Preventing Corporate Fraud: Common Causes and How to Prevent It.

White collar crimeFraud costs Australian companies millions of dollars each year and typically increases when business climates get tough. When wages remain static and the cost of living rises, fraud can be anything from fiddling an expense claim to major organised crime.

Fraud, no matter how small or large, is a problem for public, private and not-for-profit sectors, with both staff and managers represented in those caught (or not) defrauding the organisations they work for.

In working with a number of companies in recent times, it’s an issue of concern for directors and boards, however, closing the loopholes that enable fraud is not rocket science. It’s an opportunity to put processes in place to tackle the main offenders head on and stop loss from occurring.

One thing for sure is that business should be actively promoting a culture of transparency and honesty while actively seeking ways to eliminate opportunities for fraud to occur. The benefits of doing so are clear: it strengthens business cash flow, improves profits and protects the business.

So where can fraud typically occur and what are the steps business can take to address it?

Issue 1: Fraudulent Procurement/Supplier Invoices  

Procurement and supplier invoice fraud are very common areas for higher value fraud and the scale and type of activities are wide and complex.

Goods for personal use are often bought alongside legitimate purchases, sometimes in collusion with the supplier, and a very common practice is to buy goods from companies owned by family or friends. One of the more extreme cases I’ve seen is the delivery of an outboard motor instead of engineering machinery.

How can this occur? It’s not hard to miss because of lax accounting practices, for example:

  1. Invoices may arrive from a supplier and are not matched to a valid, authorised purchase order or a notification of goods or services being received is a common practice.
  2. Another difficult method to catch is the fictitious invoice that arrives in Accounts Payable which ar paid without authorisation or segregation of duties between processing and payment staff.
  3. Purchase cards are used for private expenditure like holidays, meals and the like.

Solution: The best method to resolving procurement issues is to have a proper procurement and purchasing policy in place, then putting automated and authorisation processes in place.

Simple examples of this include having security rights set at the correct level for each staff member to ensure their duties are properly segregated. Separating responsibilities of staff who create suppliers from those who pay them is critical and new suppliers should be put through a proper on-boarding process to ensure due diligence is applied.

There are also some straightforward and clear workflow processes that can be put in place for buying or receiving goods, for example:

  1. Raising purchase orders for goods and services over a certain value need authorisation.
  2. Receipting processes to confirm the correct goods or services have actually been delivered.
  3. Approved transactions are matched to the final invoice
  4. Any discrepancies that are identified should be put through the approval process again.
  5. Procurement terms should ensure that suppliers understand that orders must have a formal purchase order and that any invoice must feature the purchase order reference or will be returned unpaid.

Issue 2: Fiddling the expenses

Everyone knows this one and it’s prevalent. Recent examples show that even our Members of Parliament get caught for this one.

Staff often see expense claims as a perk of the job or a way of making up wages they feel they are entitled to.

Solution: This is a very simple loophole to close. A clear expenses policy ensures that people understand what they can or can’t claim and then the process of working to the policy ensures that it is policed by staff processing claims.

Another way is to adopt a business intelligence layer over your ERP software. We have deployed this as a solution alongside Greentree ERP software to spot unusual trends in expenditure for a number of clients and it is surprising what gets revealed.

Issue 3: Theft of assets or stock

Taking assets or stock for personal gain is a very common practice in most businesses, whether it’s a stapler from the stationery cupboard or an expensive piece of plant: they can all go missing and often do. These may be for personal use or sold off for financial gain.

Solution: Again the solution comes down to processes that record and manage inventory together with the ability to monitor assets. Knowing where an item of plant is currently located is an important part of maintaining an environment of accountability within the organisation and an asset management tool is vital to keep track.

If staff know that there are controls in place, the temptation to steal is far less.

ERP software such as Greentree is a key part of asset management. An asset module can track physical assets within your organisation and also those that are serviced at external locations. It’s imperative to know what assets you have and where they are at any time to prevent fraud.  

4: Manipulation of the sales teams bonuses/commissions

A scenario: Your sales team is recording sales at the end of the quarter and then credit them back at the beginning of the new quarter. Booking orders as actual sales is also common practice.

This is a scenario that has serious implications for an organisation’s revenue performance, revenue recognition and tax impacts. It’s also possible to see with the right ERP and sales processes.

Solution: Tackle this head on by automating bonus and sales calculations through the sales process as well as automating bonus or commission accruals. Add in alerts and reporting around this activity will identify culprits and put an end to the practice.

Additional ways to tackle fraud

These are just a handful of the types of fraud that can occur within an organisation. Others include property fraud, changing bank account details before payment, petty cash and so the list goes on. In addition to putting the appropriate technology in place, there are a number of simple steps you can take to help reduce your chances of fraud:

  1. Clear company policy and communicate it effectively through your organisation
  2. Screen employees – Take references up, do police checks where required
  3. Segregation of duties
  4. Automate controls wherever possible – Through well thought out technology solutions such as well proven ERP software solutions
  5. Have a company fraud line
  6. IT security tightened
  7. Immediate action if something is discovered, investigate and prosecute

Communicate your strategy to your business

Getting the message out to your organisation that you are doing everything possible to prevent fraudulent activity is important. Do it right and it is also possible to engage the workforce in helping in out with this process.

Of course, you may never be able to completely eliminate fraud, but as board members, directors, managers and staff, each member of the organisation has a duty to observe policies in place and utilise technology in place to mitigate fraud. It’s integral to preventing the opportunistic fraud that can affect the organisation’s reputation, profitability and – in the current business climate – possibly survival.


Previous Articles from Solutions for Tough Times

 Part 1: Improve your cashflow and profits with proper inventory control via ERP.

Part 2: Preventing Corporate Fraud: Common Causes and How to Prevent It.

Part 3: Survival Requires Cash: Top Tips for Collecting Payment


Find out how Kinetic and Greentree can help you automate your business for growth by contacting us today.


Scott Graham is one of the Directors of Kinetic Information Systems. He started his career in the UK as an accountant in practice and then industry. Scott has been in the software industry for over 18 years in the UK and over the past six years down under. You can connect with Scott via his LinkedIn profile


Posted on September 17, 2015

Categories: Kinetic, MYOB Greentree

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