Law: Time to take fraud seriously

Accountants are leading the way in dealing with white-collar crime, writes George Staple

TWO important recommendations of the Roskill Committee on Fraud Trials, which sat in the mid-Eighties, did not find a place in the legislation that followed. One urged that juries should no longer try cases of serious and complex fraud, and the other that a commission should be set up to monitor the system for detecting, investigating and prosecuting fraud.

The first has received much attention over the years since Roskill, culminating last week in a consultation paper from the Home Office. The idea of a fraud commission has, however, gone largely unnoticed. Such a body, which Roskill proposed should exist within the machinery of government but with outside members, would contribute to the reputation of financial markets, and would study and advise on the efficiency of the way fraud cases were dealt with in the UK. In particular it would keep an eye on cost effectiveness and the time that cases were taking. It would inquire into breakdowns in the system and assess the possibility of improvements by change of policy and procedure or the introduction of more efficient techniques. It would provide a degree of co-ordination between the numerous interests involved and publish an annual report.

It is a pity that the idea was not pursued. Quangos have not been popular since Lady Thatcher was prime minister, but if some of the controversial cases of recent years had come under the spotlight of a fraud commission, much public misunderstanding of the way in which the system was working might have been avoided. So the initiative of the Institute of Chartered Accountants in setting up the Fraud Advisory Panel is a welcome step in this direction. Indeed in some respects it will go further than Roskill's proposal for a commission.

The Institute has recognised that there is a shortage of reliable information about the extent and nature of fraud. A much more detailed picture of the overall problem is needed. Only then will it be possible to see where resources should be targeted.

The shortage of information is partly due to businesses which fall victim to fraud not reporting it. To do so can disclose failures in management systems and indeed can sometimes reduce the chances of recovering the money. But it is also partly due to the fragmentation of the system for dealing with fraud. In addition to the police and the financial regulators, who are responsible for investigating fraud, no fewer than eight government departments are responsible for investigating and prosecuting fraud. Some of these, together with the police, banks, the legal and accountancy professions, academics and some major companies are represented on the new Fraud Advisory Panel.

The panel has set up three working parties, the first of which will gather information on fraud. The second will be concerned with raising awareness of the problem, investigating methods of prevention and providing advice to business. The third will look at the effectiveness of existing methods of investigation and prosecution. More than 50 different organisations concerned with fraud are represented.

We are approaching the point in the economic cycle when, if history is anything to go by, business failures increase. That is when fraud has tended to occur, or at least become apparent. Shareholders will expect that companies have learnt the lessons of recent years and that improved management systems are in place to prevent fraud.

Successive governments have encouraged ordinary families to invest their savings in the equity markets and make personal provision for the pensions. Since it came into office, the Government has devoted considerable attention to financial regulation, which of course exists to prevent fraud and protect the integrity of markets. However, a number of ministerial statements, in particular from the Solicitor General, Lord Falconer, in his Denning Lecture last October, have indicated that the Government is no less concerned about the law relating to the investigation and prosecution of fraud and related offences. This is very much to be welcomed, and is a reflection of the fact that not only are shareholders entitled as a matter of good corporate governance to expect that businesses include within their management systems effective fraud controls, but also that the criminal justice system is as effective as we can possibly make it to deal with fraud.

The author is a partner at international law firm Clifford Chance, where he heads the Firm's Fraud Investigation Unit, and chairman of the Institute of Chartered Accountants' fraud advisory panel.