In June we asked R3 members for their thoughts on a range of topical issues, including fraud-related activity, late payment and other causes of corporate insolvency.
Working with businesses of all shapes and sizes throughout the UK, R3’s members have a unique insight into the causes of financial distress.
Fraud: An increase in fraudulent activity seen by the insolvency profession
The insolvency profession continues to play an important, and often under-utilised, part in the fight against fraud. According to the survey, 37% of respondents have been approached to use insolvency procedures to investigate fraud in the last year. A further 21% have been approached outside the last 12 months or so.
Of those approached in the last 12 months, 61% have been contacted more than once and 18% more than five times.
This represents an increase from the last member survey R3 conducted on the topic in March 2012, when 24% had been approached within the previous 12 months.
According to the survey, 27% of the profession have seen an increase in fraud-related cases, while 61% have neither seen an increase nor decrease.
Why the increase?
Fraud is a staggeringly expensive problem for the UK economy. While it’s impossible to put an exact figure on it, the latest figures from the National Fraud Indicator, estimates that it costs the UK £193 billion per year. This figure dwarfs previous estimates by the UK Government which put the cost at around £50 billion in 2013.
Unfortunately fraudsters are getting more innovative and professional in their schemes. So it’s not surprising to see this increase in members being approached to investigate fraud.
The insolvency profession has a significant role to play, and have extensive powers to combat fraudsters and make recoveries to victims. The fact that the cost of fraud is increasing at the same time that government agencies and law enforcement are facing tighter budgets and few resources in their fight against fraud, provides an opportunity for the profession to help fill the gap.
Causes of corporate insolvency: late payment and the ‘domino’ effect
Members were also asked about the issue of late payment. The results of the latest survey indicate that little progress has been made in eliminating the problem over the last two years despite the government’s commitment to do so.
Survey respondents say that late payment for goods or services was a primary or major cause of 23% of insolvencies in the last twelve months. This represents a slight increase from 20% when we last asked the question in a 2014 survey. The profession still regards construction as the sector with the worst track-record when it comes to paying bills on time.
Our last Business Distress tracker, a survey of 500 UK businesses, found that 12% of businesses are owed payment on invoices that are at least 30 days past due. Late payment problems not only disrupt cash-flow but businesses are also forced to commit time to chasing invoices. New research, from software company Xero,
found that UK small business owners spend 10 per cent of their working day chasing payments.
The picture is similar for the ‘domino effect’ - where one business’ insolvency is caused by the insolvency of another. R3’s members say that the ‘domino effect’ was the primary or major factor in 20% of cases, also slightly higher than the 16% recorded in the 2014 survey.
While it may seem like something which is outside of a business’ control, there are measures which can be taken to limit the impact of a supplier or customer’s failure. When businesses trade on credit, they are essentially lending to a customer without the protections a secured lender enjoys, such as a privileged position in the order in which creditors are repaid after an insolvency.
Companies need to be aware of whom they are trading with, and take proactive steps
in protecting themselves. For example, businesses should ensure they have comprehensive terms and conditions in place with trading partners. Provisions should include details such as payment terms and specifying what happens if either party don’t deliver or pay, or want to end the relationship. Clearly setting out these conditions from the outset will help prevent unnecessary uncertainty if a supplier or customer becomes financially distressed.