WHAT IS COMMERCIAL FRAUD?Anyone who has read my pieces of “How to read a Balance Sheet” or “How to interpret a Balance Sheet” or has been studying my “99 Business Definitions” and specifically some of the accounting definitions such as “Budget” and “Forecast” may start to wonder where a line is drawn. That is, a line between sloppy accounting or (say) misguided optimism or simple naivety and a downright intention to mislead, or put another way, the deliberate act of committing commercial fraud.
According to Simon Bevan of leading accountants BDO Stoy Hayward and as reported in the Daily Telegraph on 4th August 2008, the financial extent of commercial fraud far outstrips the effect of mortgage fraud, ATM fraud and credit card fraud. Commercial fraud is estimated to cost Britain’s banks £2bn a year.
The “white collar” fraudsters hit a bank’s corporate lending department by inflating asset valuations (ie a Balance Sheet action) and overstating income predictions (ie a Profit & Loss and Budget and Forecast action). Furthermore, Mr Bevan says that lenders rarely recover the losses since they need to be chased through the civil courts.
A fraudulent act may start as a simple deception to get as much debt as possible (again, see “How to interpret a Balance Sheet”). It seems that banks are reluctant to confront commercial fraud head on as it is often conducted in concert with employees and exposes poor lending standards “Banks’ credit committees often don’t want to admit they have been defrauded”. Last week both Lloyds TSB and HBOS reported a doubling in bad debts in their corporate lending divisions. It is claimed that cheats operate in collusion with solicitors and accountants who may have provided “dodgy” business plans, and valuers who overvalue assets alongside internal staff who are willing to turn a blind eye to claims that are obviously false.
In the period 1992 to 2002 I personally prepared many business plans for small to medium sized enterprises and initially under the auspices of a subsidised scheme run by the then DTI. A good sound business plan pulls all the aspirations for the future into one document and crucially concludes with the numbers. It is at that point that all the challenging of assumptions should have taken place. How to prepare a business plan will be the subject of a future piece on this website.
If you found this article interesting. Read my book “Violets” It's a cracking good read anyway, but may just give you the insight you need to kickstart YOUR BUSINESS.
jgs-2008
