Corporate Fraud - How on earth does it happen?

By Gerard Walsh

Bernie Madoff, who fleeced lots of trusting punters of a mere $65 billion, may be the new face of corporate greed, but he has a lot of relatives. Corporate fraud is alive and well in Australia. It is only a couple of months since Speciality Fashion group, that is Katies and other outlets, reported that its former property chief had siphoned off $16.5 million. Financial institutions report in-house frauds of $1 million by trusted employees and logistics scams in manufacturing see millions stolen.

Over the past 5 years, 39% of companies in our part of the world have experienced fraud. Who do they affect? The bigger the company, the more likely it is affected: 32% of companies with fewer than 200 employees to 62% of companies with more than 5,000. That’s a one in three chance if you are a small company and two in three if you are a big one.

Steps to reduce Corporate Fraud

We’ll profile fraudsters later. Today, how do we stop or reduce this sort of thing? The most effective way is through robust company controls and a strong culture - fundamental risk management. Ensure internal audit has a strong mandate; implement fraud risk management; require suspicious transaction reporting; support corporate security; and make sure personnel in financial delegations posts are rotated. Support these controls with a whistle-blowing system and follow-up on internal and external tip-offs. Result – 45% of frauds are exposed by people doing the right thing.

Because of the economic downturn, we’ll likely see more frauds exposed. The pressure to generate more revenue, keep jobs, hide significant losses or reduce costs can pressure people into bad behaviour. As managers, we must be realistic with our sales and other objectives at these times. It’s not the time to reduce control costs: be more efficient in doing it – focus on real risks and reduce overlapping controls. Never get off message about zero tolerance of fraud. Be fair in compensation, both at the top and bottom of the company.

‘Brand’ is important to all companies. Increasingly, companies are being judged by their ethical behaviour: their governance and the way they do business. We cannot fraud-proof our companies, but we can reduce the risks to a minimum. Compliance doesn’t cost a lot if done wisely and helps avoid risky activities that could affect us downstream. A risk management approach and clear communication of ethical culture will promote our brands if we communicate them clearly.

Gerard Walsh is a Business resilience & risk management consultant with over 25 years security experience, including Corporate Security Executive with global responsibility for AMP and Deputy Director-General of ASIO.

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