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Final report

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Final report

  1. 1. 1 UNIVERSITY OF MELBOURNE Department of Accounting ACCT20006 Business Forensics and Fraud Assignment Coversheet Only one coversheet (signed by all students) is required per assignment. 1. ADMINISTRATIVE DETAILS: Assignment Due Date: 2:15pm Thursday 18 th September 2013 Is this assignment being submitted late? Yes / No (please circle)  If yes, have you received an extension? Yes / No (please circle) Please submit this completed coversheet with your assignment to: Jennifer Grafton In class during seminar 8. Or if your assignment is late to: Room 08.023, Level 8, 198 Berkeley Street Department of Accounting The University of Melbourne Victoria, Australia 3010 Ph: +61 3 8344 7662 Fax: +61 3 9349 2397 email: j.grafton@unimelb.edu.au 2. COMPULSORY STUDENT DECLARATION DETAILS: Plagiarism Plagiarism is the act of representing as one's own original work the creative works of another, without appropriate acknowledgment of the author or source. Collusion Collusion is the presentation by a student of an assessment task as his or her own which is in fact the result in whole or in part of unauthorised collaboration with another person or persons. Collusion involves the cooperation of two or more students in plagiarism or other forms of academic misconduct. Both collusion and plagiarism can occur in group work. For examples of plagiarism, collusion and academic misconduct in group work please see the University’s policy on Academic Honesty and Plagiarism: https://academichonesty.unimelb.edu.au
  2. 2. 2 Plagiarism and collusion constitute cheating. Disciplinary action will be taken against students who engage in plagiarism and collusion as outlined in University policy. Proven involvement in plagiarism or collusion may result in penalties in accordance with Statute 13.1.8. STUDENT DECLARATION Please tick to indicate that you understand the following statements: We declare that:  This assignment is our own original work, except where we have appropriately cited the original source (appropriate citation of original work will vary from discipline to discipline).  No part of this assignment has been previously submitted for assessment in this or any other subject. For the purposes of assessment, I give the assessor of this assignment the permission to:  Reproduce this assignment and provide a copy to another member of staff; and  Take steps to authenticate the assignment, including communicating a copy of this assignment to a checking service (which may retain a copy of the assignment on its database for future plagiarism checking). Student Name: Student Number: Signature: 1.SarrahSharul Amin 566072 Sarrah 2. FatinAttirah Othman 567827 Fatin 3. You Li 672905 Eric 4. Anqi Ouyang 689229 Kyle 5. Nicole Jia Hui Goh 704455 Nicole
  3. 3. 3 Abstract This report focuses on the ASX listed entity, Clive Peeters Limited, and the major fraud committed against the entity in 2007, which contributed to its eventual downfall. First, it highlights the background of the perpetrator, the reasons for her to commit such a crime, and the eventual detection of the fraud. Then, the failures in the corporate governance environment, which might have left the entity exposed to such a threat, are discussed and analysed. This report concludes with recommendations to prevent the recurrence of a similar episode.
