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Furlough scheme may increase fraud risk

As the furlough scheme is extended to the end of October, Philip Fisher cautions accountants regarding a potential audit issue that could also exercise MLROs.

12th May 2020
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As the ravages of coronavirus continue to turn the business world on its head, the behaviour and experiences of both individuals and corporates have changed beyond recognition.

In this new world, one could divide both groups into three different categories: the honest, the dishonest and the just plain desperate.

That could well become relevant in coming months, as businesses and individuals try to recover from what has been, for most, a financial disaster without precedent in living memory.

The Prime Minister, seemingly speaking off-the-cuff on Sunday since his deputy was unaware of several of the measures the following morning, decided to “encourage” anyone who could not ply their trade from home to start working from Monday/Wednesday (Raab/Johnson).

This could have many implications. It should certainly help to boost the economy in a limited way. It could also easily have the opposite effect, should it lead to a more serious and longer-lasting lockdown.

However, the most telling consequence could be with regard to the furlough scheme, which is currently paying 7.5m people.

Almost everyone in the country and surely every accountant now knows that this arrangement pays 80% of the salaries of employees who are unable to work. More specifically, it prevents them from working if their employer wishes to claim what might in the past have been referred to as a relief. In passing, it is worth noting that there is an equivalent arrangement for the self-employed.

Following Tuesday’s announcement, the furlough scheme is to run until 31 October, with less generous rules from August.

This is great news for all of those accountants who have been utilising the arrangements to pay the salaries of support staff, junior staff and some of those who would not otherwise be making a valuable contribution.

It is also equally beneficial to the employers of a number that is currently running at approximately half of the workforce.

Has anyone spotted the potential contradiction yet? Companies are being “encouraged” to get a significant proportion of UK plc back to work while the furlough scheme continues to militate towards keeping staff members idle.

Possible breach of legislation

Without wishing to suggest that any company or industry is likely to indulge in activities that might be in breach of legislation, I wonder whether any reader would like to bet against vast numbers of employers continuing to claim under the furlough scheme, while conveniently forgetting that the arrangement was not supposed to apply to those who are in work.

It seems safe to say that a majority (not necessarily vast though) of employers and the self-employed would fall into the category of honest in calmer times.

There will also be a smaller number, though possibly employing millions, who are dishonest enough to think that they could continue claiming furlough to the end of October for those who have been re-employed, without the government noticing, let alone taking any action.

Then we come to the just plain desperate, who would normally fall into the honest group but are close to starving, about to lose their homes and feel that they have little choice but to make the most of whatever is available.

The problem for the government and HMRC is that it will be nigh on impossible to identify small-scale furlough fraud, without employing large numbers of investigators.

The more likely way in which they will fall upon these cases is the tried and tested methodology of whistleblowing either by those working while furloughed or business competitors.

Checks for furlough fraud

What has any of this got to do with accountants? Given our high ethical standards, it would be nice to think that none in the profession will get involved in fraudulent activity.

The first question that some might begin to ask is whether we have an obligation to include checks for furlough fraud while auditing. I leave that to the experts to determine.

Secondly, this might well become a standard-issue when due diligence investigations take place. This could put those involved in a tricky position, potentially sinking deals.

Thirdly, and most pertinently, we have an obligation to notify the authorities where we are aware of financial crimes. Clients being clients, many of them may be stupid enough to boast about their furlough frauds. In that case, accountants will presumably feel that they have no choice but to make a declaration under the Proceeds of Crime Act.

The coronavirus pandemic will cause all kinds of problems for accountants, HMRC and the world at large. This may not be the most important but, since the Exchequer is going to be desperately short of cash, it could come back to bite those who think that they are on to a sure-fire winner.

Replies (4)

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By Justin Bryant
13th May 2020 17:38

I think you need to say "will" rather than "may" in the heading here.
https://www.patrickcannon.net/will-hmrc-investigate-covid-19-claims/

Otherwise it's a bit like those highly dependable economist talking heads who say the stock market might go up or house prices might go down (of course they might).

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By philaccountant
13th May 2020 10:43

"This may not be the most important but, since the Exchequer is going to be desperately short of cash"

I'm sorry but this is a myth that needs to be stamped out and, if this crisis has shown anything, it's that there is no shortage of cash in the UK, just a shortage of political will to bring cash into existence.

It's not a finite resource, there is no gold standard to keep us restricted in our spending. Or worse, the EU and ECB crippling our economy with it's ridiculous idea of balanced budgets.

All nations should spend the money that's needed to avert a global depression. Austerity failed and the ideas behind it need to be consigned to the dustbin of history. One of those being the idea that cash is a limited resource. It's only ever limited when the people running the country don't want to spend it on the public good.

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By Brugesbear
15th May 2020 09:40

"Given our high ethical standards..."

See the latest issue of Private Eye for yet more evidence of these high standards.

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By Tom 7000
15th May 2020 12:55

We just had that discussion here.

Should we bring the cleaner back... there's no one in the office

a. No that's a waste we will be paying her for nothing and not get the furlough cash
b. But it says we have to bring them back and we should follow the spirit of this

Despite being the boss ''on paper'' I lost the argument.....

I will leave you to guess if I am a or b

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