WHITE collar crime is on the upsurge and industry is becoming increasingly concerned with fraud.

Companies very often tend to think - "Fraud, it couldn't happen to us", yet 40 per cent of companies admit to having been victims of fraud.

Over 60 per cent believe that the incidence of fraud in Ireland will increase over the coming year. Two per cent of turnover is estimated to be lost through fraud. External fraud accounts for 53 per cent of the estimated total loss and employee fraud for 40 per cent.

Poor internal controls, the nature of the industry and collusion between employees and third parties, are often the main reasons why fraud occurs.

Fraud is intentional deception, a misrepresentation of a material fact in the books of account and ultimately the financial statements. The misrepresentation may be directed against shareholders or creditors, or against the company itself by way of covering up or disguising embezzlement, incompetence and misapplication of funds.

Fraud may also be directed against a company by outsiders such as suppliers and customers by way of overbilling, double billing, misrepresentations as to quality and value of goods purchased or the credit standing of customers.

The internal environment of a company can provide a climate conducive to fraud. Opportunities to commit fraud are rampant where there is loose or lax management, and poor administrative and internal accounting controls.

. Frauds Against the Company:

Some may involve only be one person such as a creditors' ledger clerk who fabricates invoices from a non existent supplier, has cheques issued to that supplier and converts proceeds of cheque's for his/her own use. Frauds against the company also include kickbacks to employees from suppliers.

These are difficult to discern as the company's accounts are not usually manipulated. The practice of kickbacks may only come to light when a complaint is received from a supplier whose product is consistently rejected despite its quality and price competitiveness.

Frauds against the company by employees include cash diversions, thefts, signature or endorsements forgeries on cheques. They include manipulation of debtors using teaming and lading procedures, issuing fake credit notes and altering invoices.

Manipulation of creditors system including raising or fabricating supplier invoices, false, expense vouchers allowing overcharging by suppliers, is used. Manipulation of payroll is included.

. Frauds Against the Company by Outsiders:

These include short shipment of goods by suppliers, substitution of goods of inferior quality, overcharging, double charging, charging for goods but not delivering or delivering elsewhere, corruption of employees of the company by suppliers and corruption of employees of company by customers.

. Frauds For the Company: Termed management fraud this is committed, mainly by senior managers who wish to enhance the financial position of the company. They do this by inflating sales, profits and assets, understating expenses, losses and liabilities, not recording or delaying recording of sales returns, early booking of sales, inflating closing stock and kiting or recording cash in two bank accounts at the same time.

Frauds for the company also includes cheating customers through use of devices such as short weights and substitution of cheaper materials.

How can companies protect themselves against fraud? It is important to create an environment that encourages the detecting and prevention of fraud in commercial transactions.

This should focus on exceptions, oddities and accounting irregularities. Some of the questions that should be asked include:

. What are the weakest links in the chain of internal control?

. What deviations from good accounting practices are possible in this system?

. What would be the simplest way to compromise the system?

. What control features in this system can be bypassed by higher authorities?

. Can aspects of control be breached? If so, by whom? Under what circumstances?

The discipline of fraud prevention and detection requires an awareness as to the potential for fraud and an appreciation of the so called red flags or telltale signs.

These danger signs include:

. Internal Control Indicators: where internal controls are weak or unmonitored; where management compensation is linked to results; where employees are poorly managed or motivated. Other indicators include aggressive accounting policies and an over reliance or lack of supervision of long standing employees.

. Financial and Business Indicators: where there are significant excess stock levels, high level of complaints from customers, suppliers and regulatory authorities; where there are inconsistent and significant cash flow deficiencies or line of credit facility is used for long period.

. Personnel Indicators: These include low morale and motivation among employees, employees with lavish lifestyles, employees who rarely take holidays, understaffed accounting departments.

Prevention is better than cure.

The most pro active means of fraud prevention is the "review and improvement of internal controls". Adequate controls are essential. Conducting "financial and operational audits can assist in minimising exposure to fraud as well as providing added value in assessing the financial performance of the company.