  4. 4. 4 Content 1. Overview of the Fraud ..............................................................................................................................5 1.1 The Perpetrator...................................................................................................................................5 1.2 Elements of Fraud...............................................................................................................................6 1.2.1 Theft and Concealment................................................................................................................6 1.2.2 Conversion ...................................................................................................................................7 1.3 How the Fraud was Detected..............................................................................................................7 2. Factors Contributing to the Fraud.............................................................................................................8 2.1 Perceived Pressure..............................................................................................................................8 2.2 Perceived Opportunity........................................................................................................................9 2.3 Rationalisation ..................................................................................................................................10 3. Failure in Corporate Governance environment......................................................................................10 3.1 What is Corporate Governance?.......................................................................................................11 3.2 No “one size fits all” in Australia.......................................................................................................11 3.3 Lack of effective audit on corporate governance.............................................................................13 3.4 Lack of Education..............................................................................................................................14 3.5 Conclusion.........................................................................................................................................15 4. Outline of the recommended internal fraud management policies and procedures ............................15 4.1 Setting the Proper Tone....................................................................................................................16 4.1.1 Creating Culture of Honesty and Ethics.....................................................................................16 4.1.2 Creating an expectation of punishment ....................................................................................17 4.1.3 Open-Door Policy.......................................................................................................................17 4.1.4 Fraud Awareness Training Programme......................................................................................18 4.2 Proactive Measures...........................................................................................................................19 4.2.1 Good internal controls...............................................................................................................19 4.2.2 Whistleblower System ...............................................................................................................20 4.2.3 Conducting proactive auditing...................................................................................................20 4.2.4 Sufficient expertise in the audit committee ..............................................................................21 References ..................................................................................................................................................22
  5. 5. 5 1. Overview of the Fraud Clive Peeters Limited was an electrical retailer listed on the Australian Stock Exchange (Clive Peeters Limited, 2009). Up until 2010, Clive Peeters had 1,300 employees with 44 stores across Australia (Greenblat, 2010). Between 2007 and 2009, “one of the largest, if not the largest, thefts perpetrated by a person in the position of trust in the history of (Australia)” occurred in Clive Peeters (R v Causer, 2010). The fraud was committed by one of the company‟s senior financial accountants, Sonya Causer, who embezzled a total of $19.365 million of the company‟s assets over the two-year period, covering her tracks by falsifying payroll-related transactions. When the fraud was uncovered in 2009, Clive Peeters went ahead in its civil action against Sonya to recover the misappropriated assets (Battersby& McIlwraith, 2009). The company managed to recoup $16.3 million, giving an overall net loss of a little over $3 million (R v. Causer, 2010). Due to worsening trading conditions, Clive Peeters appointed McGrathNicol as their voluntary administrator in 2010, and stopped trading on the ASX (Janda, 2010). Harvey Norman then bought Clive Peeters soon after, converting some of the Clive Peeters stores into Harvey Norman and Joyce Mayne stores, while closing the rest (Zappone, 2011). 1.1 The Perpetrator Sonya Causer, a mother of two children, joined Clive Peeters as a Senior Financial Accountant at its head office in Bayswater North in 2006. In April 2007, she was promoted to Payroll Manager and had full access to the company‟s payroll systems. Sonya was in charge of salary payments to employees; payment of superannuation contributions; and the remittance of group tax and payroll tax to the Australian Taxation Office and State Revenue Offices (R v. Causer, 2010). She was granted access to the company‟s online bank account, and given the authority to revise the company‟s general ledgers and online bank account number (Carson &Battersby 2009; R v. Causer, 2010).
  6. 6. 6 The wide responsibilities and authorities held by a single personnel of the company, along with other factors, played an important role in this fraud, which went undetected for two years. According to Carson and Battersby (2009), the fraud could have been detected earlier had the board of directors not been too focused on their cost reduction plans, in response to their unexplained deteriorating cash flow. 1.2 Elements of Fraud The three elements of fraud are: (i) theft, where the company assets were taken by the perpetrator; (ii) Act of concealment, where the perpetrator attempts to cover up this act; and (iii) conversion, which sees the perpetrator converting the stolen assets into money and spending it afterwards (Albrecht, Albrecht, Albrecht, &Zimbelman 2008). These elements will be explored in further detail below. 1.2.1 Theft and Concealment Between July 2007 and July 2009, Sonya misappropriated $19 million of the company‟s funds through a total of 90 withdrawals involving 125 individual payments to 8 bank accounts (R v. Causer, 2010). According to forensic accountant Dean Newlan, Sonya used Clive Peeters‟ online bank account to withdraw money by changing the payee's genuine account numbers to accounts controlled by her (R v. Causer, 2010). Sonya manipulated the company‟s general ledger by creating „normal‟ payroll transaction journal entries. The company‟s PAYG Clearing Account, which was used to record the withholding tax collected from employees wages and other employee-related payments (Australian Taxation Office), was abused by Sonya to cover her fraudulent activities for a year. She began by debiting the PAYG Clearing Account and crediting the bank account. When the accumulated debit amount of the PAYG clearing account became too huge to conceal, she then credited the PAYG clearing account and debited the „Trade Creditors Control‟ account.
