The auditor and furlough fraud: ten things you need to know

With Boris’s announcement that there’s a roadmap to easing us out of lockdown, there’s at least a smidgen of hope that the miserable days of the pandemic will eventually be behind us. But the financial effects of COVID-19 on companies and employees will take much longer to recede, and many UK businesses have only survived thanks to government assistance such as the Job Retention Scheme (the ‘furlough’ regime) and its equivalent for self-employed workers.

For auditors, the economic difficulties coupled with the prevalence of remote working for vast swathes of employees present new risks of fraud within businesses, which could have resulted in materially misstated accounts. In February’s Newswire we highlighted both the FRC’s consolidated guidance on audit and COVID-19 and the ICAEW’s ‘Know-How’ Helpsheet on fraud and government support. Both these publications address the specific fraud risk factors arising in connection with government assistance such as furlough payments and loans, and reflect rising concerns that auditors need to focus on these new potential threats. To help you, here’s ten things you need to know about furlough fraud and your audit responsibilities:

1. In October 2020, the National Audit Office issued a report which cited HMRC research indicating that between 5% and 10% of furlough payments were fraudulently claimed. This amounts to somewhere between £2bn and £4bn of taxpayer’s money.
2. The NAO report cited other surveys indicating that between 7% and 34% of furloughed employees surveyed worked at the request of their employer while furloughed.
3. HMRC still expects to recover millions in CJRS payments at high risk of fraud. By October 2020, only around half of the estimated recoverable amount had been repaid.
4. HMRC’s fraud hotline has received over 10,000 reports of fraud (mainly furlough fraud).
5. HMRC does not expect to have a complete assessment of the total fraud and error it needs to tackle until the end of 2021 at the earliest. As at the NAO report date, HMRC had only blocked CJRS claims amounting to 10 million
6. Furlough fraud is a money laundering offence, and if auditors know or suspect furlough payments were falsely claimed, they need to follow their firm’s procedures for raising a Suspicious Activity Report.
7. Fraud is a particular type of ‘NOCLAR’ – non-compliance with laws and regulations. For December 2020 year-ends onwards, auditors need to explain in their report the degree to which their work was considered capable of detecting NOCLARs such as fraud.
8. ISA (UK) 240 – the fraud ISA – is in the process of being revised to strengthen auditors’ responsibilities. Although the changes are relatively minor, they reflect the FRC’s renewed focus on the ‘expectation gap’ between what auditors do and what stakeholders expect concerning fraud detection.
9. The ability to rationalise one’s behaviour – particularly in difficult financial circumstances – is a key factor increasing fraud risk, even for directors who have always acted in a trustworthy manner in the past.
10. Auditing remotely – for instance, conducting interviews and discussions by email, phone or video call rather than in person – increases the risk that signs of deceptive behaviour (e.g. in body language or tone of voice) will be missed. Make sure you concentrate fully on the call (and not just to ensure that your cat filter was turned off!)