- A recent survey on fraud in Australia confirms the trends Freehills has previously reported to clients that:
- the incidence and value of frauds continues to increase, and
- employee fraud is the most prevalent and accounts for the largest value frauds.
- Employers can and should take steps to minimise the risk of fraud. Increasingly also, employers should explore avenues to recover assets lost to fraud as recent cases demonstrate that recovery is a real possibility.
Fraud: the facts
KPMG’s latest Fraud and Misconduct Survey released on 8 November 2010 found that, between 2008 and 2010:
- the amount of money lost to fraud increased by 13% to a total of $345.4 million
- the average loss from fraud doubled between 2008 and 2010 to a total of $3 million, and
- fraud continues to predominantly affect larger organisations, particularly those in the finance and insurance sector.1
Who were the perpetrators?
The largest frauds, and 65% of all frauds, were committed by employees (so-called ‘inside jobs’). Employee fraud was reported to be generally the work of non-management employees acting alone, with the main motivators being greed and lifestyle factors.
How did they do it?
Employee fraud mostly involved the manipulation of internal accounting systems in the form of:
- theft of cash
- diversion of sales (for example, through false invoicing or the creation of ‘dummy’ payees), and
- cheque tampering.
How was it detected?
The survey found that most frauds were detected by internal controls or by reports of unusual activity from external sources, for example banks.
How should employers guard against fraud?
Establishing and maintaining tight internal controls offers the best chance of early detection of fraud and can even minimise the opportunities for fraud.
Companies should plan against fraud from the Board level down, to establish a zero tolerance organisational culture, for example by:
- implementing, and regularly reviewing, a fraud detection program which allows for strategic use of the internal audit function to identify trends
- conducting regular fraud awareness training for all staff
- nominating a Fraud Officer for the business and establishing line management accountability for control of fraud
- using comprehensive pre-employment screening, including criminal checks and investigating gaps in employment history, and
- developing a whistleblower policy to allow for internal reporting of suspected malfeasance.
Fraud ‘stress testing’ is an emerging strategy employed by businesses to test the effectiveness of their ability to control and detect fraud.
The Australian Standard 8001-2003 ‘Fraud and Corruption Control’ is a useful guide for employers in establishing a minimum standard in fraud control.
Can you recover your money?
Yes! It is often possible to recover defrauded funds, provided the organisation acts swiftly following detection.
Freehills recently acted for Clive Peeters Limited in a case of fraud by the payroll manager in which the company was able to recover over $16 million of its $19 million loss due to a timely and strategic approach to investigation and recovery. Recently, Flinders University was also able to recover $13.9 million of $20.5 million that was diverted by a cashier.
Immediately following detection, companies should establish an investigation team and weigh the options as to whether suspension or dismissal of the employee is appropriate. In some instances, the company may get the cooperation of the employee at an early stage, prior to or during suspension, while they work to establish the extent of the fraud. Often that cooperation ceases when the employment is terminated.
For publicly listed companies, ASX disclosure may be required if the scale of the fraud is likely to be price sensitive. In such cases, Listing Rule 3.1 requires that disclosure be made to the ASX immediately and prior to disclosure to any one else in the public.
Legal requirements for reporting fraud to the police vary from state to state, but generally immediate notification to police of the suspected fraud is appropriate.
Given the size of many frauds and the speed with which large amounts of money can be stolen, we are noticing cases where, at the time of detection, the employee has not had the opportunity to fully dissipate the stolen funds. In some cases, the funds have been held in bank accounts, valuable assets or invested in traceable assets such as real property or shares. In this case, the employer has reasonable prospects of recovering the defrauded funds.
Injunctions offer the quickest and most effective means of recovery.
If granted by the court, injunctions can freeze property and assets and allow the company to obtain information to assist in the recovery of the defrauded amounts. Injunctions are subject to close supervision by the courts and are only granted where the employer is able to establish a strong prima facie case that the fraud has been committed, the damage to the company is significant, and there is a strong likelihood that the assets will be dissipated by the time a final judgment is entered.
There are two types of injunctions:
- Mareva injunctions (also known as freezing orders) restrain a person from removing from the jurisdiction of the court, or otherwise accessing, certain assets, for example bank accounts, and
- Anton Pillar orders, which permit the company to inspect the employee’s premises to search for documents, computers and company records relevant to the fraud.
Implications for employers
- Employee fraud continues to present a significant business risk, particularly in large organisations.
- It is critical for companies to be prepared for fraud by having in place:
- appropriate pre-employment screening
- effective and ‘stress tested’ internal controls in accounting systems
- a coordinated fraud response strategy, and
- a whole-of-organisation commitment to ethics.
- Proceedings for recovery of misappropriated funds are effective and more common.