  7. 7. 7 Though blocked out from the sub-ledger records stored in the IT department, she capitalised on the fact that employees usually look up the „flat text file‟ for details of transactions instead of referring to the sub-ledgers. Hence, no employees detected the discrepancies between the general ledger and sub-ledger, allowing Sonya to remain undetected for two years. 1.2.2 Conversion At the time the fraud was discovered, Sonya had 44 properties registered under her name or that of her companies‟, in addition to 3 vehicles, some jewellery and Clive Peeters‟ shares (R v. Causer, 2010). 1.3 How the Fraud was Detected The fraud was discovered in 2009 when Sonya‟s colleague, Peter Katsipodas, printed the sub-ledgers requested by the auditor for their annual audits. These sub-ledgers are stored in the IT department, which Sonya did not have access to. He „accidently‟ checked the balances of these sub-ledgers and the general ledger, and noted that there was a variance of $2 million, which he tried to track by creating a new spreadsheet with Sonya‟s assistance. During the investigation, Peter saw that Sonya had changed the figures in the new spreadsheet, which he reported to the company‟s finance controller, Steve Rowarth, unbeknownst to Sonya (Carson &Battersby, 2009; R v. Causer, 2010). Sonya alleged that what she had done was to mitigate stress for the company, and only admitted forging $5 million at first. As the figures still did not tally with the sub-ledgers, further investigations revealed a total variance of $19.3 million (Battersby&Mcllwraith, 2009). The company then denied Sonya access to their financial system and searched her emails. They then found deleted payments in bank statements and payee‟s account numbers that varied from the company records (Battersby&Mcllwraith, 2009). Sonya was entrusted by the company to deal with its funds, being the senior accountant of the company after all. Her obligation was to carry out her tasks honestly and transparently, yet she leveraged on the trust and employee discretion given to her to commit such a crime. During the
  8. 8. 8 court trial, Justice John Forrest said that Sonya‟s crime “was sophisticated and involved a degree of planning” to it („Delusional Senior Accountant‟, 2010) 2. Factors Contributing to the Fraud Figure 1: Donald Cressey‟s Fraud Triangle (Albrecht et al., 2008) Three key elements must be simultaneously present in order for a person to engage in fraud: Perceived Pressure, Perceived Opportunity and Rationalisation. These factors are interactive; the greater the perceived pressure or opportunity, the less rationalisation is needed for the perpetrator to commit fraud (Albrecht et al., 2008). 2.1 Perceived Pressure The element of perceived pressure refers to the motivation or incentive of a person to commit fraud which can come from almost anything such as debt, expensive tastes or addiction problems (Albrecht et al., 2008). Sonya Causer and her present husband Michael, have two children, Deakin and Kirralee, both of whom suffer from autism and behavioural and intellectual disabilities. It was revealed that Deakin suffers from Autism Spectrum Disorder and has significant learning and behavioural difficulties, which requires intensive support in all aspects of day to day living and constant supervision. Kirralee also has Autism Spectrum Disorder, with similar delays in her development to those of Deakin (R v Causer, 2010). Michael had quit his job and had been the primary carer for the children, with Sonya taking over for the weekend. The strains of taking care of her children with challenging behaviour, has placed considerable stress on her marriage and home life. Dr Catherine
  9. 9. 9 Lynch, paediatrician of both children, had made the remark that stresses on families caring for children with disabilities are “enormous, chronic and ongoing” (R v Causer, 2010) The Victorian Supreme Court heard at her plea in 2010 that she “lived a lonely existence with no friends and no one to confide in”. In sentencing, Justice John Forrest accepted that Causer was suffering from a delusional disorder due to work pressures, marriage problems and stressors associated with raising two autistic children, and an element of depression which led her to believe that she was a “property guru” (Petrie, 2010). 2.2 Perceived Opportunity Opportunity refers to a person‟s ability to commit and conceal fraud, while believing that he or she will not be caught. (Albrecht et al., 2002). In Clive Peeters, Sonya was able to alter the creditors‟ bank details, such that the funds was directed to her own account instead (R v Causer, 2010). After being promoted to Payroll Manager, Sonya had full access to the company‟s accounting system, the authority to transfer money from the company‟s online-banking system as well as access to the company ledger (R v Causer, 2010). From the court report, it appears that Sonya was the one to both authorise and make payments to creditors. Having many responsibilities delegated to her, coupled with the lack of supervision from both management and other employees in the company, Sonya was able to make 90 withdrawals involving 125 individual payments which amounted to almost $20 million. During her testimony, she