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This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.


Dealing with employee fraud

Employee fraud is on the rise in Australia, putting many companies out of pocket and, in some extreme cases, even out of business. With recent reports suggesting that employee fraud can cost Australian businesses anywhere up to $18 billion annually, the truth is that we just don’t know how much is lost through fraud every year.

Many offenses go unreported as business owners prefer to dismiss those involved and suffer the losses rather than bear the associated embarrassment, the risk to reputation of the business or the costs and distraction of lengthy court proceedings. Furthermore, a great number of offences go undiscovered as many businesses do not have systems in place to uncover fraud even where it may be suspected.

Nonetheless, it is clear that the number of fraud offences is rising. In its September 2008 quarterly report the New South Wales Bureau of Crime Statistics revealed that the incidences of fraud increased by a staggering 19.1 per cent from the previous quarter. Fraud was the only major category of crime to show an upward trend during this period.

The growth in fraudulent activity appears to be consistent with increasing concerns about the state of the global economy. While past reports have suggested that the key motivations for committing employee fraud are greed and gambling, many experts believe that the prime motivation for much of today’s fraud stems from financial strain. Employees faced with financial difficulties such as being unable to make mortgage repayments or struggling with their children’s schooling may be tempted to ‘borrow funds’ from the business. Generally, the individual will begin with a small defalcation with the size of the offences escalating as he or she discovers that they have not been caught out.
Today, the variety of schemes used to defraud a business is astounding and can range from falsifying expense claims to setting up a secondary business and submitting false or inflated invoices. Some of the most common fraudulent practices include:

• Falsifying invoices

• Falsifying expense claims

• Creative accounting and unauthorised adjustments to financial statements

• Manipulating computer data

• Electronically transferring funds into personal accounts

• Receiving kickbacks from suppliers

• Payroll fraud including the creation of ‘dummy employees’; and

• Misappropriating company assets or funds.


Notwithstanding the financial loss to the business, the consequences of employee fraud can be devastating. Perhaps the biggest fallout for a business is the sense of betrayal that can follow such an offence. Research has revealed that the most likely offender is a long serving, trusted employee. In fact, in the majority of cases it is the trust placed in the employee that allows the offence to take place. He or She is often an individual with access to secure information and company finances and who has been with the business for long enough to spot any potential loopholes or opportunities for defalcation. Moreover, due to their position of trust, his or her work and activities often go unchecked.

Furthermore, many businesses are faced with the ugly truth that the offender is a business partner or director. In their report ‘Serious Fraud in Australia and New Zealand’ , the Australian Institute of Criminology Research and PriceWaterhouseCoopers found that in the majority of serious offences (those involving a loss of over $100,000) the employee involved was either a director or accounting professional.

The reputation of a business may also be jeopardised when fraudulent activity is brought to light. One need only look at the press coverage surrounding the recent cases of St George Bank, Railcorp and the French Bank, Societe Generale to see the damage that can be caused. While a small business is unlikely to be faced with the same media attention, its reputation may still be tainted in the local community and it may have difficulty attracting new clients and retaining the trust of older clients.

Strategies to minimise the risk of fraud

As highlighted in table 1, the majority of fraud cases occur where the employee is given unconditional trust and the business has inadequate financial controls and checks. As such, a high proportion of fraud can be avoided with the implementation of some straightforward strategies. Table 1 summarises some of the strategies available to every business whether it employs just two individuals or has a workforce of over one thousand.

Table 1:

Implement a code of conduct

The code of conduct should make clear that fraudulent activity on all levels will not be tolerated and will be dealt with severely. It should outline the steps to be taken if an employee suspects another individual of fraud and provide guarantee of anonymity for any employee reporting fraudulent activity.
Review internal controlsIt is important that employee activities are carefully monitored and controlled no matter how well trusted an individual may be. Comprehensive cross checks should be implemented including those of weekly bank reconciliations and monthly accounts. All cheques over an agreed amount should require two signatures.
Segregate cash handling and financial reporting dutiesNo single individual should be responsible for, or have access to, more than one of the following:·         The ability to make entries in the accounting records.·         Access to cash or business assets.·         The ability to authorise transactions above an agreed amount or move business assets.
Spot check outgoing invoices and electronic funds transfers (EFT)In a busy working environment it can be difficult for the authorising officer to check the bank details and amount of every outgoing payment. Often accounts payable are given little more than a cursory glance. It is, however, important to ensure that all outgoing invoices and EFT payments are spot checked regularly.
Conduct regular auditsThe majority of fraud cases are discovered during internal audits. It is important to conduct audits on a regular basis. Not only will it increase the chanced of revealing any discrepancies but an audit also shows employees that the business is aware of movements in its inventory assets.
Screen new employees and suppliersAll new employees should be screened thoroughly and references should be checked. It may also be useful to screen suppliers and other related third parties where they work closely with the business.
Monitor employee behaviorBusiness owners should look out for employees who work late or rarely go on holidays. Such individuals may appear diligent but they may have ulterior motives for wishing to be in the office alone. Additionally, lavish spending or living out of his or her means could be a red flag indicating a possible offence.
Hold fidelity insuranceFidelity insurance protects the business from loss of money, securities, inventory and assets that may result from a crime committed by an employee.


What can you do if you are a victim of fraud?

Even if you implement all of the above strategies it is possible to become an unwitting victim of fraud. As mentioned above many businesses choose not to prosecute the offender due to embarrassment, a risk of reputation or fear of spiraling legal costs when they have already suffered financial loss.

The costs associated with recovering fraud losses, however, can frequently be lower than anticipated and the recovery of losses may be in the business best interests. Following allegations of employee fraud a forensic accountant is often appointed to investigate the value of the financial loss. Sophisticated offenders generally go to great lengths to cover their tracks with a series of complicated accounting treatments. An experienced forensic accountant should be able to pull together a number of accounting skills including calculation and auditing techniques to untangle the details of the crime and provide an objective and accurate assessment of the losses involved.

Bryony Vandepeear
My Business, April, 2009


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