Fraud

Fraud is often difficult to detect and difficult to investigate. Poor internal systems allow fraud to occur. Often as businesses grow, its employee and client base expand and the logistics of business operations change so that internal controls which were adequate are no longer appropriate.

In 2004, the Australian Institute of Criminology estimated that fraud costs approximately $5.3 billion each year, with only approximately 6% of misappropriated monies recovered. Fraud is often:

  • undetected
  • not reported to police
  • dealt with internally or not investigated

The typical fraudster:

  • Has no criminal record
  • Has no history of corrupt conduct
  • Is often considered a loyal and well-respected employee who has been with the company for a number of years.

Motivations

  • The biggest incentive is greed. Greed exposes the victim to possible fraud. The thought of wealth without hard work is an enticement to enter into a business/commercial venture, eg the promise of large tax refunds.
  • Financial failing of the business
  • To avoid financial liabilities, including taxes
  • To fund gambling and other personal or business debts.

How They Do It

  • Falsifying documents
  • Creating non-existent employees
  • Creating non-existent suppliers
  • Misappropriating cash
  • Misappropriating income and writing off debtors
  • Misuse of Government or corporate funds, eg expense claims
  • Use of complex structures which make it difficult to trace transactions
  • Muddying the waters so that a clear trail cannot be detected, often done by false entries to accounts
  • False accounting practices, eg one-sided journal entries
  • Changing cheques
  • Use of multiple entities with internal charges between them
  • Organised offenders, ie sophisticated crime.

Detecting Fraud

  • Often detected by a “whistle-blower”, often by accident
  • Review of key financial data
  • Statistical analyses
  • Observance of behavioural anomaly
  • Observance of changes in normal business practices
  • Absence of financial controls
  • Lack of transparency
  • Changes in suppliers
  • Awareness of controls being overridden
  • Missing records
  • Lack of details or explanations in financial records
  • Refusal to answer questions
  • Secrecy
  • Failure to take leave
  • Documents are not originals
  • Working unusual hours
  • Unbalanced bidding for contracts, or suspicious bidding practices
  • Provision of goods or services to employees by contractors
  • Analysis of actual figures vs budget

Investigation

  • Often done internally by inexperienced staff members and not reported to police
  • Often complex and requires careful planning to increase the likelihood of recovery
  • Needs to be conducted on the assumption that it will end up in court
  • Consideration must be given to legislative requirements, such as the Privacy Act, the Workplace Surveillance Act, the Independent Commission Against Corruption Act, etc
  • Should be undertaken by a suitably qualified, experienced and impartial person.

Public Sector Fraud

  • Individuals claiming benefits to which they are not entitled
  • Individuals evading payments to government, eg taxes
  • Individuals contracting to the government to provide goods and services and failing to act as they have been contracted to do, eg incomplete delivery or no delivery at all
  • Providing hourly rates at less than commercial rates and then increasing the number of hours worked, or “bumping” up less qualified staff to higher roles.