External Threats and Whistleblowing
Financial irregularities are predominantly perpetrated by external actors, often with international connections. So, whilst employee misconduct remains a key risk, 68% of irregularities involve external parties or collusion between external and internal parties. Notably, 24% of businesses report a rise in international offenders targeting UK victims. Whistleblowing remains a crucial method of detection, with 21% of irregularities identified through internal or external whistleblowing. Despite its importance, only 22% of entities have a whistleblowing policy, highlighting a concerning shortfall.
Seeking Specialist Assistance
The most common method of businesses investigating financial irregularities is to appoint external forensic accountants or auditors (47%), although over a quarter had increased spending on their own internal financial investigation resources. In the year that the 'Failure to Prevent Fraud' offence came into force under the Economic Crime and Corporate Transparency Act (ECCTA) many businesses have seen an increase in related costs, with 55% reporting higher expenditure on investigations and anti-fraud projects. Financial irregularities significantly impact costs, with average losses equating to 11% of turnover. Recovery remains challenging, with businesses reclaiming less than a third (32%) of losses, often through legal actions or insurance. Only 26% have fidelity or cyber insurance, underscoring the need for better coverage.
Impact of the ECCTA
ECCTA has raised the stakes for businesses this year as they could now face criminal action if they do not have reasonable procedures in place to prevent fraud. Unsurprisingly some 86% of businesses said ECCTA had been a trigger for a thorough reappraisal of anti-financial crime procedures. Worries clearly persist, with over half of the businesses surveyed being concerned about financial irregularities in the next 12 months and 45% noting an increase in concern levels since the offence’s introduction.
Technology's Role in Financial Crime
Technology is playing an increasingly influential role in financial irregularities, 22% of businesses were targeted by deepfake AI and 19% had experienced security breaches due to cyber-attacks. 22% of businesses had also encountered cryptocurrency-related irregularities. Encouragingly, 27% have invested more this year in fraud detection tools such as AI and data analytics, as entities look to technology to protect their business.
Upcoming Article Series
In the coming months, we will delve deeper into themes from this year's survey, including:
- Employee dismissals linked to financial irregularities;
- Use of private emails and devices for business;
- Top risks for UK businesses in the next 12 months;
- Cyber-crime controls; and fraud response plans, risk assessment, and awareness training.
About the BDO Investigations Survey
Conducted with Censuswide, our survey offers insights into financial investigations by UK corporates. We define Financial Investigations as investigations into accounting anomalies, regulatory breaches, potential fraud and other financial crime (together referred to as financial irregularities). The survey complements BDO's FraudTrack publication, providing real-world experiences from 500 directors and business owners of entities with 200+ employees.