Fraud can be defined as the illegal act of deceiving another or others with the intention of making a financial or personal gain.
Fraud can involve anything from taking cash from a cash register, to stealing millions by altering a company's accounts or assuming another's identity.
Forensic accountants can be employed to catch fraudsters and identify the extent of the theft by conducting detailed investigations into the suspects' financial histories. A forensic accountant can provide the court with evidence to issue the defendant with an appropriate punishment.
The history of fraud
Unfortunately, with the existence of large amounts of money comes the existence of large amounts of temptation.
Fraud, the act of deceiving another for personal gain, is the inevitable dark side of business.
Certain types of fraud, such as plastic card fraud, email scams and internet banking fraud are of course modern phenomena. Fraud itself, however, is nothing new.
Fraud in the 21st century
Today, the UK government's Serious Fraud Office (SFO) lists 140 different fraud offences in their Fraud Taxonomy. These are listed under 7 categories:
- Corporate - Fraud concerning foul play within or against businesses.
- Charity - Scams against non-profit organisations.
- Market abuse - Intentionally manipulating the market for personal gain (wiping out competition unfairly, giving away insider information etc.).
- Public sector - Council tax fraud, falsely claiming public funding etc.
- Fiscal - Wrongly claiming certain grants (child benefit, guardian's allowance etc.), or tax credit fraud.
- Supporting activities - Identity theft, forgery, bribery etc.
- Individual - Fraud involving an individual's personal accounts e.g. Internet banking scams, email scams etc.
Fraud is currently governed in the UK by the Fraud Act 2006.
What is the Fraud Act 2006?
The Fraud Act 2006 came into force on January 15 2007. It is government legislation designed to clarify laws surrounding fraudulent activity.
Prior to The Fraud Act 2006, fraud was governed according to a medley of 'old law'. The 'old law' included the 8 deception offences as outlined in The Theft Acts of 1968 and 1978, in addition to common-law offences developed in case-law (as opposed to in parliament).
The Fraud Act 2006 was designed to modernise and tighten-up any discrepancies in fraud law. One of the biggest changes can be found in Section 1, where the term 'fraud' has been redefined as a single offence that can be committed in 3 different ways. These 3 different ways are as follows:
1. Fraud by false representation.
2. Fraud by failure to disclose.
3. Fraud by abuse of position.
The main emphasis on the new Act is that:
a. The conduct must be dishonest.
b. The intention must be to make a personal gain at the loss or risk of loss to another individual.
What is 'fraud by false representation'?
'Fraud by false representation' is listed in the Fraud Act 2006 as the intention to give inaccurate information for personal gain at the risk of another's loss.
The emphasis in Section 2 on fraud by false representation is that a defendant doesn't actually have to cause a loss or make a gain, they only have to intend to.
For a representation to be 'false', the person making the representation must be aware that it is, or might be, false.
What is 'fraud by failure to disclose'?
'Fraud by failure to disclose' is listed in the Fraud Act 2006 as the act of deliberately withholding information even when there is a legal obligation to disclose. In order to convict someone for fraud by failure to disclose, the court must first establish:
- That the defendant had an official obligation to reveal some kind of information to someone else.
- That the defendant withheld this information with the intention of making a gain or causing a loss to another - even if no loss or gain was made.
What is 'fraud by abuse of position'?
'Fraud by abuse of position' is listed in The Fraud Act 2006 as the act of exploiting a position of responsibility for personal gain. Fraud by abuse of position often occurs when a person, trusted to safe-guard something valuable, exploits their right of access by stealing it. For example: an employee of a software company exploits his position by cloning expensive software products either for a profit or for use by friends.
Sentencing guidelines for fraud
If an individual suspected of fraud is taken to court, their decided punishment will depend on the following aggravating and mitigating factors:
Aggravating factors (factors that increase the severity of the crime) are as follows:
- A large amount of money was stolen.
- Money was spent on luxuries.
- The position exploited was one of extreme trust - such as a director or trustee.
- Either the intended or actual loss was a particularly large amount.
- Either the intended or actual gain was a particularly large amount.
- If the fraudulent activity occurred over a long period of time.
- If the defendant fails to plead guilty.
- If the defendant refuses to offer voluntary repayments.
- If the victim was elderly or vulnerable.
- Use of another person's identity.
- The offence has a lasting effect on the victim.
Mitigating factors (factors that reduce the severity of the crime):
- Only a small amount of money was stolen.
- The money was spent on necessities.
- The position exploited was one of minimal trust - such as an employee.
- The defendant played a minor role in the fraud.
- The defendant was given misleading or inaccurate advice.
- Either the intended or actual loss was a particularly small amount.
- Either the intended or actual gain was a particularly small amount.
- If the fraudulent activity happened only briefly.
- If the defendant pleads guilty.
- If the defendant volunteers to repay the money taken.
- If the defendant is disabled, ill, has family difficulties or is considered to be in any other state of vulnerability.
The maximum penalty for fraud is 10 years in prison.
How can a forensic accountant help with suspected fraud?
If you have reason to believe somebody you know is committing fraud, whether through embezzlement, identity theft, tax cheats or any one of the 114 examples of fraud listed in the government's taxonomy, a forensic accountant can help you to build a discrete case against them. To find out more about how a forensic accountant works, please visit our forensic accounting page.
Signs that someone is committing fraud:
During their investigation, a forensic accountant will be on the look out for the following 'red flag' signs:
- Whether colleagues, friends or family of the suspect have noticed any significant changes in the suspect's behaviour.
- Whether the suspect has large personal debts or an apparent desire for financial gain.
- Evidence of transactions occurring at odd times, involving unusually high amounts or sent to strange recipients.
- Any discrepancies in accounting records or unexplained items on reconciliations.
- When only photocopied documents are available, or some documents appear to be missing.
- When responses to inquiries are vague, inconsistent or implausible.
- Any missing assets, whether inventory or physical.
- Excessive voids or credits.
- Any evidence of duplicated payments.
- Conspiracy among employees - especially if they are unsupervised.
- If one employee has sole control over a process without supervision or help.
How a financial accountant will use investigative evidence
1. Analysis - Once the forensic accountant has discovered evidence of suspicious anomalies, they will look for any patterns that can be traced back to their source (when transactions were made, where they were made and who by).
They may also compare certain suspects' behaviours with financial patterns. For example, when an employee can't explain their whereabouts at the time of an unexplained business transaction, or when an averagely paid individual suddenly acquires a new sports car or takes a lavish holiday.
2. Conclusion - After analysing the evidence, the forensic accountant will then decide who the most likely suspect is, exactly what they have taken, when it was taken and how.
3. Litigation support - The forensic accountant will then present their evidence clearly to a team of lawyers. They may also be required to present this evidence in court.
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