admitted it was easy for her to commit the fraud and the fact that she is obsessed with real estate motivated her to do so. (“Deluded accountant”, 2010) There was also a loophole in the company‟s management system, whereby employees of the company only need to check flat text file for transaction details instead of a subsidiary ledger. This allowed Sonya to guise the perpetration just by manipulating the general ledger. It is evident that the lack of internal controls in Clive Peeters, such as segregation of duties, poor system of authorization and independent checks, provided opportunities for Sonya to commit the fraud. Although the company did employ external auditors, the fraud was only discovered during an annual audit when the accountant noticed a discrepancy of $2 million between the general
  10. 10. 10 ledger and subsidiary ledgers, which blew up to $19.3 million upon further investigation (Carson &Battersby, 2009). If more effective controls were put in place, the fraud might have been discovered earlier or not even have occurred at all (Jans, Lybaert&Vanhoof, 2011). 2.3 Rationalisation Rationalisation occurs when fraudsters have to convince themselves that their act is not wrong with accepted notions of morality and trust even though they know it is not ethical (Albrecht et al., 2008). At the time when Sonya became obsessed with buying and selling real estates, Prosecutor Peter Kidd was quoted in saying that “(she) said it was never about the money, rather it was about the negotiations and dealings with the real estate agents” (Carson &Battersby, 2009). Clive Peeters‟ Managing Director, Greg Smith, also said that Sonya “did obviously have a passion for property and loved buying and selling property, (she also) liked going to auctions and being the winning bidder” and remembered hearing Sonya say that she was interested in negative gearing and building up a property portfolio (Draper, 2010). In addition to the 44 properties controlled by Sonya, she also purchased a motor vehicle for herself, a motorbike for her husband, jewellery and some Clive Peeters shares. Perhaps she thought that this was her „reward‟ for the long-term care of her children, both of whom had special needs and were therefore challenging to look after. However, the value of the „rewards‟ she got for both herself and her husband are not as significant as the extent to which she bought and sold the properties. Thus, it is probable that most of the money stolen from Clive Peeters‟ accounts was to „fund‟ her „passion‟ for real estate, while the rest was used to buy little rewards for both her and her husband for working so hard to raise and care for their family. 3. Failure in Corporate Governance environment Under section 3.1, we will discuss the Australian corporate governance environment generally, and then the ASX Corporate Governance Principles. We will then explore possible reasons on why
  11. 11. 11 the Australian corporate governance environment failed to prevent Sonya from committing the fraud under section 3.2, 3.3, and 3.4. 3.1 What is Corporate Governance? In order to explore reasons why it failed to prevent the fraud, we should first understand what corporate governance itself is. Du Plessis, Bagaric, & Hargovan (2010) stated that there is no single definition for corporate governance. After considering various developments, including findings in the HIH Royal Commission's report, they conclude that corporate governance is a system in regulating and overseeing corporate conduct that takes into consideration all stakeholders affected by that conduct, aiming to ensure socially responsible corporate behaviors, while ultimately strives to maximize efficiency and profitability of a corporation (Du Plessis et al., 2010). This is aligned with the definitions proposed by Brickley & Zimmerman (2010) and Solomon (2010), as well as the one suggested by Justice Owen in a background paper published prior to the Report of the HIH Royal Commision (Background Paper II, November 2001). To put it simple, it is how an organization is managed internally and externally in order to be responsible to all stakeholders. Corporate governance is important because a well-governed company has low risks of fraud and corporate collapse, as well as management acting in the best interest of stakeholders. Good corporate governance can “increase wealth creation by improved performance of honestly managed and financially sound companies” (Bosch, 2002). This is proved later in a study in the United Kingdom conducted by Selvaggi and Upton (2008); where good corporate governance leads to better long term performance. Dechow, Sloan and Sweeney (1996) found that weak corporate governance practices in an organization make it more prone to fraud, highlighting another importance of having a solid corporate governance practices. 3.2 No “one size fits all” in Australia In Australia, the Australian Securities Exchange (ASX) has been developing a set of recommendations of corporate governance principles since 2003, with revisions in 2007 and recently, 2014. Under ASX Listing Rule 4.10.3, introduced in 1996, listed entities must disclose
