practice are clear. It is preferable to have a second signatory who is required to sign checks when another signatory is absent.


Rotating signatures. If a number of people can sign cheques, a fraudster can ‘rotate’ the signing of cheques, which makes the exercise of effective supervision very difficult. This is particularly common in frauds involving withdrawals of cash.

Electronic transfers.The absence of checks at the bank’s end makes the need to have very tight security procedures over electronic transfers all the more important.

Delegated authority without control. It is essential to have controls in place where certain areas of the business are under the sole control of one person. Check that all payments for services or goods received are correctly made and constitute proper value for money. One of the easiest employee frauds to get away with for year after year is the ‘kickback’ from a complicit supplier. Make sure that purchasing decisions are subject to periodic value for money testing and if the payments made are more than the market rate, find out why.

Employees who insist that all ‘their’ paperwork is left untouched until their return from holiday. This is a clear warning sign that they do not wish to have their work scrutinised by other people. Find out why.

Not counting noses. With the large number of people gaining employment temporarily in the UK, it may be a simple matter to continue to pay an employee who has left, who then shares the income with the employee facilitating the fraud. The number of names on the payroll should be the same as the number of people employed. Make sure it is.

Buying from and selling to the same firm. It may sound like good sense to deal with a customer that is also a supplier on a single account. It normally is – but one danger is the possibility of a fraud where purchases are either fictional or delivered elsewhere. Because there are entries on both sides of the account, they may go unchecked. The cheque written agrees with the total on the ledger account, but is that verified?


Concentrating on big items only. The essence of the most successful long-term fraud is that it does not attract attention. It is the smallness and regularity of the transaction which establishes it as ‘part of the furniture’ and makes detection less likely. Make sure that ‘small’ accounts are reviewed, at least on a test basis.

Mr Collins continues: “Businesses that do suspect fraud, should take legal advice immediately. Whilst their main aim will be to obtain evidence that will stand up in court, they should proceed with caution, as there is a risk of being taken to an employment tribunal should their suspicions prove incorrect or they act in a way that breaches an employee’s employment law rights

“In addition, the way they gather evidence or record personal data on employees must comply with the Human Rights Act and the Data Protection Act.

“It is worth remembering that most internal frauds are carried out by highly trusted employees, as they have a great advantage over most criminals – a detailed knowledge of the control systems of the organisation which is being defrauded.”

With 39 partners, FBC Manby Bowdler is the fourth largest law firm in the West Midlands.  The firm has offices in Wolverhampton, Willenhall, Telford, Shrewsbury and Bridgnorth.

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