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.
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.