  12. 12. 12 their corporate governance practices, benchmarking against those principles recommended by the ASX Council (ASX Listing rule). These recommendations are not made mandatory in order to provide flexibility to entities, recognizing that all organizations are different, hence there is no „one size fits all‟ approach (ASX Council, 2014). This flexibility means that if a board considers that the recommendations are inappropriate for their company, they have the discretion to adopt policies that they deemed to be more fitting. However such listed entities must disclose the reasons of doing so, under the „if not, why not‟ approach (ASX Corporate Governance, 2014). Thus from here, it is clearly seen that corporate governance policies that were adopted by companies are subject to the board‟s judgement of what is appropriate for the company, depending fully on their own interpretation of the principles and how to govern their company in the best way. Ramsay and Hoad (1997) highlighted a survey conducted by the Australian Investment Managers‟ Association (AIMA) in 1997 finding that 80 percent of the companies made efforts to comply with the rule, but had imperfect understanding of its purpose and rationale. Furthermore, AIMA reported that 10 percent of the companies who have prepared disclosure statement, did so without proper internal analysis of their own corporate governance. The above findings highlighted the flaws in corporate governance environment; namely, lack of understanding and organizations claiming to comply when they do not. Nearly 20 years passed after this rule was introduced, along with the several revisions of the ASX Principles, reinforced by the Corporations Act 2001, so companies will surely have better understanding of the corporate governance requirement than they did in the 1990s. However, this does not eliminate the chances that there are some companies which still do not grasp the essence of good corporate governance. In Clive Peeters 2009 Annual Report, it is stated that they did not comply with ASX Principle 2.1, where instead of having a majority of independent directors on board, there was an equal split of independent and non-independent members of the board. The reason given by Clive Peeters was that all directors could act in the best interest of shareholders by keeping performance, professionalism and independence in mind (Clive Peeters Limited, 2009).
  13. 13. 13 However, it could be argued here that by having an equal split, the independent directors were unable to challenge the management, as well as to properly represent the stakeholders as a whole, thus not entirely achieving the aim of Principle 2.1 intended by ASX. Since the board is controlled by management, they were too focused on the operation side of Clive Peeters, hence did not represent the interest of all stakeholders. As they are focusing on cutting cost between 2008 and 2009, they missed out the accounting anomalies such as the abnormal rise in tax clearing account, which resulted in the fraud not being detected earlier. Other incompliance with the rules of Clive Peeters is ASX Principle 4.1. It is recommended that the audit committee members should have accounting and financial expertise. However, in Clive Peeters, none of the four members in audit committee have expertise in auditing and none of them have accounting related backgrounds (Clive Peeters Limited, 2009). As a result, Clive Peeters did not establish an effective audit committee to monitor red flags, which probably explained why they did not make it part of their procedures to reconcile the sub-ledger with the general ledger on a routine basis. In addition, if they had paid attention to the accounting anomalies and weak internal control, then the fraud may be detected earlier. Thus, since there is no effective audit committee, the weak internal control system in Clive Peeters is ignored, ultimately leading to the failure of preventing Sonya‟s fraudulent activities. And this leads to our next section. 3.3 Lack of effective audit on corporate governance Lack of an effective audit specifically on an entity‟s corporate governance might give rise to discrepancies between what is intended by ASX Principles and what is understood by the company, as well as companies claiming compliance with the principles when they actually do not. Although external and internal auditors try to find out material misstatements on financial statements, other areas of corporate governance such as the tone at the top on fraudulent activities are left unaudited. An ineffective audit would convey wrong information to stakeholders. Clive Peeters‟s Audit, Business Risk and Compliance Committee declared that their risk management and internal control systems were sound in the Clive Peeters Corporate Governance Statement every year during 2007-2009. Ironically, the fraud was happening at the same time and they declared sound even after fraud was uncovered. The only difference after the fraud was that
