Is this fraud?

Is this fraud?

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I know this quite a specialist subject but....

My limited understanding of fraud is that it is essentially the misappropriation of funds for personal gain.

What if an internal accountant of a company lent the company he worked for a sum of money with a loan agreement. Note that the loan is from a limited company of the accountant in which he is the director of - so, the loan hasn't come from the accountant personally.

However, the company he lent money to then failed to make the repayments of the loan agreement and was in massive financial difficulty. Worried about this the accountant decides that, wearing two hats, an accountant and a creditor, he should make a deal with himself to have one of the invoices of the company paid directly into the bank account of his limited company that lent the company he works for the money - covering only the sum of the loan and nothing more.

Whilst this is not fraud according to the definition of misappropriation definition above surely this is illegal? Chatting about this with a colleague however he was arguing that by wearing "two hats" and because there was an actual loan agreement in place this technically isn't fraud.

Surely not???? There is something wrong with this - even if it is for a genuine loan - you can't just go around changing the bank details that customers pay into? What do you say? You can trust me, I'm an accountant.

Replies (17)

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Locutus of Borg
By Locutus
28th Aug 2012 22:02

If I understand what you've said correctly
Using his privileged position, the accountant is ensuring that a debt that he has an interest in is settled in preference to others without the knowledge of his fellow directors. The customer also believes that the supplying company is being settled, when this is not the case. The accountant is doing this in the knowledge that the loan is unlikely to be settled otherwise.

The "two hats" nonsense doesn't cut any ice with me. In my mind this is clearly fraud or deception of some kind.

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By petersaxton
29th Aug 2012 07:03

It's fraud

It's simple. Don't take notice of people who don't seem to have any common sense.

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By twj4789
29th Aug 2012 09:04

Agree with the above

If he wanted repayment and the debt wasn't disputed why didn't he wait until said customer paid into the company account then transfer it to his Limited Company account?

There are a lot of other avenues here though, as a creditor what did his loan agreement say with regard to repayment? As an accountant and director, if he was that desperate it would seem the company is insolvent and should it be trading?

My view is that by having a customer pay into his account to settle the debt he was obtaining the funds through deception.

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By bernard michael
29th Aug 2012 09:11

The ultimate liquidator will demand the money back and may instigate/recommend  proceedings under the disqualification of directors legislation

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By Carlos_Fandango
30th Aug 2012 10:43

If it's nothing else it's surely preferential creditor treatment.

Diverting fees paid from a debtor directly into your bank account, bypassing the invoice company entirely - that's just plain wrong.

Hopefully it will come out but, should the company recover, he'll simply put through a journal to cr debtors dr bank, then cr bank, dr creditorand all will look okay.

They always say the ones who carry out the fraud are those in charge of the business don't they?

 

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By brianheg
31st Aug 2012 11:30

It depends - did the employer company authorise him to do this?

The funds are as asset of the payee company. Based on the OP the accountant appears to have appropriated them without receiving any authority to do so from the payee company. If this is correct, I would be of the view that this is straighforward theft.

If the payee company has consented to the appropriation (effectively assigned the debt in payment of the loan), it is less likely that the accountant will have committed an offence. If the company is solvent there is likely to be no issue. If the company is insolvent, the directors will have created a preference. The accountant may also be creating a preference if a director or deemed to be a shadow director of the company. Potentially, recovery action would be taken by a liquidator or administrator. This would also be potentially a matter for disqualification from acting as a company director.

If there is a factoring agreement in place, the debt will be owned by the factoring company and not by the company, and so cannot be assigned. Directing the funds to a bank account other than the factor's will be misconduct in the operation of a factoring account, again a disqualification matter.

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By BabsHarris
17th Sep 2012 18:58

Many thanks for the teaching aid....

I have just been working with a student on the Professioanl Ethics element of AAT and this seems like a really good example of Fraud through Abuse of position.  I'll be using this in my teaching!! 

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Replying to Darryl Gibson:
David Winch
By David Winch
21st Sep 2012 13:37

Teaching - fraud by abuse of position

In the news today a classic case of "fraud by abuse of position" - an employee who fraudulently claimed 'expenses' from her employer (and has been sentenced to 5 years imprisonment).

Lloyds Bank worker Jessica Harper jailed for £2.4m fraud

 

David

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David Winch
By David Winch
17th Sep 2012 19:19

Teaching

If you are teaching about fraud do not overlook the fact that a vital ingredient of fraud is dishonesty.  The meaning of dishonesty in this context is explained in the leading criminal case of R v Ghosh [1982] EWCA Crim 2 and is summarised in the directions which judges customarily give juries in the trial of such cases in English Crown Courts:

 

If you are sure that the defendant acted as the prosecution alleges, the final issue is whether the defendant was acting dishonestly. In order to resolve that issue you need to consider two questions:

1. Was what the defendant did dishonest by the ordinary standards of reasonable and honest people? It is for you to decide what those standards are and to apply them to this question.
If what the defendant did was not or may not have been dishonest by those standards you must find him not guilty. If, however, you are sure that reasonable and honest people would consider the defendant’s actions to have been dishonest you should move to the second question.

2. Must the defendant have realised that what he was doing would be considered dishonest by those standards? You are, in other words, drawing an inference as to what was the defendant’s own state of mind.

