Insolvencies spike exposing fraud

Company insolvencies are soaring, highlighting the impact of the energy crisis and inflation. The rise in cases is bringing a worryingly significant amount of fraud to light. What should you look out for?

Protecting assets

Company owners obviously want to prevent misappropriation of company assets. Smaller businesses are especially at risk because they generally have fewer controls in place than larger organisations and can be disproportionately affected because fraud can often be significant in relation to income.

There are various types of fraudulent activity, for example:

• Employees: Financial pressures can lead to otherwise honest employees abusing the company’s trust. The fraud might not be outright theft, but the use of company assets for personal gain.
• Inventory theft: Stealing goods for resale is made much easier if there are poor inventory controls in place, such as where employees can easily change records to cover for shortages.
• Directors: The scope for errant directors to carry out fraud is wider still and could include selling off assets to a company – related to the director – at below market value.

Customers

As difficult as it can be, businesses need to avoid dealing with fraudulent customers and avoid extended credit where possible.

If caught up in a phoenix company fraud, the financial cost can be so great that a business ends up insolvent. The assets of a failing company are transferred at below market value to a new ‘phoenix company’ before insolvency, with little funds remaining to pay creditors.

Mitigation

There is no way to prevent fraud completely, but vigilance, for example spot checks and especially due diligence, can help. This applies particularly for new customers. It’s not infallible, but checking directors’ credentials could well highlight serial abusers of the phoenix company arrangement. Review information on the Companies House website.