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Fraud in your business - Some things to know

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Wayne Gilbert


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Fraud in your business - Some things to know

Posted 15 Feb 17 by Wayne Gilbert

Board members and management are responsible for ensuring that robust risk management systems, processes and procedures are in place within an organisation. Further, they need to ensure that these systems, processes and procedures change to meet the needs of the organisation as it changes.  Not appropriately addressing the risk of fraud can lead to significant financial losses for an organisation and in some cases reputational damage.

The findings of the Association of Certified Fraud Examiners (ACFE) in their “Report to the Nations on Occupational Fraud and Abuse” has again emphasised the need for directors, business owners and management to be vigilant when it comes to fraud and corruption.

Some of the more notable finding in the report from those surveyed included:

  • organisations lose 5% of revenues in a given year as a result of fraud;
  • asset misappropriation (cash, inventory and/or plant and machinery) was the most common type of fraud; and
  • in over 94% of cases the offenders attempted to conceal the fraud by creating and altering documents. 

The findings also revealed that there was a correlation between the period an offender had worked at an organisation and the size of the fraud. Indeed, the size of fraud losses, were found to be significantly higher the longer the offender had been employed with the victim organisation.

Common weaknesses we have found when undertaking fraud investigations, and some of which were also observations made in the ACFE report, include:

  • insufficient segregation of duties;
  • lack of management review;
  • poor record keeping practices;
  • failure to sight original documents; and
  • “trust” being a main contributor to a breakdown in process - with trust being placed in employees and management without sufficient controls to prevent or detect fraud if that trust is breached.

It is therefore paramount that directors, business owners and management alike set the appropriate “tone” of their respective organisation. Firstly, through the implementation of policies which promote the values of the organisation and also provide effective internal controls and governance. Secondly, by demonstrating an adherence to those policies and appropriately investigating any ethical concerns raised by employees or suppliers. The “tone” will infiltrate through an organisation.

The ACFE report also revealed that tips were the most common detection method of fraud.  We believe that to further enhance good governance, due consideration should be given by directors, business owners and management in implementing mechanisms that will provide employees and suppliers an avenue to raise ethical concerns without fear of it negatively impacting either their employment or contractual arrangements. One mechanism that has been shown to be effective is an independently run Whistle-blower Hotline service that allows ethical concerns to be raised anonymously and/or confidentially via the telephone, email or post.

Whilst it is important to ensure that there are appropriate prevention and detection mechanisms in place to both deter and detect fraud within an organisation it is equally as important that an organisation has a framework in place to respond to fraud issues once they have been detected.  Not responding to these matters effectively can lead to further losses (litigation, fair work costs) and can also have a detrimental effect on the reputation of the organisation.

So, what does an organisation need to do to effectively respond to a fraud issue which has been detected?  Some things to think about are listed below:

  • Assess the situation—what type of fraud is it
  • Seek support and guidance from experts
    • One question to ask is “do we have the required expertise to investigate this fraud in-house?  If not, ensure that you have identified resources that can assist.
  • Communication—only those within the organisation that need to know what has occurred should be informed.  The number of people that need to know will change during the course of the investigation.  However, too many people knowing about the issue can jeopardise the investigation.
  • Make sure you develop an investigation plan that is consistent with your own Misconduct disciplinary policies and procedures and ensures that natural justice is observed.
  • Ensure that the investigation plan gives consideration to the sources of evidence and how that evidence might be lawfully collected.
  • Ensure that evidence is collected in a manner which will give it the best chance to be admitted into evidence at a later date.
  • What is the investigation strategy?  Is the investigation primarily being conducted to seek restitution for the alleged perpetrator; or to ensure that the matter is reported to the police for prosecution only.  Each of these pathways may require a different approach and different experts to assist.
  • Ensure that when interviewing any alleged perpetrator that your interviewers have the necessary skills to carry out that task—and always ensure that the alleged perpetrator is treated fairly and the principles of natural justice are applied.

Fraud is a risk that needs to be mitigated within organisations.  Policies, processes and procedures need to change as an organisation changes to ensure that they meet the needs of the organisation.  It is important to make sure that prevention, detection and response mechanisms are in place.  Ultimately the responsibility for ensuring that this happens wrests with directors and senior management.  However, we should not forget that all personnel within an organisation have the responsibility to prevent fraud.


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