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.