Fighting fraud –
a matter for the Board
By Frank O’Toole, Partner,
Fraud, or the incidence of it, has long been considered a taboo subject
within corporate circles. No one seriously wanted to talk about it, let
alone admit that it could potentially happen within their organisation.
Yet, the reality is, corporate fraud is incredibly widespread.
The Australian Institute of Criminology estimates that financial crime
costs the Australian economy $5.88 billion each year. That represents
about 30% of the overall cost of crime in Australia annually, and this is
the direct cost only. If indirect costs such as investigation, prosecution
and other collateral costs are taken into account, the cost may be as
high as $10 billion annually.
In recent times, increased regulatory requirements and scrutiny on
governance, good corporate citizenry and executive behaviour,
particularly since the collapse of HIH, One.Tel, Enron and Worldcom,
have undoubtedly made Boards focus more on fraud risk.
So too have standards such as Australian Auditing Standard AUS210
which holds directors and management responsible for preventing and
detecting fraud, ASX Principles on Corporate Governance, and the
8000 series on fraud control and corporate governance, just to name
a few. Recent developments including organisational and individual
prosecutions, enforceable undertakings, commercial sanctions, and
the increased media attention to regulators’ activity in this area, have
also contributed to managing this risk.
Boards with a strong governance focus are now playing closer
attention to managing internal fraud. The fraud we are most likely
to read about in the media is a fraud by a senior executive or other
employee, and this type of fraud is also the most significant in terms
of reputation damage.
Internal fraud manifests in a variety of ways, the most common
including payroll fraud; accounts payable fraud; financial misstatement
fraud and manipulation of data provided to regulators; false payments
where an apparently legitimate payment to a supplier is made against
a legitimate claim but is directed to an employee; supplier kickbacks
to an employee in return for preferential treatment; and undisclosed
conflicts of interest where business is done with a supplier in which an
employee has an interest.