Around the world, there is growing interest in the impact of fraud on company financial statements as well as scrutiny of the responsibilities of auditors in the detection and reporting of fraud. This is partly due to the suspicion that fraud may have been an important element in some recent corporate collapses, such as the fall of British companies Carillion and Greensill, and German company Wirecard. In addition, there is concern that actual or potential fraud may be occurring in the disbursement of state or regional aid to enterprises faced with severe financial challenges due to coronavirus lockdowns. The recent launch of European Public Prosecutor Office (EPPO) operations in June to support the work of the European Anti-Fraud Office (OLAF) is a testament to the concerns surrounding the misuse of EU funds. Laura Kövesi, the head of the newly created EPPO, publicly stated in an interview with German business-newspaper Handelsblatt that in the EU “no country is clean.”

To address fraud and strengthen the UK’s framework for auditing large corporations, the UK Government’s Department for Business Energy and Industrial Strategy (BEIS) has organised a consultation titled Restoring Trust in Audit and Corporate Governance. The move comes in response to Sir Donald Brydon’s Independent Review of the Quality and Effectiveness of Audit, which found that urgent reform was needed to ‘prevent and detect material fraud’. The principal UK professional accountancy body, the Institute of Chartered Accountants in England and Wales (ICAEW), is now consulting its members regarding the sections of the BEIS proposals which affect the audit process.

In the US, there is a similar renewed focus on fraud, manifested most recently by the International Auditing and Assurance Standards Board (IAASB) consultation on possible changes to the International Standard on Auditing (ISA) 240: “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”.

In the UK and some other jurisdictions, much of the discussion has been around the degree of responsibility of professional auditors, management, and the directors of listed companies to prevent, detect, and report fraud. Of particular interest is the possible impact of fraud on the viability of companies defined as Public Interest Entities (PIE), principally comprising listed companies. Interestingly, one of the topics the BEIS consultation addresses is the proposal to extend the classification of PIE to include smaller enterprises than was hitherto the case. This change is being considered as the distortion of fraud among smaller corporate entities also has considerable economic consequences and can undermine other elements of economic activity. For example, subsidies and business support granted to SMEs during the current pandemic could be fraudulently claimed on the basis of false financial statements, or decisions based on financial data, such as in mergers and acquisitions or judicial awards, could equally be influenced by fraud.

Major fraud cases such as that of Bernie Madoff’s asset management company, which was shown to be a giant Ponzi scheme rather than an asset management business, resulted in actual losses for investors topping $18 billion. More recently, losses from the fraudulent collapse of Wirecard AG are also likely to amount to several billion US dollars. In both cases, the frauds were initially ignored by auditors and regulators. Madoff’s fraudulent scheme was reported to the SEC in 1999, nearly ten years before the SEC took action. Similarly, the Wirecard fraud was first highlighted by FT investigative journalists two years before regulatory action was taken. Had the relevant regulators not been so slow to react and less inclined to award the benefit of the doubt, huge losses could have been averted. Hence the measures proposed in the UK regarding widening the scope of the PIE are a step in the right direction.

The current discussions around fraud have tended to focus on the damage suffered by investors, private or public, and aim to combat fraud in this corporate context. Rather less attention has been focused on the equally damaging criminality often associated with fraud, including corruption and money laundering. Whilst there is an increasing body of legislation designed to combat both in many jurisdictions, the enforcement of such legislation is often still problematic. Relatively few convictions for corruption and money laundering are reported.

In recent years, more attention has been given to the past, if not still current, roles that accountants, bankers, lawyers, real estate agents, and others have played in facilitating money laundering in major financial centres, the City of London and New York included. It is no secret that London has benefitted from inflows of capital from Russian and ex-Soviet, Central Asian and Eastern European states. In his book ‘Kleptopia’, Tom Burgis, an investigative journalist reporting for the FT, exposes the massive money laundering associated with extractive industries in the Democratic Republic of the Congo and Russia. This money laundering runs at a scale of billions of dollars, but there are smaller cases that have been exposed as well, such as the one involving Moldovan father and son oligarchs, Anatolie and Gabriel Stati. The Statis stand accused not only of money laundering but also defrauding an arbitration tribunal to win an award against the government of Kazakhstan.

In conclusion, fraud is more pervasive than many will admit. It is a financial crime with a far-reaching impact, yet Western governments, regulatory authorities, and those well placed to detect and combat fraud and associated corruption – namely auditors, bankers, lawyers, and others – are still only starting to catch up in tackling this criminality. It is often easier not to follow up on warning signals than seriously tackle a crime that provides a valuable inflow of funds to many capital markets. To repeat the words of Laura Kövesi of the EPPO regarding the EU, “no country is clean”. Her comment might also include many other countries, including the UK and the U.S.