White collar fraud otherwise known as occupational fraud and abuse can affect any business from an SME through to a large multi-national company. All it takes is one person within the business to use their position for personal enrichment through the deliberate misuse or misappropriation of company resources or assets1 for the business to be a victim of fraud.
The difficulty arises in discovering fraud before it escalates to a level that could jeopardise the on-going viability of the business. This occurred to a client recently as a result of their finance administration manager completing and lodging the company's quarterly business activity statement to the Australian Taxation Office ("ATO") reporting the GST liability and PAYG tax obligations and remitting the GST payable but diverting the payment for PAYG tax to his personal bank account. He managed to conceal his fraudulent behaviour for fifteen months and misappropriated approximately $330,000. In most circumstances, when a perpetrator is successful in misappropriating assets they will continue to fraudulently acquire assets or funds as greed or financial need escalates. With each fraudulent transaction, the amounts generally increase over time and the perpetrator tends to get careless in the concealment of their activities. This leads to discovery of the fraud by accident or through co-workers reporting the perpetrator to the company executives.
The first step is to realise that fraud can occur in any business, the old saying "it will never happen to me" could be the most detrimental business mistake made. An open mind and awareness of the day to day operations of the business will assist in identifying possible indicators of white collar crime, commonly referred to as "red fl ags". The identification of any one of the red fl ags listed below is not conclusive evidence of the existence of fraud but as you start placing more ticks in boxes, the likelihood that fraudulent behaviour is occurring increases.
- Are you aware of any employees complaining of personal financial difficulties?
- Has an employee's way of life changed significantly without conceivable reason or does an employee appear to live beyond their means?
- Are you aware of any disgruntled or resentful employees?
- Do any employees carry on a business of their own outside their employment with the company?
- Are you aware of any employees with drinking, gambling or drug problems?
- Are there employees that have a particularly close relationship with the company's suppliers or customers?
- Are there employees that do not take their holidays or only take holidays for two or three days at a time?
- Does the business contain departments which operate "above the company's laws and guidelines"?
- Are there departments that are rarely reviewed by management or performance results questioned, whether good or bad?
- Is there adequate segregation between the custody of assets and accounting for those assets?
- Is separate authorisation of transactions required when a person is dealing with company assets? Is there always more than one person involved and aware of all transactions?
- Is there any separation of accounting duties between accounting functions such as different employees maintaining accounts receivable and accounts payable?
- Do you have unrealistic budgets in place and is the level of employee remuneration dependant on achieving budget targets?
- Is too much trust placed in key employees?
- Does the business conduct thorough background checks on potential employees, including speaking with all referees and confl ict of interest checks where appropriate?
Detection of Fraud
Never discount the possibility of an employee committing fraud. Fraud frequently involves the most unlikely employees including key people who have been with the company for a long time or someone whom you place a great deal of trust in. Our finance administration manager in the case above had been with the company for twenty-seven years and the directors trusted him without question in managing the financial affairs of the business.
Enforce annual holidays. If a fraud is occurring, the perpetrator is generally unwilling to take leave for fear of abnormalities in accounting records or procedures arising that require concealment or explanation. A large number of frauds are detected by accident and at a time that the perpetrator is on sick leave or holidays and another employee steps in to assist in their role.
Ask questions. Employees typically become aware of changes in a coworker's behaviour, lifestyle habits or unusual actions displayed while completing their daily tasks. Maintaining an open environment where employees can freely speak to company executives and where management enquires of employees if they are aware of unusual behaviour displayed by co-workers or disgruntled or unsatisfied employees often increases the detection of fraud. The accounts payable clerk in our case study company recognised some of the finance administration manager's accounting transactions were out of the ordinary and explanations provided for the "erroneous" correspondence received from the ATO were not plausible. The co-worker refrained from questioning his actions or reporting them to management. This is common where employees feel they are unable to raise questions about the actions of superiors or report their concerns to the company directors for fear of chastisement.
Check personnel records. Ensure that former employees are removed from the payroll system, signatory lists, computer and email access. This will eliminate the use of previous employee's details in establishing ghost employees. This facilitates the processing of accounting journals to avoid detection of the perpetrator and to misappropriate additional wage payments that are re-directed to existing employees bank accounts. The use of employee details to redirect additional funds occurred in another case where an office administrator in a small company managed all accounting functions and had access to internet banking which enabled her to create additional employees and redirect the wage to her personal bank account. A simple check by the directors of the weekly payroll report and the bank account numbers to which payments were being made would have highlighted multiple wages being paid to the one bank account.
Analyse financial statement figures. A simple line by line analysis of the profit and loss statement comparing the income and expenditure items from one period to prior periods will highlight items which have fl uctuated significantly. Further analysis of the highlighted items should be conducted to understand the nature of transactions contained within the income or expense item. "Soft" expenses such as consulting and advertising are often target accounts used in accounting for fraudulent transactions. The office administrator who maintained the entire accounting system utilised petty cash, inventory and shipping cost accounts to conceal monies directly transferred to her personal bank account.
Establish a whistleblower service. The establishment of a telephone hotline provides a neutral and anonymous way of reporting suspect actions or known fraudulent activity. Often employees and other stakeholders are reluctant to report fraudulent behaviour, especially in the circumstances involving an employee in a more senior position than theirs, for fear of not being taken seriously or retribution. The success of a whistleblower service is dependent on the monitoring of the service and following up on all information disclosed.
Fraud deterrence is the process of eliminating the opportunity for employees to commit fraudulent activities. Deterrence can be introduced through strong internal controls and employee awareness of the company's pro-active fraud detection methods and consequences in the event that an employee is discovered perpetrating fraud.
Internal controls including the segregation of office duties, separation between accounting for assets and custody of the asset (particularly cash and inventory) and the requirement for at least two people to be involved in every transaction through authorised signatories. These controls help to maintain a system that provides less opportunity to commit fraud. Weak internal controls in our two case studies provided the opportunity for the employees to commit fraud and substantial losses were incurred by both businesses.
Publicised checks on transactions and accounting records, an open communication policy, surprise audits and the establishment of a confidential system of reporting suspicious behaviour will all assist in deterring fraudulent behaviour through the perception that should someone choose to commit fraudulent behaviour they will get caught.
Investigating fraud and prosecution
The investigation of fraud can be commenced by the company in collating documentation that supports the belief that company assets may have been misused or misappropriated by one or more employees. The use of a forensic accountant is beneficial to the investigation of fraud in that the forensic accountant relies on the company records to confirm the occurrence of fraud, uncover the extent of the fraud, identify the methods used by the perpetrator, establish the identity of the perpetrator in the event they are unknown and any collusion that may have taken place, assess the value of the fraud in dollar figures and prepare a brief of evidence that can be used to confront the perpetrator(s).
In the event that the company chooses to make a claim for economic loss in an attempt to recover restitution from the perpetrator under the civil law system, the work carried out by the forensic accountant and the evidence collated can be used to prepare a detailed report for submission to the Courts.
If the company chooses to criminally prosecute, the use of a forensic accountant is essential in preparing the case for the police to pursue by providing a detailed brief of the crime including how the crime was perpetrated and explaining complex accounting treatment in simplified terms, marshalling evidence, and conducting any further investigations require by the fraud squad in preparing a case to prosecute the offender.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.