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Key ‘business fraud’ issues: lessons learned from Lookers’ £4m black hole

Paul Daly, UHY Hacker Young

It is interesting to see further details announced today around the ongoing financial investigation at Lookers. 

Grant Thornton have been appointed to investigate the fraud and initially focused on the operating division from which the concerns arose. 

They have concluded that around £4 million of misstatements have taken place around the bonus receivable accounts, along with a number of fraudulent expense claims. 

At the Lookers board’s request, the investigation has been extended to the other operating divisions and a number of balance sheet accounts have been found not to be reconciled. 

The impact of this is still to be determined.

In our experience, the subject of manufacturer bonus remains one of the most challenging when it comes to both internal or external audit. 

The manufacturer offer is inherently complex and often subject to variation in response to trading conditions.

In our view, at any year end the resulting debits and credits in the balance sheet must be audited in totality and not just on a sample basis. 

There have been numerous instances where we have taken on a client where these checks have not been in place and the accounts have been incorrect as a result. 

The most common error being to deliberately or otherwise mis allocate the incoming payments against the debts (usually oldest first). 

This can provide false reassurance to an auditor who sees that the remaining balances appear current when in fact they represent mistakes or fraud that can have built up over several years. 

Due to the high volume and value of transactions, the resulting write offs can be truly eye watering as illustrated in this example with just one division suffering a £4m problem.

With regard to the other issue highlighted of certain balance sheet accounts not being reconciled, again this is an all too common problem that we see on a regular basis. 

Disciplines should be in place to ensure that every single balance sheet account is reconciled on a frequent (ideally monthly) basis. 

Furthermore, in larger businesses there should be peer review or an internal audit function to regularly carry out detailed secondary checks to ensure these disciplines are being followed and encourage the right mindset in both the finance and operational functions in the business. 

Whilst it is tempting, especially in times like we are currently experiencing, to reduce the level of resource available to the finance function this is likely to prove a false economy in the long run.

Auditing techniques are increasingly moving towards control tests and use of technology to interrogate data. 

Although we welcome these advances and continue to develop our own unique approach to their use in motor retail we are still firmly of the view that our audit must be heavily focused on ensuring the year-end balance sheet is not materially misstated. 

When fraud and errors stop manifesting themselves in this way, we may be convinced to change our approach.

Author: Paul Daly, Partner at UHY Hacker Young

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