  14. 14. 14 the board added an announcement of conducting other measures aimed at guarding exceptional circumstance (Clive Peeters Limited, 2009). AIMA (1997) report might shed light on the reason why this can happen, organisations claiming to comply without any actual analysis of their corporate governance. ASX Principle 3 recommends a listed entity to have a code of conduct, not only for its directors and senior executives but also employees. This code of conduct or a summary of it needs to be disclosed. However, without effective audit, there is no way for other external stakeholders to judge whether the code of conduct is communicated effectively along the chain of command. Companies can have it written on papers, but do not really practice what they have preached. For Clive Peeters, the board had a code of conduct, but it can be argued that the company did not clearly articulate its code of conduct as a business practice for its employees. An effective code of conduct in guiding the behaviour of directors, senior executives and employees must be promoted across organisations and reinforced with proper training. Appropriate disciplinary action should be taken if it is breached (ASX Council, 2014). With good education or awareness on fraud, employees in Clive Peeters might have noticed the red flags from Sonya‟s behavior, which leads to our next section. 3.4 Lack of Education Employee education and training is a part of establishing strong corporate governance (Du Plessis et al., 2010). Without sufficient education and training, including on fraud awareness, an organisation will have a weak corporate governance, hence more prone to fraud (Dechow et al.1996), as well as unable to fully discharge their responsibilities to various stakeholders. However, most small and medium enterprises and even some large companies only have training programs limited to operations. Some even argue that establishing good corporate governance is costly for small and medium organizations (Du Plessis et al., 2010). From Clive Peeters Annual Report (2009), there are no indications that employees are being specifically educated on fraud under their “Easy Academy” staff training program. If employees are more aware of fraud and its symptoms, there will be fewer opportunities for fraud to take place
  15. 15. 15 (Albrecht et al., 2008, Fraud Risk Management, 2009). Albrecht et al. (2008) suggested that employees are in the best position to recognise fraud as they are more familiar with their surroundings hence able to recognise unusual behaviors or question red flags faster than an external party could do, such as external auditors. Had employees been properly educated on fraud, Sonya‟s colleagues would certainly question Sonya‟s sudden extravagant lifestyle such as the purchase of a luxury Audi, owning numerous properties, becoming the 14th largest shareholder in Clive Peeters (Carson & Battersby, 2009), and appearing in the news for winning the Royal Children‟s Hospital Good Friday Appeal Online Auction bid on an expensive car (Carson & Battersby, 2009). They would also realise that the weak internal control system which resulted in the lack of segregation would definitely present opportunities for potential perpetrators to exploit. 3.5 Conclusion We have now established our opinion on why the Corporate Governance environment failed to prevent the Clive Peeters fraud. They are mainly: lack of understanding on corporate governance, lack of effective audits on corporate governance, as well as lack of training on preventing fraud. We will now recommend some policies and procedures that Clive Peeters could implement to prevent recurrence of the fraud. 4. Outline of the recommended internal fraud management policies and procedures Figure 2: Components of an Anti-Fraud Programme (Ernst & Young Fraud Investigation & Dispute Services) •4.1.1 Creating culture of honesty and ethical •4.1.2 Creating an expectation of punishment •4.1.3 Open door policy •4.1.4 Fraud awareness of training programme Setting Proper Tone (Foundation) •4.2.1 Good internal controls •4.2.2 Whistleblower System •4.2.3 Conducting proactive auditing •4.2.4 Sufficient expertise in the audit committee Proactive Measures
  16. 16. 16 As seen in Figure 2 above, two main steps are suggested to prevent Sonya‟s fraud recurrence. Setting the proper tone in an organisation as the foundation of proactive policies is essential , as employees would first have to be equipped with the proper mindset before carrying out any measures to prevent fraud. Our recommended measures are targeted at mitigating the elements of Cressey‟s Fraud Triangle in light of Sonya‟s fraud. Reactive measures would not be applicable in this case since our focus is the prevention of recurrence of the fraud that had taken place at Clive Peeters. 4.1 Setting the Proper Tone The “tone at the top‟ as defined by Association of Certified Fraud Examiners, refers to the ethical atmosphere that is created in the workplace by the organization's leadership. The employees would uphold strong ethics and integrity through a trickle-down effect, if their leaders created this atmosphere successfully. However, if upper management appears unconcerned with ethics and focuses solely on the „bottom line‟, as can be argued in Clive Peeters fraud, employees will be more likely to commit fraud under the impression that ethical conduct is not a priority within the organization. Thus, it is important for the proper tone to be set in Clive Peeters to ensure that a culture of strong ethics is established throughout the organisation. In order to set a proper tone in Clive Peeter, we recommend the company to create a culture of honesty and ethics, expectation of punishment for unethical behavior, implement an open door policy to promote effective communication and establish a fraud awareness training programme to all their employees. 