Increase in liability claims puts spotlight on corporate cashflow
News Article - 03 December 2009
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Legal experts are warning that corporate liability claims will rise significantly during the economic downturn. Research by KPMG revealed that reports of fraudulent financial activities were at their highest ever level since they begun studying corporate fraud 21 years ago. Whilst accountancy reforms have been enacted to ensure compliance and increase confidence that business audits will uncover financial deception, fraud discoveries in the last year have rarely led to litigation. According to leading auditors, however, this is set to change.
During times of economic prosperity businesses may limit exposure in the event of corporate fraud discovery to protect their reputation. When the economy is in recession, however, the financial implications can be serious enough that a company will pursue legal action against their auditors in an effort to gain compensation for money lost as a result of the fraudulent activity. While the fraud is unlikely to have been caused by the auditor, many companies feel it is the auditor’s duty to discover financial irregularities, and report them before they can affect business goals.
Legally, auditors are not required to look for fraudulent activity in the course of their work, but in many cases notice ‘red flags’ that may – when pieced together – point towards fraudulent activity that they can then report. In the past, total transparency over a company’s financial decision-making may have been improbable due to time constraints, and some degree of irregularity was expected due to the rigidity of compliance regulations. For example, balance sheets can sometimes be slightly out. But with the possibility of facing litigation if directors are unhappy with their performance, it is expected auditors will analyse company finances in greater detail.
To cope with this increase in cash flow scrutiny, businesses should look to increase their financial transparency to the fullest extent. Small and medium sized enterprises are particularly vulnerable to fraud during recession, and must ensure they take adequate steps to protect against the possibility. Employees may become more susceptible to external attempts to buy sensitive information, - such as the recent T-Mobile situation where client information was allegedly sold for profit - and managers desperate to keep the business profitable may be tempted to falsify sales returns. This, when combined with the willingness of auditors to delve deeper than ever before, means small and medium sized businesses are at an exceptionally high risk of running into financial difficulties as a result of unintentional fraud. Unlike larger firms, they may also find it almost impossible to shake off the damaging effects to reputation.
Access’ accounting software is engineered with total transparency in mind. With the capacity for two year’s financial statements to be kept open at any one time, along with automatic alerting capabilities, regular financial irregularities – such as deliberate over-ordering of goods – can be easily flagged up and reported to prevent recurrent fraud. The ability to keep copious notes on each financial transaction can also be used to prevent explanative information being omitted when the audit begins. And with the ability to drill-down to source documents as standard, auditors get access to the logical process for each transaction, providing significant assurances over the legitimacy of financial reporting.
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