Internal fraud poses a risk to NFPs and businesses of all sizes. Better accounting practices can help ensure that fraud is detected and your funds are protected.
‘Million Dollar Employee Fraud in Australia’, the seventh major fraud research study since 2008 from Warfield and Associates, looks at cases where employees were convicted of major fraud. The study compiled by the accounting and corporate investigations firm exposes the methods fraudsters used and the damage they caused. It recommends that “Being proactive with regards to fraud control is important for all sized organisations.”
The study findings act as a horrible but very useful warning, and may prompt NFPs and businesses to improve their systems to prevent internal fraud practices – or at least expose them early on.
There is a place for trusted outsourced accountants who can implement the best processes and technology to monitor and deter fraudulent practices within an organisation.
The serious impact of internal fraud
The ramifications of internal fraud can be devastating for NFPs and SMEs, even when the fraudulent practice has been detected and stopped. Quite often, the perpetrator is unable to repay the funds stolen. The Warfield study notes that, “The likelihood of repayment by the perpetrator/s was also diminished by the existence of a severe gambling problem, as most of the fraudulently obtained funds were used to gamble.”
Fraud-based losses can force organisations to downsize, sell assets or even liquidate. Associated impacts include employees retrenched and branches or stores closed. Longer term there can be issues with meeting payments, including extra mortgage costs or servicing the ATO debt for the diverted funds. There may also be difficulty obtaining insurance or an increase in insurance premiums. Uncovering the fraud itself involves additional costs, such as the extra staff time spent documenting the problem, forensic accounting fees and legal fees.
The study indicates that, “Small businesses or not-for-profit organisations may not be able to survive if the amount is large enough to deplete their financial resources.”
Other adverse impacts could be stress on owners and other staff members, plus reduced trust and dysfunctional relationships within the organisation.
The damage that fraud cases inflict on an organisation’s image can also be costly. For large organisations that might otherwise “absorb their frauds with little apparent impact on their operations”, negative publicity is actually a key concern. The study points out that, “The vast majority of the frauds included in this research were publicised by the media.” If it is a small business, that tarnished image may potentially lead to a loss of vital commercial opportunities. For NFPs, “Stakeholders, who provide grants or make donations, may also question their wisdom in choosing that organisation to contribute scarce resources.”
Given the heavy costs associated with internal fraud, outsourced accounting services that detect fraud or protect the organisation can be regarded as a valuable investment.
Protection against internal fraud
Businesses and NFPs can learn from the 102 cases of million-dollar fraud in the Warfield study and implement better ways to operate. Some key lessons that can be taken from the case studies of fraud-affected Australian organisations include:
- Don’t allow one person to count the cash takings, prepare the deposit slip and undertake the physical banking of cash.
- Scrutinise creditors to ensure payments are not being paid to fake creditors.
- Ensure there is segregation of duties in changing credit or bank account details.
- Introduce a reporting trigger to notify customers or management within the financial institution of reversing receipts for payments which puts accounts temporarily into a negative balance.
- Conduct background checking / pre-employment screening processes to identify staff with criminal history.
- Review controls over EFT with an expert who can spot where the systems can be manipulated.
- Train staff to be focused rather than blasé when conducting regular checks and balances.
An outsourced accounting service can help by increasing staff vigilance and teaching them how to spot the signs of fraud.
Making your organisation safer
As we noted in our recent article on payment redirection scams, to combat financial risks – whether they are external scams or inside jobs – your organisation can introduce accounting strategies that segregate duties and add controls.
Talk to us about how our outsourced accounts service can reduce the risk of fraud. From providing accurate and detailed budgets that highlight unusual expenditure to freeing up the CEO to monitor the business, our team can help make your organisation safer.
For more information, contact the Next Dimension team.