4.1.1 Creating Culture of Honesty and Ethics To prevent the recurrence of similar fraud, it is crucial for the Clive Peeters to create and maintain a culture of strong ethics with zero tolerance to dishonest behaviors as the first protocol in setting a proper tone. Clive Peeters need to create high expectation of strong ethics, and stay committed to conveying these expectations across the company. By embedding these values in the company culture, the employees will follow suit in adopting such values (Mahadeo, 2007). In essence, tone
  17. 17. 17 at the top and high commitment from senior management is required in promoting this culture (Fraud Risk Management, 2009). Building a code of conduct could act as a way for the company to show expectations on acceptable behaviors (Albrecht et al., 2008). To ensure the established code of conduct is communicated efficiently, the top management should routinely hold a meeting to discuss integrity and ethics in working environment and behavior rules. Senior managers are supposed to firstly obey these rules as models. This will show how determined the company is in ensuring the code of conduct is followed by everyone within the company. This reinforces the expectations the company has on its employees. The Fraud Scale introduced in Albrecht et al., (2008) suggested that the more dishonest a person is, the less opportunity and/or pressure is needed to motivate a fraud. Thus a strong culture of honesty and ethics would make it harder for a person to rationalize their perpetrations, hence reducing the chances of fraud taking place. 4.1.2 Creating an expectation of punishment One of the greatest deterrents to dishonesty is fear of punishment (Albrecht et al., 2008). Strong policies in regards to fraud should be well publicized so that employees would understand that even minor frauds are not tolerated. In the case of Clive Peeters, there is a lack of expectation of punishment. The company has no policy in place for dealing with fraud, hence lack indication that it will not tolerate fraud or any dishonest conducts. In setting the proper tone of honesty and strong ethics, people in top positions must be the first to abide the rules and become role models for their subordinates. 4.1.3 Open-Door Policy As discussed in 2.1, one of the factors that leads to Sonya committing the fraud is immense pressure that she faced, as well as having no friends or anyone to confide in. To prevent the recurrence of similar fraud, Clive Peeters could implement an open door policy. To implement such policy, it is important that managers be highly committed to this policy and willing to spend
  18. 18. 18 their time talking with the employees (Mahadeo, 2007). With this policy in practice, employees in Clive Peeters are free to talk with their managers and colleagues about their concerns. This policy allows employees like Sonya who faces pressure or problems to have someone to talk to. By reducing pressure, the possibility of committing a fraud would be much lower. This is crucial as when people keep their problems to themselves they lose the need to rationalize and this could lead to dishonest acts (Albrecht et al., 2008). Besides, it also allows employer to provide appropriate support to their employees, hereby lowering the possibility of employees acting dishonestly against the company (Albrecht et al., 2008). In addition, the policy will help in creating a culture of honesty and a positive work environment as closer relationship between employees and employer is created. Hereby, employees may be less likely to commit fraud that will result in the loss of company as they have a positive feeling to the company they work for (Mahadeo, 2007). 4.1.4 Fraud Awareness Training Programme Clive Peeters should also implement a fraud awareness training for employees and managers as none of the previous training disclosed in annual report related to fraud. Organizations which implement fraud awareness training at all levels across the company show lower losses and shorter term fraud than a company without such programmes (Report to The Nation, 2012). For Clive Peeters, it appears that the people within the company are lack of awareness on fraud as the employees failed to be suspicious of Sonya. This is very common in most major fraud cases where the perpetrator‟s colleagues are shocked that they are unaware of what was happening (Fraud Risk Management, 2009). Clive Peeters awareness programme should include educating employees what factors constitute fraud, the red flags they should be aware of, the serious impact of fraud toward the company by fraud case learning and everyone within it and possible action that could be taken if fraud is suspected to happen (Albrecht et al., 2008). Employees may be educated in a number of ways, besides through formal training and talks, management can create ongoing awareness through posters, payroll bulletins and employee newsletters (Fraud Risk Management, 2009).
