Melbourne businesses reveal possible multi-million dollar frauds: Four tips to stop it happening to you

Businesses have been warned to strengthen controls to prevent employee fraud, with two Melbourne-based businesses uncovering dodgy transactions in the past few days possibly worth several million dollars.

On Sunday, the Melbourne branch of Dual Australia, the Australian arm of the international insurance firm Dual International, revealed $17 million had been allegedly misappropriated in a complex fraud case.

A statement on the company’s website revealed the fraud had been detected through its internal procedures and it began an investigation immediately.

“Court orders were obtained to allow identification and freezing of assets, and legal action has been taken against the employee concerned,” the statement says.

SmartCompany contacted Dual International, but no response was available prior to publication.

In an interview with insurancenews.com.au, Dual International chief executive Damien Coates said the fraud was well-hidden and has been committed by one of the former employees in the Melbourne office who had previously worked at a third-party service provider before joining the business.

“With the swift action taken, we are confident there will be no financial impact on Dual or our capacity providers,” he said.

The former employee’s assets included a $4.4 million house, a $600,000 town house and bank accounts containing multi-millions of dollars.

Meanwhile, late last week shares in Melbourne-based business Phosphogenics, which develops pharmaceutical and nutraceutical products, were placed in a trading halt. This morning, a statement was released on the Australian Securities Exchange saying the company’s chief executive Esra Orgu had been suspended from her duties pending further investigations.

Phosphogenics had uncovered “irregular transactions” in relation to its invoicing and accounting records.

“The company believes that the amount involved may be material. The company has retained independent legal and accounting professionals to undertake a thorough and extensive investigation,” Phosphogenics statement says.

Despite the investigation, current clinical trial programs are continuing as planned and the company has funds on hand of $14.1 million.

SmartCompany contacted Phosphagenics, but no further information was available.

Such frauds are not uncommon – businesses of all sizes encounter these types of cases. Many, such as the Clive Peeters fraud, are crippling.

In light of the investigations underway, SmartCompany spoke to three fraud experts about how to protect your business from a similar disaster.

Establish effective controls

KPMG forensics partner Gary Gill told SmartCompany businesses should focus on the prevention of fraud, rather than the detection.

“You need to make sure you have effective controls in place which stop people being able to initiate and process fraud transactions. This involves making sure everything is recorded in the books and duties are segregated so people only have access to the information they need,” says Gill.

“If it’s to do with payment approvals, if you’re paying electronically, make sure you have certain people which need to authorise all payments and ensure people can’t access other people’s passwords,” he says.

Regularly challenge control effectiveness

KPMG forensics partner David Luijerink told SmartCompany employee fraud is the most common type, and businesses need to determine which areas are at greatest risk.

“Many firms would be best placed by getting a good understanding of the specific risks of fraud which can occur in key processes involved with their assets such as cash, small tangible items, gifts and entertainment and marketing expenses.”

“When they have a clearly defined group of risks which can occur in any organisation, they need to rigorously challenge control effectiveness to prevent these types of risks. Without this effective challenge, there is often a complacency the current controls will prevent fraud from occurring,” he says.

Conduct internal audits

Warfield and Associates chief executive Brett Warfield told SmartCompany it can be difficult to detect fraud, particularly when it involves a chief executive or someone in a position of authority, so internal audits are crucial.

“That’s one of the prevention basics. You need to be looking at the systems on a regular basis and if you’re talking about a senior person such as a chief executive, make sure there is a power to review reports and transactions and look behind financial statements.

“You want to have a strong audit and risk committee and this has become of much higher priority within organisations in the past decade,” he says.

Warfield says fraud can be difficult to detect when it’s committed by a senior person because they tend to have access to all the companies details and transactions.

“When it comes to senior management, they can be signing off on amounts of over $1 million. So that’s why it’s important to have an audit committee and have board members signing off on expenses on a monthly basis.”

“Everyone in the organisation, including the chief executive and the chief financial officer, needs to be accountable,” he says.

Encourage staff to report possible fraudulent activity

When fraudulent activity occurs within an organisation, the experts agreed it’s often a confronting task for a less senior employee to report the suspicious activity.

Making employees feel comfortable to speak up is often a two-fold task which involves providing a whistle-blower service, while making sure the person is not unfairly treated as a result and the behaviour is fully investigated.

“Where we’ve seen organisations go wrong is if they have taken action against the whistle-blower. This is the biggest issues businesses have, they need to walk the talk and make sure employees feel encouraged to speak up,” Warfield says.