Now I don’t want to scare you, but fraud is far more widespread than you might imagine. You may have read about the Prince of Tahiti fleecing the Queensland Department of Health for $11m, or when Brisbane City Council lost $600,000 due to a staff member diverting funds from a supplier to their own bank account. There was even a case several years ago when a person in charge of collecting the coins from parking meters in Brisbane embezzled $2m to fund his extensive fine wine collection and more recently it was exposed that expenditure had been inflated in a multi-million dollar fraud within the National Australia bank.
But it is not just the top end of town. It is often in small business, where lack of controls present significant opportunities for fraud and the results can be devastating.
What are those opportunities?
- The trusted bookkeeper having an opportunity to divert funds and cover it up
- A warehouse person taking stock
- A sales person selling to a friend at discounted prices
- The purchasing officer ordering goods and diverting some to a different address
There are a number of red flags which provide good indicators of a high risk fraud possibility and with comprehensive, transparent systems reporting and a trained eye they are fairly easy to spot.
So, is your business at risk of fraud?
Can your invoices be amended or credited and cash be received for a sale, that is being pocketed and you are none the wiser?
Are you easily able to check your stock quantities to ensure that goods are not being taken from your warehouse by staff members?
How do you know that the number of goods are being dispatched is the number being delivered?
How can you tell if there is a trend for one salesperson or customer to be receiving abnormally high discounted prices?
Is it possible that fictitious supplier invoices are entered into your systems and paid, with the proceeds diverted to a bank account controlled by an employee?
If you have a large payroll, could you be paying fictitious employees? I’ve seen it done.
Here is an example where too much trust was placed with the bookkeeper. In 2016, one of our clients wanted us to train a new accounts staff member and we were working with their existing bookkeeper, a long standing, loyal employee who was the backbone of the company and had been for many years. Our approach was to assist in streamlining their rather cumbersome systems and to get the bookkeeper involved with the changes and training, to make the whole process easier. But, we were met with all sorts of resistance and reasons as to why the changes couldn’t be done and how they wouldn’t work. When given an ultimatum that the systems had to be changed and made more transparent, the bookkeeper resigned. We subsequently found out that a family member was in a similar industry and sometimes purchased goods from our client. There had always been a question of certain types of missing stock. Given the timeframe we had to work in we were never able to prove a fraud, but all the signs were there. Since then the new staff members have been able to settle into their roles, systems have been improved and the whole of the bookkeeping process is running more transparently.
Then there is the story of Greg, the part time bookkeeper of a client in Brisbane who went on leave for some medical treatment. We were was asked if we could look after their bookkeeping temporarily until he could return. As we got the records up to date, and for some reason there was a lot outstanding (red flag), there were a number of transactions that didn’t feel quite right and sure enough there were cheque payments sitting outstanding in the bank reconciliation. Rather than make adjustments to tidy up the books, we looked into these transactions more closely. The bank was asked for copies of the cheques so that we could find out who they had been made out to. When we checked the accounts we found that they had not been entered as payments on the supplier accounts. There were no invoices. The cheques had all been endorsed and paid to cash at a branch of the bank in Toowoomba. Upon further investigation we were able to ascertain the extent of the fraud discovered and the result was a payment of tens of thousands of dollars from the bank to the client. Had the client had a more stringent payment process this fraud could have been averted.
Fortunately, this client is still in business and of course at the time needed a new bookkeeper. We assisted in wording an ad, interviewing candidates and helping with the selection. The recommended candidate was a mature lady who had the right experience to do the job. And although there were concerns she may have wanted to retire, over 10 years later she still works with the client and when she goes on holiday, we are called in to cover the bookkeeping.
Bookkeeping is not the only opportunity to commit fraud. Another business owner in Brisbane described to me how a staff member filled up his van each night and sold the goods through a separate channel. The business owner had wondered for some time why it was so difficult to make a profit. After putting some stock release processes in place the ongoing theft was discovered, and needless to say the business did start making a profit and has grown significantly since then.
Jeremy and his team have been involved in uncovering, investigating, quantifying and preventing frauds. Apart from the red flags identifying where there may be a potential fraud, there are simple ways to prevent it happening to you. Jeremy can explain quickly and easily, the risk triangle and the 6 key accounting controls that you can put in place so that you know you have minimized the possibility of a fraud occurring in your business.