  19. 19. 19 By implementing these programmes, employees will be well informed about early sign of fraud and could help in identifying evidence that may indicate fraudulent activities and thus help the company in detecting the fraud (Fraud Risk Management, 2009). Continuous effort taken by firm will show firm commitment in creating an ethical environment and thus creating a positive work environment that results in lower opportunity for fraud to occur. 4.2 Proactive Measures Once a proper tone is set as a solid foundation, a supplementary and extensive proactive anti-fraud measures should be conducted. 4.2.1 Good internal controls The committee of Sponsoring Organizations‟ (COSO) definition of internal control framework includes: good control environment; accounting system; control activities; monitoring and communication; and information (Albrecht et al., 2008). In the case of Clive Peeters, there was a lack of efficient control activities. Sonya‟s responsibilities were too wide, and should have been delegated to several employees. It is recommended that the person in charge of authorization in transferring money at online bank system should not have access to changing the account details. Additionally, apart from these two employees, there should be a third employee reconciling the subsidiary ledgers and general ledgers periodically. However, in this case, there may not be sufficient employees available to carry out the segregation of duties due to the reduction in staff numbers undertaken by Clive Peeters to reduce cost. Therefore, an alternative approach should be in place, such as random sampling and matching of the control account with subsidiary ledgers by their internal audit committee. If the committee had performed such checks before, this mismatch can be detected much earlier. Additionally, job rotations can also be used to prevent fraud where abnormal procedures (such as changing account details) can be detected by other employees. Informing the employees of the
  20. 20. 20 policy of rotations is necessary to deter fraud perpetrators, as they will understand that their fraudulent activities might be uncovered by others. 4.2.2 Whistleblower System Section 307 of the Sarbanes-Oxley Act of 2002 requires that all public companies to have a whistleblower system to assist employees and others in reporting suspicious activities. (Albrecht et al., 2008) In the case of Clive Peeters, however, it can be argued that there was a lack of effective whistleblower system. Although the colleagues of the perpetrator knew that she purchased a lot of properties, which was well beyond her income, no one reported this. If the colleagues had paid close attention to the changes in her lifestyle, this fraud may be detected much earlier. Clive Peeters cut some staff so there were not many staff left. In this case, the anonymity must be particularly protected so that whistleblowers will not fear the retribution. (Albrecht et al., 2008) In addition, the company should establish an independent party to report to. In Clive Peeters, there are three independent directors on board and they are in a good position to take charge of it. 4.2.3 Conducting proactive auditing Organizations that proactively audit for fraud create awareness and expectations among employees that their actions are subject to scrutinization at any time. By increasing the expectation of getting caught, proactive auditing reduces chances of the fraudulent behavior taking place (Albrecht et al., 2008). Additionally, Clive Peeters would be recommended to conduct assurance of effectiveness on its corporate governance against fraud. However, Clive Peeters may not afford to do the fraud auditing as it focused on cutting costs. We should understand that the failure of detecting this fraud eventually led to the company‟s
  21. 21. 21 bankruptcy, which is much more costly to stakeholders. Therefore, it is important for the company to have a long-run decision horizon and not only aim at increasing short-term profits. In addition, the reduction of staff created more opportunities for fraud (through the lack of segregation of duties and wide authorities bestowed to Sonya), which were ultimately taken advantage of by Sonya. 4.2.4 Sufficient expertise in the audit committee The audit committee plays a key role in reducing agency costs by overseeing the effectiveness of management‟s financial reporting (Jubb & Lin, 2012). The findings of studies suggest that the domain-specific knowledge of accounting experts provides them with an effective means of monitoring management‟s financial reporting practices (Dhaliwal, Naiker & Navissi, 2010). Therefore, the corporate governance requires that the board has the appropriate balance of skills, knowledge, experience, independence and diversity to enable it to discharge its duties and responsibilities effectively (ASX Corporate Governance, 2014). However, in the case of Clive Peeters, there is a lack of sufficient skills in the audit committee, all of whom have no accounting-related expertise. This leads to their failure of detecting the accounting anomalies, which is a typical fraud red flag. So in order to enhance the efficiency of internal audit, personnels with appropriate skills in the accounting field should be chosen to the audit committee.
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