Director of Growth, Europe MindBridge
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Auditors must address post-virus resilience

Covid-19 created the perfect climate for financial fraud – both corporate and personal. As businesses and government strive to get the economy back on an even keel, faster data-driven insights and risk assessments will be needed from auditors, writes MindBridge European growth director Stuart Cobbe.

16th Sep 2020
Director of Growth, Europe MindBridge
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Auditors need to support finance managers with more timely post-Covid interventions
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Government loans and handouts have been distributed with minimal accountability to businesses in financial distress. Finance departments are now working remotely with limited oversight and often under extreme pressure. Opportunistic fraudulent activity is inevitable – and the business cost could be devastating.

With HMRC’s well publicised focus on the fraudulent use of the furlough scheme, reputations are on the line. But companies also need to plan for the next nine months. How many “zombie” businesses are only operating due to deferred VAT or PAYE payments? And how many companies will fail when they cannot repay loans?

Regain control

During the first phase of the Covid-19 pandemic, the priority was to safeguard the economy. Now, however, as the fire-fighting period comes to an end there are growing questions about how government financing – from grants to loans, furlough payments to VAT deferments – has been used.

The total cost of furlough claims reached £35bn by mid-August – despite 30,000 applications being rejected, with many likely to have been attempts to defraud the taxpayer. Research by economists from Cambridge, Oxford and Zurich universities found that as many as two-thirds of furloughed workers continued to work.

Indeed, so large is the potential abuse, that there is now a 90-day amnesty in place to allow employers to repay wrongfully claimed sums without penalties or sanctions. Those that fail to disclose face both prosecution and reputation damage – with HMRC planning to name and shame. There is also a significant financial penalty: HMRC can impose a tax charge equivalent of up to 100% of the grant to which any recipient was not entitled and was not repaid.

Numerous large organisations are now publicly revealing plans to repay all furlough payments. For many, this is an opportunity to boost corporate reputation and demonstrate a commitment to re-establishing business as usual. However, given the huge pressures businesses have been under in recent months, many CFOs and FDs will be concerned about the way government funds have been acquired and used.

Multiple financial risks

The potential misuse of furlough, however, is far from the only financial risk. The extraordinary shift in every business’s modus operandi over the past few months has opened the door for opportunistic fraud. New sources of income; staff working from home with limited oversight; the financial pressures – both business and personal - created by the recession. The misappropriation of assets should be a very real concern for businesses of every size.

This is about far more than reputational damage. For organisations that have relied upon grants and loans to survive, an employee exploiting the lack of oversight to syphon funds for personal use could tip the company into failure.

Looking further ahead, companies must determine how – or whether – deferred VAT payments and loan repayments can be made. Is the company truly solvent or no more than a zombie business operating with a balance sheet propped up by short term government finance?

Data-driven insight

With workers dispersed to their homes and margins being squeezed, CFOs and FDs can feel the pressing need to regain visibility and maintain trust in the face of increased financial risks. Auditors have a vital role to play in protecting businesses from the fallout of the second wave of Covid-19. Finance managers will need their auditors to identify mistakes in their application for government support, highlight potential fraud or flag up repayment concerns before it’s too late.

Traditional financial risk assessment models will not be adequate. At best, problems will be revealed months after the fact. Companies need rapid identification of areas of unexpected activity today. This is where auditors and finance departments using sophisticated machine learning and artificial intelligence techniques can deliver real business value by rapidly assessing financial data and surfacing unexpected activity. Armed with this insight, finance teams will know where to focus, what questions to ask and what remedial action to take.  

Essentially, auditors and finance professionals can provide the insight required to enable companies to identify problems quickly – from fraud to cashflow – prioritise the risk and take the steps to safeguard both reputation and solvency.

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