Corporate Fraud

Corporate Fraud or Employee Theft, occurs far more often than people are comfortable talking about.

It can happen to very small businesses as well as to global brands. As an owner or investor in a business the consequences can be significant.

Missing Assets

Most companies will have tight controls over cash with daily balancing. However, in a retail environment, we have seen staff pocket cash transactions rather than processing them through the till properly.

In some cases, the staff may be taking stock. As stock has been removed from the store, inventory does not reconcile. Unless it is detected, you may be presuming that it is due to customer theft of products, when that is not the case. If you suspect this conduct, you should ensure you have video equipment installed, or use a mystery shopper to see what the staff member does.

It is also important to ensure that all assets recorded in your financial statements actually exist. One global company had billions in cash go missing by recording cash as being held with a bank when it wasn’t. However, more commonly it is missing inventory which may only be discovered when a stocktake is undertaken, which could be months later.

If a person has access to the financial reporting, they may be able to manipulate the numbers. If one asset is taken, either another asset needs to be overstated, or a liability reduced, to match the value taken. As liabilities are external to the business, it is far more likely another asset is being overstated.

While it may not be possible in smaller organisations, for larger organisations, segregation as to who is responsible to sign off on asset and liability values is important.

Non-business Expenses

A common area for fraud is personal expenses being claimed against the business.

Corporate credit cards are a particular target, where for example, the may be entitled to use it for petrol for their car, but also purchase petrol for their partner’s car.

Another area is false invoices, where invoices are issued from organisations associated with the employee.

In some cases, it may involve employees being paid excessive overtime they are not entitled to, or in larger organisations, fictitious employees.

In family companies it can arise where there are multiple shareholders and one or more family members treats the company as their personal assets, to the detriment of others.

How to deal with potential Fraud

While your first instinct may be to confront the person, that may be the wrong approach. The reason is that you need to preserve any evidence there is, particularly in an IT environment, as well as to try to get additional evidence to strengthen your case through catching them in the act. Often the frauds involve multiple transactions over a number of years rather than a single large transaction.

Depending on the circumstances, you may need to:

  • engage Forensic Accounting Experts;

  • engage IT Specialists to ensure that a forensic image of the data is obtained;

  • obtain injunctions from the Courts to freeze the proceeds taken;

  • work in conjunction with State or Federal Police;

  • determine how best to manage internal or external communications.

It can be a complex process, with significant consequences, so it is important you obtain legal advice early and develop a coordinated strategy.

Robert Downing

Hope Earle
Business + Property Lawyers

This communication is intended to provide commentary and general information in relation to Victoria, Australia. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication.