New Financial Year a Good Time to Review Fraud Risk

Sponsored: Up to 50 per cent of organisations are affected by fraud, while only 10 per cent are aware of it writes Chris King, a partner at award-winning chartered accounting firm HLB Mann Judd.

With the new financial year upon us and organisations focusing on ways to maximise their bottom line, the investment in measures to mitigate fraud risk is even more important for Not for Profits.

Fraud is still one of the biggest threats to NFPs, with Queensland organisations (overall) the most affected in Australia – 51.3 per cent of the national total – and Tasmania, the Northern Territory and Western Australia the least affected states with 0.1 per cent, 0.2 per cent and 0.4 per cent respectively of the national total loss.

The frightening statistic is that up to 50 per cent of businesses are affected by fraud and only 10 per cent are aware of it.

While every business understands the importance of focusing time and money on strategies to minimise tax, they should also be looking at systems to avoid fraud.

Fraud comes in all shapes and sizes, from stealing a ream of paper to millions of dollars in cash or stock. Research has identified key indicator traits of individuals that commit fraud.

The data indicated that the “typical” fraudster has the following profile:

• aged between 31 and 45
• is a trusted employee
• often working in a managerial position
• earned less than $100,000 per annum
• no prior history of committing fraud
• come from differing areas of a business.

It also affects organisations of all sizes and in all sectors, and businesses undergoing change – whether that be growing or downsizing – are most at risk.

For NFPs with poor internal controls, fraud can present a major threat which often goes undetected, with an average of only 5 per cent of perpetrators caught. And while many businesses feel protected by the assurance of technology, it is really just providing another avenue to perpetrate fraud. It is also interesting to note that a large percentage had previously suffered a fraudulent activity.

Aside from the obvious financial loss, one of the key results from fraud is the breakdown of trust that can occur, once a fraud is identified. As fraud often comes as a shock to co-workers, the result is often a heightened level of distrust in others that they work with. This lack of trust can erode the culture and effectiveness of the work place environment.

There are some traditional areas where fraud is perpetrated:

• misappropriation of assets / funds – activities like false invoicing and over-charging typically represent the transactions where this fraud occurs
• engagement of contracted positions or appointment of position due to conflicts of interest
• fraudulent financial reporting
• establishment of fraudulent charities – while not directly affecting legitimate NFPs, the overall damage occurs against the sector

To help protect your business against fraud, there are several things to take note of:

• Employees often commit fraud to support a lifestyle or addiction, and it can be brought on by significant life changes like a marriage breakdown.
• Telltale signs of fraud are when people start living outside their means, buying new cars and homes or taking holidays when they never did before.

The drive to obtain more efficient finance process can sometimes lead to basic internal control mechanisms being removed to assist in obtaining efficiency gains. This lead to an increased fraud risk within an organisation.  

One option to assist in confirming whether your internal controls structures are appropriate, is to have an internal auditor reviewing existing structures. They can provide feedback on their suitability and recommendations for improvement.

HLB Mann Judd is an award-winning chartered accounting firm. We’re not just accountants; we’re financial and business advisers, using our knowledge and experience to ensure your financial success. Contact us here.