£327,000 expenses fraud: What we can learn from Lookers

5th Jan 2021
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In a quite remarkable set of accounts, car sales group Lookers recently announced that they have fallen victim to a £327,000 employee expenses fraud. But whilst this sounds like bad news it isn’t the biggest of their problems. In addition to the theft of well over a quarter of a million pounds worth of cash expenses by one employee, the group has had to make restatements and provisions totalling just under £46m.

The group, that boasts 160 branches all over the UK and Ireland is a dealer for brands such as Aston Martin, BMW and Ford.

The question that everyone must be asking is how could it get to this point?

Historic problems come home to roost

During 2017/18 it appears that the group noticed irregularities in the accounting in some divisions and called in Grant Thornton to carry out a wide-ranging review of their operations and what was uncovered was stunning.

In the directors’ annual report the Lookers Group disclosed that sales had been overstated by some £25m over a number of years and this included £10.9m in 2019 alone. It appears that some of the branches were inflating sales figures so that they could achieve their bonus targets.

Unfortunately, the finance department doesn’t come out unscathed as in addition to ‘creative accounting’ by its branches the accountants managed to apply incorrect policies which had a material effect on the results.

These included incorrectly applying the costs of debt issuance, incorrectly accounting for lease transactions, incorrect treatment of a staff car scheme, wrongly apportioning project capitalised costs, overstating inventory and manufacturers bonuses and significant problems with applying accounting policies to newly acquired businesses.

As a result of issues that were spotted in 2018, the group instigated a wide-ranging review that highlighted a huge number of areas where problems had arisen and this is where the fraud comes in.

It appears that the fraud continued over a number of years and came to light due to the investigation into other matters. Information is scarce and the individual remains unnamed, presumably due to the ongoing criminal investigation but it would appear that the fraud relates to expenses payments.

As if all of that wasn’t bad enough for the shareholders of Lookers, historical sales practices seem to have caused issues with the sales of cars, finance and insurance and an ongoing FCA investigation has caused the business a £6m cost and in this year’s set of accounts resulted in a £10.4m provision for remedial action and potential fines.

Lack of control and oversight seems to be the main themes here with the report stating that there were inadequate reconciliation processes, lack of oversight and control, poor quality and under-trained staff.

Unfortunately for Lookers, the lack of control at both a central and departmental level led to a failure to perform basic accounting reconciliations and the absence of formal policies and procedures.
 

What can we learn from Lookers?

Although it may be tempting to think that this may never happen to us, there are some clear lessons that we can all take from the Lookers situation.

Firstly the failure to recruit staff of sufficient quality and experience has to be somewhere near the top of the list of causes and allied to the lack of investment in training, this resulted in staff simply not knowing how to apply accounting policies correctly, or challenging back to senior management on incorrect treatments.

What is also clear is that Lookers failed to do the simple things well. The truth is that every finance department should be able to carry out basic balance sheet and bank account reconciliations as a matter of course even if they are unsure on the specifics of IFRS.

It is always tempting to blame people at the coalface but when this kind of situation occurs, the responsibility lies firmly at the top. Controls need to be adequate and they have to be regularly reviewed and in addition, managers must understand the mechanics behind their accounting policies.

It is conceivable that Lookers simply did not have the systems in place to reduce the workload and make sure that many of their policies were being automatically applied.
In terms of the expenses fraud, it is clear that there was a lack of oversight and that could easily have come from an expenses system that did not make it easy for managers to maintain a watching brief.

After all, £327,000 isn’t a small amount of money and if it were only one individual it would lead you to believe that it could have been spotted with the right reporting.

There have to be questions also about the incentivisation of the departments that ended up reporting inflated sales figures to achieve bonus. Often, incentives can lead to undesirable behaviour so managers do need to ensure that their bonus systems won’t encourage people to ‘bend the truth’.

It is distinctly possible that the management of Lookers took their eye off the ball and a certain amount of Hubris occurred due to the fact that the group is a profit-making enterprise.
 

It can’t happen to us

The main lesson that we can take from this case is that yes, it can happen to us.

Directors can often be guilty of devolving too much responsibility and it has to be borne in mind that anyone who takes up a position on a board has a fiduciary duty to the shareholder to ensure that their money is being looked after. If we don’t make sure that our staff are adequately trained, and the management are properly incentivised then it leaves the door open to unscrupulous activity.

Our systems need to be up to date, easy to use, and make the implementation of controls second nature. Modern SaaS expenses software like Access Expense can make managing expenses far less time consuming, policing your expenses policy easier, and give you the analytics and dashboards to monitor and report on staff expenses.

And management must keep its eye on the ball. Sweat the simple stuff and you won’t go far wrong.

Only by making sure that everyone is correctly incentivised, there is proper oversight and that controls are adequate to reduce the risk of fraud and false accounting can we be sure that this won’t happen in our own organisations.

Access Expense, our leading cloud-based expense management software can automate your expense process, and make controlling and monitoring your expense process pain-free. Book a free demo and see how it can work for you.