Lynne Munns of Version One explains the importance of document management in combating accounting fraud.

In the current economic climate, organisations are increasingly susceptible to internal fraud as much as external threats. It is therefore vital that staff are not provided with the means to easily commit fraud. Document management systems reduce the risk of fraudulent activity as they prevent documents from being manipulated or shredded in an attempt to cover fraudsters’ tracks making systems such as these key to cross-company security measures.

Fraud in the headlines
Fraud is once again hitting the headlines with the news about Sir Allen Stanford orchestrating a fraudulent, multi-billion dollar investment scheme. Bernard Madoff, the former chairman of the Nasdaq stock market, is also unlikely to be far from our minds after his arrest for running a hedge fund which allegedly racked up a phenomenal $50bn (£33.5bn) of fraudulent losses, making it the biggest case of its kind.

Looking back, few can forget the false accounting scandal at Enron in which Arthur Andersen LLP was found guilty in the US of obstructing justice. The prosecution alleged it had destroyed relevant documents after it had become aware of an investigation by the SEC into the affairs of its client, Enron.

Similarly, executives at telecommunications giant WorldCom perpetrated accounting fraud that led to the largest bankruptcy in history. Evidence shows that the accounting fraud was discovered as early as June 2001, when several former employees gave statements alleging instances of hiding bad debt, understating costs and backdating contracts. The Enron and Worldcom scandals, which proved devastating to both companies’ reputations, were directly responsible for their downfalls

The lessons learnt from these scandals include the importance of managing risk by having effective document retention policies and electronic document management (EDM) systems in place. Without the use of EDM systems, businesses, especially finance professionals, are laying themselves open to the risk of fraud.

An Enron-scale case could happen in the UK
The findings of a survey by Version One in 2008 highlighted that despite the controls that exist in the UK, three quarters of senior finance professionals believe that a case of fraudulent activity on the scale of Enron could happen in the UK. Version One carried out the research with 190 senior finance professionals (finance directors and managers) across a range of public and private sector organisations.

The survey revealed that 73% of senior finance professionals believe an Enron-scale scandal could occur in the UK due to “poor controls, collaboration between unscrupulous employees and the ease in which paper documents can be modified”. On top of this, 73% also stated that someone in their organisation would be able to tamper with or ‘lose’ a document to suit their ends, whilst 38% admitted that they had come across activity that could be considered fraudulent involving business documents. Worryingly, a quarter of these stated that they had witnessed document fraud “a number of times”.

And the cases of corporate fraud are getting worse. KPMG’s Annual Forensic’s Fraud Barometer revealed that UK courts heard more than £1.1bn worth of fraud cases in 2008, the survey’s highest recorded level since 1995. According to KPMG, company managers, employees and customers were tried for fraud relating to £300m last year – three times the value seen in 2007. Worryingly, the KPMG survey predicts that these figures are likely to increase in 2009 as the credit crunch tightens and more and more employees undertake desperate measures to solve their own financial problems. So what can be done?

Preventing accounting fraud
It is always going to be a challenge to prevent an unscrupulous employee from committing a fraudulent act if they have their mind set on it. However, organisations can implement measures and systems to help protect themselves from acts of fraud. Document management is one such system that is vital to the prevention of accounting fraud.

What if a member of your finance team decides to shred invoices, credit agreements and correspondence in an attempt to cover their poor handling of a situation? Would they be able to cover their tracks and get away with it? Could a member of staff fraudulently doctor documents to suit their own agenda, creating a false audit trail?