Good times for fraud

Fraud is a growing problem for corporate Australia, but there are tools that can detect suspicious activities.
Litigation is often cited as the main beneficiary of any business downturn, but there is another oblique area of financial services which proliferates during a financial crisis. Accountants are now reporting an unprecedented boom for their forensics departments, because in a downturn, fraud is rife.
Deloitte Australia claims that it has undertaken as much as five times its normal work in this area over the past 12 to 18 months and there is no sign of it slacking off. KPMG has also reported a considerable increase in its forensics business, and the need to take on new personnel to cope with the “boom”.
Unlike litigation, fraud is far less heralded – it is the corporate stain which dare not speak its name. Often accountants are brought in with both a covert and an overt role – overtly as auditors to check accounts and covertly to dig deep inside company data to check for both forced and unforced errors.
Frank O’Toole, Deloitte’s national financial crimes services leader, says the uncovering of fraud tends to occur when companies are compelled to examine their spending. “Sometimes it comes up during a normal cost-cutting exercise,” he notes.
While the media tends to hype up the proliferation of external, web-based fraud, internal fraud is by far the bigger problem for corporate Australia, costing the economy around $3.5 billion a year, according to the Australian Institute of Criminology. KPMG says around 65 per cent of frauds perpetrated on companies are internal. O’Toole says that often it is the employee who would be least expected to commit fraud who is tempted. “Normally those who would choose to do the right things are faced with certain pressures – they’re not getting a pay rise and they’re struggling with mortgage repayments and school fees – faced with the opportunity to misappropriate $20,000 or even $50,000, they succumb.”
KPMG’s head of forensic, Gary Gill, says it will continue for some time to come: “They’re saying the worst is over and things are looking good – well the bottom line is people are still doing it tougher now than 12 months ago,” Gill says.
Simple tricksWhat kinds of frauds are being discovered? Gill says much of the fraud is very simple – on the accounts payable side KPMG is seeing a lot of false invoicing – the setting up of bogus vendors and then the processing of false invoices.
Gill also sees a lot of simple online payments fraud, much of which is barely disguised. “Sometimes they just transfer money straight out of the company account into their personal accounts,” says Gill.
O’Toole mentions slightly more canny pretences – the collusion with suppliers, whereby invoices are inflated for the benefit of both parties. Expenses fraud is also escalating, says O’Toole. “They tend to be around the $10,000 or $15,000 mark but we have seen expenses fiddles of up to $1million occurring.”
Forensic departments never tire of saying that companies which fail to segregate authorization and custodial duties will always be more susceptible; they also point to the need to regularly test internal controls for weaknesses.
Last but not least, a whistleblower process – which may incorporate a number of lines of access to report suspicions anonymously, is deemed essential.
Deloitte Forensic research found that around 70 per cent of frauds are usually identified by someone else in the organization, and over 80 per cent of staff who will not report fraud cite a fear of retribution as the reason.
Insurers even say that without good lines of reporting suspicions, a company will not be considered for fidelity insurance, which covers Corporates for internal fraud. See Fire, flood or … fraud?
Technology sniffs out fraudBoth Gill and O’Toole say one of the most exciting developments has been the growth of data analytics technology to monitor suspicious electronic transactions among thousands of pieces of information.
Document management systems are also becoming critical to support complex legal cases stemming from the misdeed.
Deloitte has its own proprietary system, as does KPMG. Both are constructed to analyze the million pieces of data in everyday business systems, such as comparing vendor master files to employee records. They can uncover real frauds as well as operational mistakes.
What kinds of things can they flag? Gill says you can run a comparison between accounts of employees on the payroll system against your vendor bank account numbers. “If an employee has the same number, you know there’s a problem.”
“You can look for duplicate payments – one legitimate, one false. Also round sum payments – very few invoices are for round sums. It’s a good idea to have them checked as well as any payments processed outside of normal business hours,” Gill says.
Deloitte cites a number of “red flags” the technology is most likely to throw up, which also includes things such as short-term changes to employee or supplier accounts.
Another give-away that fraud may be occurring is the repeated structuring of transactions just under the delegated authority limit. “Of course, five payments of $9999 authorized by a staff member with the authority to approve costs up to $10,000 would certainly be subject to close investigation in any organization … if detected,” says O’Toole.
Transactions conducted directly through the electronic funds transfer system rather than the accounting system is also subject to scrutiny. “Typically, instances of EFT fraud appear to be linked to issues around access to computer log-ons and inappropriate use of passwords,” says O’Toole.
Is the cost of using this technology worth it? A company can spend millions trying to get to the bottom of its problems, but huge frauds have been discovered quickly – and at a relatively low cost.
Source:- The Sydney Morning Herald; By Adam Courtenay