Mitigating fraud risk as recession bites

Be alive to risks inside – and outside – businesses

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With the UK on the brink of recession, firms are likely to see a heightened risk of fraud in the coming months. External fraudsters are a danger, but internal threats are also a concern – such as employees struggling with the cost of living or looking to deflect from dwindling business performance.

Insurers are alive to these challenges and will be placing increased scrutiny on firms when it comes to fraud risk. For that reason, it’s vital that firms ensure their risk mitigation measures are up to scratch.

Recession looms amid hard insurance market

Several factors have contributed to a hardening of the professional indemnity insurance (PII) and crime insurance markets in recent years. A readjustment of loss ratios in 2018, coupled with Brexit and the impact of the Covid-19 pandemic on insurers’ bottom lines, has seen many insurers reduce their capacity, or exit the market altogether.

As a result, many accounting firms have found it more difficult to source appropriate crime or compliant PII cover for their practices. Typically, premiums have increased significantly, or firms have chosen to carry lower limits of indemnity.

Now into 2023, these trends show few signs of abating quickly. Latest forecasts from the Bank of England suggest that the UK economy is set to enter recession this year, as it continues to recover from recent economic shocks, including rising inflation, and Russia’s invasion of Ukraine. With this comes the potential for insurance rates to climb yet higher, as insurers look to offset rising claims costs and the deferment of non-essential insurance purchases.

As ever, firms most affected are likely to be those undertaking higher-risk activities, with tax mitigation in particular remaining under scrutiny from insurers. Firms with a claims or notification history, as well as those embroiled in ongoing legal action, may also bear the brunt of underwriters’ hesitancy.

Fraud risk – inside and out

The possible recession is set to exacerbate already challenging conditions for firms, but also threatens to introduce new challenges. In particular, firms should be wary of a heightened incidence of fraud.

According to Cifas, owner of the UK’s National Fraud Database (NFD), the first nine months of 2022 saw more than 309,000 recorded cases of fraud – a 17% rise on the previous year. This was largely driven by incidence of false application and identity fraud, which rose by 45% and 34% respectively. The same data also revealed that internal fraud is on the rise, with attacks by staff against their employer up by a quarter compared with 2021.

Having control over clients’ finances makes accountancy firms an attractive target for fraudsters. For these firms, risk may manifest in several ways. For instance, fraudsters may wish to commit impersonation fraud, using the services of the accountancy firm to add legitimacy to an illegitimate venture – such as filing records on Companies House. Likewise, fraudsters may exploit gaps in internal controls to perpetuate fraud or solicit staff into selling confidential information.

As the cost-of-living crisis places individuals under increasing financial strain, accountants with access to client monies, bank accounts or financial records may also be tempted to commit fraud, such as through direct theft, inflating expenses claims, or colluding with clients. Similarly, as business declines, managers may falsify accounts to mask underperformance, including overstating revenue, failing to record expenses, or misstating assets and liabilities.

Firms should also be alive to changes in how fraud is perpetrated. For instance, one of the impacts of the Covid-19 pandemic has been to encourage more employees to work remotely. While this may limit direct access to company assets, it increases the threat to digital security.

Risk mitigation can satisfy insurers

The heightened fraud risk underlines the need for increased vigilance among firms when it comes to protecting their assets, and those of their clients. However, they aren’t the only ones with cause for concern.

ACCA regulations require that member firms in public practice with more than one member of staff have fidelity guarantee insurance (FGI) to the value of at least £50,000 in place for any one claim. Typically taken out in parallel with professional indemnity insurance (PII), FGI exists to safeguard firms against theft of the firm’s own money, securities or property by an employee, partner, contractor or volunteer.

Like PII, FGI is a positive for firms, helping to protect their bottom lines. Nevertheless, the impact of the recession and growing risk of internal fraud also make it a source of increased scrutiny from underwriters when such cover comes up for renewal.

In order to ensure that appropriate FGI can be sourced, it’s important for firms to take steps to demonstrate fraud risk mitigation. These may include:

  • During the recruitment process, hire all new employees on condition of a satisfactory written reference.
  • Require two signatures for cheques in excess of £15,000 (if applicable, noting not possible for sole practitioners).
  • For bank transfers in excess of £25,000, require call-backs from the bank to an authorised person to commence the transaction.
  • Perform regular checks of cash book entries, and cross-reference these against bank statements.
  • Require all employees who receive cash and cheques to pay in daily.
  • Do not permit any individual to release computer-initiated transfer authorities to a bank without checking and authorisation from a second person.
  • Ensure entries by each individual are controlled by unique passwords held by them alone.
  • Utilise two-factor authentication for all online banking facilities.
  • Validate the identity of new payees and the authenticity of any changes to existing payees.
  • If authorised to handle client monies, ensure proper procedures are in place to minimise the risk of fraud.

Ian Saxelby – Vice President, Global Professional & Financial Risks, Lockton Companies LLP

If you have any questions about professional indemnity insurance please contact your Lockton Account Manager for further advice or email

Lockton is ACCA’s recommended broker for professional indemnity insurance