It’s a 'huge problem for companies all over the world, no matter the industry or size,' says expert
As the economy tightens, internal fraud will likely begin to increase, as some employees become desperate to make ends meet.
Forensic accounting and corporate investigations firm Warfield and Associates investigated 102 cases in Australia between 2012 and 2022, revealing more than $350 million was stolen by internal fraud.
The report only investigated monetary amounts exceeding $1 million, meaning that there are millions of dollars being stolen in smaller amounts in businesses across the country.
“Internal fraud, which is employee fraud, is a huge problem for companies all over the world, no matter the industry or the size of the company,” Nelson Yiannakou, head FinCrime at Revolut APAC, said. “Organisations lose an estimated 5% of revenue to internal fraud each year, representing more than $4.5 trillion globally. Since it often goes undetected or unreported, the true scale is hard to measure.”
All companies should define, implement and embed an internal fraud risk strategy and framework,” he said, “enabling the management of internal fraud risk within the company's risk appetite and driving sustainable value-add through the reduction of employee fraud-related losses. This should include the appointment of a dedicated internal fraud risk manager.”
The research from the report discovered that ‘lifestyle improvement’ was the main motivating factor in 44 cases (43%) while gambling addiction was responsible for another 39 cases (38%).
False invoicing and electronic funds transfer fraud were the most prevalent ways in which frauds were perpetrated.
There are many indicators that an employee is involved in company fraud.
“One of the first signs is unusual behaviour or changes in behaviour of people, such as working late without explanation or refusing to take time off,” Coco Hou, managing director of Platinum Accounting Australia, said.
Also, unexplained discrepancies in financial records, such as missing or incomplete documentation, unauthorised transactions, or unexplained increases in expenses or decreases in revenue can be signs, she said.
“Finally, complaints or tips from employees or external parties regarding potential fraudulent activity should always be investigated.”
It is important employers have specific procedures in place to ensure there is a structure of sign-off on expenses or purchases so that more than one employee is involved.
A lot of companies set limits that an individual can sign off for but there are ways around that by dividing up invoices or involving someone else in the company in the fraud.
The Warfield and Associates report revealed that the shortest time frame for a fraud was four days and the longest was 17 years, though 52 of the frauds (50%) took more than five years to discover.
Ten cases involved collusion between the perpetrator and either another employee or external party such as a supplier or contractor.
“Implementing specific systems, procedures and checks on an ongoing basis is important,” Hou said. “Ideally, if this can be undertaken by an external provider as well, in addition to internal processes, it should work as a detector.
Businesses need to establish clear policies and procedures for financial transactions, such as requiring dual approval and documentation for all transactions above a certain threshold, she said.
“Companies also need to regularly monitor and review financial records and transactions for any irregularities or discrepancies.
“Finally, employers should conduct regular employee training on fraud prevention and detection, emphasizing the importance of ethical behaviour and the consequences of fraudulent activity.”
Yiannakou outlined several procedures that can stop employee fraud:
Gift & entertainment registry - to ensure full disclosure of gifts, entertainment or hospitality provided by suppliers, clients, third parties to mitigate bribery and corruption risk.
Anti-bribery and corruption policy - to ensure company is committed to conducting business in a customer-focused, honest and ethical manner.
Whistleblowing channel - Whistleblowing is generally the disclosure of information which relates to suspected wrongdoing. A channel or means should be established which provides full anonymity and confidentiality to the whistle blower.
Confidentiality and privacy levels - to minimise Unauthorised or inappropriate disclosure, misuse or loss of confidential, personal and / or sensitive information.
Non trading policy - to avoid insider trading during blackout periods.
Misconduct policy - to raise awareness and address beach of internal policies or procedures.
Employee screening policy - to identify onboarding of new employees with criminal history and determine suitability.
Third party/outsourcing provider policy - screening all contractors, consultants, third parties for suitability and alignment with companies’ internal policies.
Information/data security policy and access rights.
