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Making companies pay for failing to prevent employee fraud

Australia’s employee fraud problem needs a new approach. Shutterstock

The high cost of organisational fraud in both private and public sectors in Australia continues to haunt organisations, particularly fraud committed by “trusted” employees.

Cases prosecuted this month include former Sydney Ferries CEO Geoff Smith, who was sentenced to more than three years jail for a corporate credit card spending spree, and former Burke Shire Council deputy CEO Frederick Aqvilin, who is alleged to have illegally transferred more than A$1 million of council monies to his own account.

Spectacular cases in recent history include A$45.3 million stolen from ING by an employee over five years, and A$16.4 million stolen from Queensland Health, and later attributed in part to poor supervision and management.

Often even more damaging are financial crimes committed by groups of senior executives working in collusion within large organisations – frauds that are usually very difficult to detect.

Who can forget HIH, One.Tel and Clive Peeters? And then there’s the evolving Commonwealth Bank and ASIC fraud scandal in which the activities of dodgy financial planners led to thousands of people losing their life savings.

Multiple victims

The victims of fraudulent acts are not only shareholders or customers of the company; innocent employees are at risk as they can lose their jobs as a consequence of these crimes.

Then there are those who have missed out on aid from a not-for-profit organisation where a major fraud has been perpetrated. According to accounting firm BDO’s 2014 Not-For-Profit Fraud Survey, 70% of organisations that experienced fraud in the previous two years had suffered fraud in the past. This suggests many organisations had failed to implement fraud prevention policies.

KPMG reports that, although managers commit less fraud overall, the cost of a single incident can be hundreds of millions of dollars. Determining the overall cost of fraud to a nation like Australia is almost impossible as more than 50% of cases are never reported. This means the true cost is at best, an educated guess.

High profile cases like that of HIH founder Ray Williams, who served two years and nine months in jail, attract media attention, but many fraud cases go unreported. Paul Miller/AAP

Accountability in the UK and beyond

Recently, and in response to the ongoing problem of corporate crime, UK Attorney-General Jeremy Wright has considered bringing in a new offence of “failure to prevent financial crime”.

The proposed reform to the UK Bribery Act could result in companies being found guilty of financial offences regardless of whether the board knew about them, making it an offence if a company is found to have failed to prevent financial crime.

The fallout for companies, should this reform pass through parliament, is the potential of multi-million pound fines and reputational damage should rogue employees commit fraudulent acts that were preventable. This is in addition to legislation already enacted that places strict and heightened liability upon companies, directors and individuals for bribery-related acts when carrying out business in the UK.

The implication for Australian and other international organisations doing business in the UK is that the Bribery Act has extensive territorial scope, making them equally liable and exposed to prosecution for failure to prevent bribery, regardless of where the misdemeanour occurred. Therefore, if the reform is passed, Australian organisations doing business in the UK would also be open to prosecution if it could be shown that inadequate systems and weak control measures contributed to the crime when it occurred.

Organisations may argue that they are compliant with the Foreign Corrupt Practices Act (FCPA) or local laws such as CLERP 9 rules sitting under the Corporations Act, but this alone does not constitute immunity under the UK Bribery Act or, for that matter, with the US Sarbanes-Oxley Act.

Are Australian legislators doing enough?

The Corporations Act, passed in 2004, developed rules relating to financial disclosure, whistleblowing and remuneration for directors and executives and is relevant to company directors of small and large organisations. They are legally enforceable auditing standards, which have shifted the emphasis on fraud controls back into the corporate governance arena.

However, 10 years on there has been little change in the corporate fraud climate in Australia with cases continuing to emerge. The UK Bribery Act and proposed reform, alongside the tightening of the Sarbanes-Oxley rules in the US place greater emphasis on fraud prevention, compliance and corporate governance than currently exists in Australia.

The crackdown on organisational bribery and corruption by international legislators shows a growing intolerance of less than honest corporate practices.

Improving and strengthening governance and other control measures to minimise corporate fraud may spawn the next wave of legislation and force companies to take their fraud prevention strategies more seriously. It remains to be seen if reform to the Bribery Act is passed, and whether Australia adopts a similar legal principle. Regardless, unless organisations become more vigilant, proactive and transparent on minimising fraud, legislators may just force compliance upon them.

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