PKF International

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Fraud in the UK retail sector

12 Jan 2016

Andy Whittaker, Senior Manager at PKF Littlejohn, looks at some of the questions retailers should be asking about fraud and the importance of addressing them as part of an anti-fraud strategy to create a competitive advantage.

With the demise of the UK Government’s National Fraud Authority (NFA) last year the subject of fraud seems to have moved down the government’s priority list.  However, those of us working within the retail sector know only too well that the problem persists and certainly hasn’t moved down the criminal’s agenda. 

In the absence of the NFA’s Annual Fraud Indicator we have to look at other ways to try to gauge the extent of the problem and this brings with it a number of difficulties. 

First, who are we to believe?  Many software and data analytics companies will be painting a grim picture with the aim of presenting their solutions as the silver bullet - but what are they basing their figures on? 

They may be based on detected fraud, yet research has shown that at best, only 1/30th of fraud is ever detected and the results of surveys or questionnaires can at best only be guesstimates.  Or have they just trawled the Internet, looking for published figures?  Are these statistically valid and based on accurate fraud loss measurement exercises?  …who knows?

In the UK there is now a government-recognised method to accurately measure losses to fraud that achieves a level of accuracy to within 1% and has a 95% level of statistical confidence.  By using such a method a company can accurately measure the extent of the problem and, in so doing so, effectively target its limited resources to reduce the impact of fraud.  By knowing what the true cost of fraud is to a business it can then be dealt with and reduced just like any other business cost, with demonstrable returns being achieved on the investment made.

Within the sector fraud can attack a retail business from a number of directions – internally by staff (at all levels) and externally by suppliers, customers and cyber criminals.  Many organisations target their internal counter fraud activity against those undertaking customer facing activity and they are right to do this as most fraud is of low value but high in volume. 

But how many organisations undertake proper background checking on senior staff and directors?  Can they rely on a brief and often bland reference supplied by a former employer?  Have they checked to ensure that the reference is genuine?

Externally, following-on from the horse-meat scandal and the introduction of the Alcohol Wholesaler Registration Scheme, companies are now starting to recognise the importance of undertaking effective due diligence right along the whole length of their supply chain as a tool to identify and reduce fraud risks.  But when suppliers, sometimes two, three or more times removed from the retailer or are based overseas, how does a company do this beyond a basic Google search?  

Today most retailers are reliant on e-commerce and this is where many risks now lie.  What evidence has been sought to ensure that customer and financial data is encrypted and securely processed and stored?  What penetration testing has been done and by who?  Who will be liable for the financial and reputational damage if a breach were to occur?

In a sector where customer confidence and brand reputation are essential retailers should be asking all of these questions and many more if they are to reduce their exposure to the risk of fraud and mitigate some of the uncontrolled costs of their business.

For more information on how PKF Littlejohn can help businesses assess and manage their fraud risk please contact Andy Whittaker, Senior Manager, PKF Littlejohn on awhittaker@pkf-littlejohn.com.

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