Fraud prevention - division of duties

To prevent fraud, auditors and management consultants recommend divisions of duties or a system of checks and balances.

This means that as far as possible, no one person is in charge of a sensitive or important function. For example, a cheque book should not be left in the hands of an employee who has power to decide on payment who is the cheque signatory as well.

Another common example is found in the financial industry in relation to traders - allowing one person to be in charge of trading as well as back room operations (the paperwork involved in the trades). This is of course similar to the Barings Bank situation.

Forged cheques

Many cases of corporate fraud involve the use of forged cheques by company insiders. For example, an employee who is in charge of the company cheque book, may take a few cheques and forge the authorised signatory's signature to draw cheques payable to himself or his accomplices.

What is the legal position? Case law requires banks to know their customer's signatures. Therefore, a forged cheque is not valid and any withdrawal is not authorised. The bank would have to refund the monies drawn out.

However, banks have often reacted through using contract clauses in their agreements with their customers, to shift some of the risk to the latter. Customers may be required to take reasonable care of the cheques. More common is the clause that deems the regular statements of accounts sent to the customer as conclusive within a certain time period (usually 14 days). In other words, after 14 days, if the customer does not query the statement, all reported withdrawals will be deemed valid.

For corporate customers, case law has held such clauses to be valid. For individual customers, perhaps such clauses may be invalid under the Unfair Contract Terms Act, but this is highly arguable.