If you are sure that the defendant knew that what he was doing was dishonest by the ordinary standards of reasonable and honest people then he is guilty, whether he personally regarded it as dishonest or not.

 

David

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By BabsHarris
17th Sep 2012 19:35

Teaching

Many thanks David I will also include that.... also thnaks for not commenting on my spelling!

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By Midlands Accountancy
17th Sep 2012 19:43

False accounting ?

Is it fraud ?  Not necessarily.  It all depends whether the other directors authorised it or not.

Similarly, it is not preferential creditor treatment unless the company actually goes into liquidation before the final due repayment date of the loan.

However, it would appear to be false accounting, depending I suppose on how he has actually recorded this transaction (if at all) in the books.

 

The only reason I can think of for doing it this way is if the company is s overdrawn that had these funds been paid into the companies bank they would have been retained by the bank to cover an unauthorised overdraft. In that case technically I suppose he has defrauded the bank.

 

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Replying to Eric T:
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By brianheg
17th Sep 2012 23:23

False Accounting

Midlands Accountancy wrote:

Is it fraud ?  Not necessarily.  It all depends whether the other directors authorised it or not.

Similarly, it is not preferential creditor treatment unless the company actually goes into liquidation before the final due repayment date of the loan.

However, it would appear to be false accounting, depending I suppose on how he has actually recorded this transaction (if at all) in the books.

 

The only reason I can think of for doing it this way is if the company is s overdrawn that had these funds been paid into the companies bank they would have been retained by the bank to cover an unauthorised overdraft. In that case technically I suppose he has defrauded the bank.

 

 

I agree that it could potentially be false accounting, as well as fraud and theft. However, in relation to preferences  the due date for repayment of the loan is not a factor taken into account in s239 and s240 of the Insolvency Act 1986. The relevant factors in s239 are a desire to prefer on the part of the company, and the company doing or suffering something to be done which has the effect of a preferring a creditor. It is correct that the ability to challenge preferences is reserved to administrators and liquidators. The relevant time limits prior to the commencement of administration / liquidation are set out at s240, and do not include consideration of the due date for payment of the liability.

Also, the bank may in most practical situations be deprived of the funds, but it does not follow that a fraud has been perpetrated against the bank. Suppose the debt were paid in cash, or the company operated bank accounts with more than one bank. The bank does not have a right to receive the funds unless it has a valid fixed charge over the book debts of the company. In the absence of this, the funds belong to the company, and the company is the victim of the fraud.

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By Midlands Accountancy
18th Sep 2012 00:17

brianheg

I disagree regarding s240.  If a debt is due to be paid before the date of insolvency, and, if it has been paid before that date in accordance with a legally binding loan agreement, then there can be no challenge as the company has merely abided by a contract to pay.

If, however, the company knew it was insolvent and intended to cease trading, then any payment made after that date could be construed as giving preference to one creditor over another.   In practical terms the amount of time between the payment and the date of insolvency would be a telling factor.  

 

However, in this particular case, the waters are muddied by the fact that this is not an arms length transaction. THAT fact could, and probably would, raise numerous legitimate questions.

.

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Replying to petia_kit:
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By brianheg
18th Sep 2012 15:17

Midlands Accountancy

Midlands Accountancy wrote:

I disagree regarding s240.  If a debt is due to be paid before the date of insolvency, and, if it has been paid before that date in accordance with a legally binding loan agreement, then there can be no challenge as the company has merely abided by a contract to pay.

If, however, the company knew it was insolvent and intended to cease trading, then any payment made after that date could be construed as giving preference to one creditor over another.   In practical terms the amount of time between the payment and the date of insolvency would be a telling factor.  

 

However, in this particular case, the waters are muddied by the fact that this is not an arms length transaction. THAT fact could, and probably would, raise numerous legitimate questions.

.

I think we're essentially saying the same thing but using different language.

s240 says (amongst other things) that If the company is not insolvent, under the criteria set out at s123 of the Act, at the date the payment is made then the transaction can't be challenged under s239. Being insolvent in this context is not the same thing as actually being in liquidation or in administration. If the company is insolvent at the date of the transaction, the transaction is capable of being challenged under s239.

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By Eve 2206
21st Sep 2012 15:33

Going concern

Hi

How can a company's accounts consider it a going concern when it clearly was not.  If it was a small company and below the audit threshold then the accountant should have known the financial position of the company and whether or not there was a reasonable chance of getting the money back.  He should have been able to renegotiate the repayment of the loan much sooner if he was on the ball.

What he has done is fraud - obtaining a personal gain by deception.

He's a fool and will lose everything he's worked for.  It must have been a lot of money otherwise he would have just written it off as a bad debt at some point I presume.

Eve

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By petersaxton
21st Sep 2012 15:42

Eve

You are so cruel!

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By Eve 2206
21st Sep 2012 16:48

oops - didn't mean to be....

but to risk all you've worked for - all those years of study - your whole life??!!  I can't imagine how that poor accountant is feeling right now, but unless you're about to retire, then there's no way it's worth the risk.  I just hope I never find myself in his position, but none of us are infallible.  For him to take that risk he must have ploughed all his money into the business?

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