Fraud and Corruption

The definitions of Fraud and Corruption are as follows according to the Australian Standard Fraud & Corruption Control AS8001-2008:

  • Fraud – “Dishonest activity causing actual or potential financial loss to any person or entity including theft of moneys or other property by employees or persons external to the entity and whether or not deception is used at the time, immediately before or immediately following the activity. This also includes the deliberate falsification, concealment, destruction or use of falsified documentation used or intended for use for a normal business purpose or the improper use of information or position.”
  • Corruption – “Dishonest activity in which a director, executive, manager, employee or contractor of an entity acts contrary to the interests of the entity and abuses his/her position of trust in order to achieve some personal gain or advantage for him or herself or for another person or entity.”

Examples of Fraud & Corruption:

  • Fraudulent statements
  • theft of cash
  • theft of property
  • Secret Commissions (bribery)
  • False Invoices
  • Procurement
  • Accounts fraud
  • Confidential information & intellectual property
  • Misuse of corporate cards
  • Expense claims
  • Changing member accounts
  • Cheques
  • Online fraud
  • Insurance claims
  • Counterfeiting
  • Identity fraud

According to the Australian Institute of Criminology, fraud costs the Australian economy at least $3 billion per year.  The 2010 KPMG Fraud Survey revealed 65% of major frauds are likely to be perpetrated by an insider.  The 2010 BDO Not-For-Profit Fraud Survey revealed:

  • The most common type of fraud reported was cash theft (24%);
  • The average duration of the fraud was ten months;
  • Only 12% of fraud was committed by unpaid volunteers;
  • Collusion was present in 24% of reported frauds;
  • Financial pressures and maintaining a lifestyle are the most common motivators for fraud;
  • The presence of volunteers among the workforce of not-for-profit organisations does not appear to increase the risk of fraud occurring;
  • Strong internal controls (79%),
  • Ethical organisational culture (75%)
  • External audits were considered to be the primary factors in reducing the risk of fraud;
  • The majority of survey respondents did not report the fraud to Police;
  • 36% of organisations did not terminate the employment of the fraudster;
  • 67% of organisations did not recover any of the funds from the offender.

The consequences of fraud are:

  • Lost revenue
  • Negative press/reputation
  • Regulatory/Legal
  • Risk to business survival

Further likely consequences:

  • Loss of client and stakeholder confidence
  • Difficulty obtaining grants, fundraising and donations
  • Lost time to rectify the problem (employees’ wages, etc.)
  • Diversion of management resources
  • Disruption to business
  • Cost of external resources
  • Negative impact on morale
  • Staff turnover

Fraud tends to occur with 3 contributing factors:

  • Motive – greed/lifestyle; personal debt; personal financial losses; market expectation/bonuses; compulsive habits (eg. gambling, drugs & alcohol, affairs, cars, shopping); grievances/resentment; personal problems; family/peer/other pressure.
  • Opportunity – Opportunity is the ability to commit fraud. Fraudsters don’t want to be caught, they also
    believe that their activities won’t be detected. Opportunity is created by weak controls, poor
    management oversight, and/or through use of one’s position and authority. Failure to establish adequate
    procedures to detect fraudulent activity increases opportunities for fraud to occur. Of the three
    elements, opportunity is the leg that organisations have the most control over. It is essential that
    organizations build processes, procedures and controls that don’t needlessly put anyone in a position
    to commit fraud and that can effectively detect fraudulent activity if it occurs. Lack of controls (preventative and detective); lack of responsibility or accountability; absence of visible disciplinary policies,remote locations, lack of monitoring.
  • Rationalisation – This is justification for their actions. They can afford it, it’s for a good purpose/it is helping someone in need, I deserve more, revenge, no one will get hurt, It’s only a loan. If caught what is the outcome, ie warning, community service or fine?

Since little can be done to influence an individual’s motivation to commit fraud, or their rationalisation for committing fraud, you must focus your attention on removing the opportunity to commit fraud and help create a positive ethical culture that is resistant to fraud.

Uniting Church’s role in Fraud Control and ways of controlling Fraud and Corruption:

  • Be responsible for fraud & corruption control – identify and understand the risks of fraud and corruption and keep up to date in relation to fraud and corruption control;
  • Implement, maintain and adhere to a strong system of appropriate internal controls and pay particular attention to segregation of duties (eg. 2 signatories on a cheque) – promote culture of corruption resistance and fraud control;
  • Identify where fraud could occur (ie. fraud risk assessment);
  • Provide information to staff;
  • Manage conflicts of interest; (Failing to do this is often a causal effect of fraud and corruption. Conflicts of interest often arise because of conflict between an employee/volunteer’s duties and responsibilities and their own private interests.  Conflicts of interest can be actual or perceived);
  • Monitor ongoing commercial relationships with third parties;
  • Be aware of the indicators or ‘red flags’ (see below) of fraud;
  • Seek assistance where required in relation to control and investigations.

Possible ‘Red Flags’ of Fraudulent or Corrupt Behaviour:

  • Member complaints
  • Excessive variations to budgets or contracts
  • Excessive payment for services
  • Heavy gambling habits
  • Secretiveness
  • Long hours (consistently first to arrive/last to leave)
  • Excessive control of all records by one officer
  • Lavish lifestyles
  • Customer/supplier will only deal with one employee
  • Employees not taking holidays
  • Sudden changes in work habits or life
  • High staff turnover
  • Larger than life personalities (autocratic behaviour)
  • Loss of accounting records or unavailability of financials for no good reason.

Research has shown the sources of information for fraud detection comes from the following:

  • Tips – Employees (49%), Customers (18%), Anonymous (13%), Vendor (12%)
  • Management Review
  • Internal Audit
  • By accident

If You Suspect Fraud or Corruption

x  Immediately confront the suspect/s
x  Damage or mark any evidence or potential evidence
x  Limit the scope of your concerns to the one specific issue

✓ Report in accordance with Uniting Church policy, processes & procedures
✓ Be objective in your assessment (remember the suspect/s may be innocent)
✓ Limit the number of people with whom you discuss your suspicions
✓ Carefully preserve any evidence
✓ Call for expert assistance