When undertaking valuations for business owners or due diligence for business buyers, we occasionally find large variability in a business’s financial results, such as a year or two that runs significantly against a positive trend and is difficult to explain.

In other circumstances variations are not as obvious, such as:

• the business never seems to have reached its full potential
• the business has lost long-term staff for no apparent reason.

On investigation it’s discovered there were deficiencies in internal processes that may well have led to inappropriate behaviours.

Employee fraud doesn’t discriminate

It doesn’t seem to matter whether a business is large or small, cash transaction-reliant or invoice orientated, involved in retail, industrial or another sector – employee fraud happens and it can seriously impact the fortunes of a business. We sometimes describe it as ‘the mismatch between trust and reality’.

On a positive note, our discoveries often help the business owner identify significant risk in and around their business, and consider mitigation and protection strategies. Of course, it would be much better if they could have the learnings without the painful experience!

Meet our contributor

David Harrison has been a JPAbusiness client for the past five years. His business, CRE Insurance Broking, is a successful Sydney-based risk management and insurance brokerage firm that specialises in assisting clients from the construction, resources and energy sectors mitigate many forms of business, people and operational risk.

We’ve worked with David to help him grow his business and what we particularly like about CRE Insurance Broking is its approach to risk management.

David’s business identifies the risks and issues specific to clients and then tailors risk protection solutions from providers around the globe to address those issues and bring value, savings and peace of mind.

So who better to provide us with some insights about employee fraud in business and the strategies to address it.

Insights from the experts

For this eBook and blog series we have also drawn on valuable information published by CPA Australia.

CPA Australia has kindly allowed us to reproduce information and advice from their brochure Employee fraud – A guide to reducing the risk of employee fraud and what to do after a fraud is detected.

CPA Australia is one of the world’s largest accounting bodies, with a global membership of more than 160,000 members working in 118 countries around the world.

What is employee fraud?

By David Harrison
CRE Insurance Broking

Over recent years the frequency and volume of economic crime experienced by Australian businesses has increased dramatically.

While cybercrime has become the number one economic crime in Australia, the traditional employee crimes of asset misappropriation, fraudulent accounting and corruption continue to cost businesses millions of dollars annually.

PricewaterhouseCoopers’ (PWC) biennial Global Economic Crime Survey 2016 reported the following damning statistics:

• 52% of Australian respondents experienced economic crime in the last 24 months – significantly higher than the global rate of 36%
• 30% of Australian respondents experienced more than 100 incidents of economic crime – the global rate was 9%
• 30% of Australian respondents suffered losses in excess of $1 million
• the most common economic crimes experienced in Australia were:
  • Cybercrime – 65% (this is double the global rate)
  • Asset misappropriation – 63%
  • Procurement fraud – 30%
  • Bribery and corruption – 28%
  • Accounting fraud – 14%

Source: PWC Global Economic Crime Survey, 2016

Those statistics are extremely disturbing, particularly considering they only reflect the crimes that were discovered.

It’s clear that cybercrime is an enormous and growing problem in Australia, but as it tends to be driven by external factors, we’re not going to focus on it in this blog series. Instead we’re focusing on employee fraud; what it is, what drives it and what you can do to minimise it.

Types of employee fraud

Examples of employee fraud include:

• creating ‘ghost’ employees or not deleting ex-employee records and having the salary of these ‘ghost’ employees paid into the fraudster’s bank account
• creating bogus suppliers, with payment being made to the fraudster’s bank account
• creating bogus purchase orders of a bona fide supplier and substituting the supplier’s bank account details with fraudster’s bank account details
• obtaining kickbacks or bribes from suppliers or contractors
• associates of the staff providing services to the business at inflated prices
• personal use of business resources
• inflated/bogus reimbursement claims
• manipulation of financial data to receive performance-based bonuses
• faking time sheets
• private purchases through business accounts/business credit cards
• providing discounted (or free) goods and services to friends and associates.

Source: www.cpaaustralia.com.au

Who commits employee fraud?

According to PWC’s Global Economic Crime Survey 2016, the most likely characteristics of an internal fraudster are:

• male
• 31–40 years old
• university/college graduate
• low-to-middle management.

While these are the most common characteristics, it’s important to remember that fraudsters can come in all ages, genders and positions within a business.

Content in this blog has been used under licence from CPA Australia Ltd, www.cpaaustralia.com.au

James Price has over 30 years' experience in providing strategic, commercial and financial advice to Australian and international business clients. James' blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers.