A global fraud study conducted by the Association of Certified Fraud Examiners in 2013 highlighted the following facts concerning fraud:

• A typical organisation loses 5% of its revenues to fraud each year.
• The majority of reported frauds remained undetected, on average, for 18 months.
• Employees with higher levels of authority will perpetrate much larger frauds and losses.
• The longer an employee has worked for an organisation, the greater the fraud losses tend to be.
• 77% of all frauds are likely to be committed by employees who work in the following areas of an organisation:
• Executive and upper management
• Accounting and or finance –– Purchasing and accounts payable
• Sales
• Customer service
• Operations
• 86.7% of frauds typically involve some form of asset misappropriation.
• The existence of and/or instigation of a strong environment, with anti-fraud controls and independent checks and balances was seen to result in:
• The much earlier detection of fraud
• Frauds costing an organisation significantly less.

The table on the following page shows examples of the more common types of financial fraud due to asset misappropriations.

During the past 15 months, members of Nexia firms, whilst conducting audits of Schools and Colleges, have become involved in the investigations of frauds perpetrated by trusted employees.

Instances of fraud identified include:

• Fictitious reimbursements.
• Credit card purchase of personal items.
• Purchase of personal items and submission of fictitious invoices.
• Personal expenses misallocated to building improvements as part of building contracts.

Click here to download the full newsletter for a complete list of Common types of fraud due to Asset Misappropriation.

What are some anti-fraud controls that you could implement?

Common controls include:

• Strong whistle blowing policies understood by all employees.
• Employees taking leave as it falls due and on a regular basis.
• Rotation of employee’s duties. This provides back up for key functions.
• Independent reviews and authorisation of key accounting processes and functions. Adequate segregation of duties.
• Controls over the use and authorisation of credit cards.
• Control over the purchasing and receipting functions.
• Minimum of 2 authorisations and passwords for all payments.
• Periodical review of and matching of critical master files data, including payroll, accounts payable and banking.
• Use and independent review of edit reports; for example payroll exceptions and master file changes.
• Use of purchase orders.
• Requirements for original invoices to be presented.
• Establishment of a list of authorised suppliers.
• Comprehensive and timely reconciliations processes, with timely follow up of all variances and reconciliations.
• Strong controls over the use and location of assets.
• Stock takes of assets and authorisation of asset write-offs.

Responding to early indicators of fraud is absolutely critical to detecting fraud and lessening its impact. It is important therefore to understand the nature of early indicators or “red flags” and having an appropriate set of mechanisms to deal with early warnings.

Common examples of red flags include:

• Signs of recent and/or excessive wealth and/or spending by employees.
• Gambling habits and/or addictions.
• Unusually close relationships with particular customers or suppliers.
• Failing to declare potential conflicts of interest or gifts. 
• Request for system access not commensurate with employees’ duties.
• Staff not taking holidays.
• Bypassing established procurement processes when purchasing goods, supplies and/or services.
• Lack of supporting documentation (including originals) for transactions.
• Lack of reconciliation of bank and cash accounts.
  Lack of reconciliation of key control accounts, including debtors and creditors.
• Lack of reconciliation of clearing and suspense accounts.
• Failure to follow up reconciling items identified in reconciliations on a timely basis.
• Inconsistent financial data.

Given the high cost to organisations of fraud, prevention thereof should be a key priority.

Prevention methods can include the following:

• Pre-employment screening of future employees.
• Reviewing and improving internal controls.
• Developing a corporate code of ethics and conduct.
  Preparing a statement of the organisation’s attitude to fraud.
• Enforced leave and job rotations.
• Developing a fraud control strategy.
• Conducting and/or attending fraud awareness training.
• Conducting due diligence on suppliers and establishing a list of authorised suppliers.
• Establishing clearly documented whistle blowing policies and procedures.

Ultimately a key preventative measure to stop fraud remains the commitment to a strong internal control system with appropriate checks and balances in place. Organisations should regularly review their control systems to ensure that they remain effective and current.

In addition, statistics show that whistle blowing continues to remain a strong detector of fraud, therefore fostering the awareness of employee protection for whistle blowers is a key tool.

Your local Nexia advisor is ideally placed to assist in the review of internal control processes, procedures and systems and if you require any assistance please contact them.

Noel Clifford, Partner - Adelaide