Company directors and business owners must be alert to potential fraudulent activity

Australia:  Scrutiny of the accounts of troubled Australian companies facing insolvency has revealed a worrying trend in the rising number of cases of financial fraud, with companies and company directors using criminal means to access cash to keep their business or personal finances afloat, according to chartered accountants and business advisory firm PKF. They advise that companies should be alert to financial irregularities and ensure that processes and internal controls are in place to help minimise the risk of fraud. Banks and financial institutions should also be aware of this trend and remain vigilant so as to not be taken in by fraudulent activity.

Ken Whittingham, Partner - Corporate Recovery, for PKF, said they have been receiving an increasing number of calls from bankers, accountants and lawyers whose clients are facing business failure in the worsening economic environment. He said an alarming number of these business failures revealed some form of fraudulent activity, an indication of business owners and directors resorting to desperate measures in worsening business conditions.

“We have seen a huge increase in fraudulent behaviour, much of which had gone undetected until these companies’ books came under scrutiny,” he said. Mr Whittingham said cases commonly include invoice fraud, directors cashing unauthorised cheques and companies building up large loan accounts in the knowledge that they could not be repaid. “One recent case involved a company director receiving financing from two different institutions for a piece of plant equipment,” he said.

“Property and related industries are also at a higher risk because the property market moves so quickly. For instance, a property valuation made in March will likely represent a higher figure than what it is actually worth by September, but banks and other financial institutions have often lent on this earlier valuation as a basis for a loan. That money is then lost,” said Mr Whittingham.

Mr Whittingham said that as the downturn continues they expect to see a rise in the prevalence of fraud as business owners resort to increasingly desperate and illegal methods to survive. “It is disturbing to see a criminal element creeping in, but business owners and directors should remember the maxim that crime doesn’t pay,” he said.

Mr Whittingham said that while they have come across fraud in every size and type of company, unlisted companies were at more risk of fraud than their listed counterparts because compliance rules and regulations are not as strict as those for listed public companies. He said now was the time for these businesses to get their house in order by tightening up their systems and internal controls, including cash management, ensuring there is appropriate segregation of duties and making sure financial accounts and tax bills are up to date. “Having strong controls in place will make it a lot harder for someone to tamper with the books or engage in some form of illegal behaviour,” he concluded.

Advice to businesses to minimise fraud

Fraudulent behaviour, by its very nature, is difficult to detect even by auditors, but Mr Whittingham says that there are some measures and activities that companies can take to minimise their risk and exposure to fraud.

He said companies should:

• Keep their books up to date and in order
• Segregate duties with different people for credit and debit activities (ie. don’t have the same person banking deposits and paying the bills, therefore having too much control over cash-flow)
• Arrange to have co-signatories for cheques and
• Be alert and vigilant (watch for changes in gross margins and trends. If something seems unusual then it is worth investigating straight away)