Fidelity/Crime Insurance - What's Your Reputation Worth?

When we last reported the results from BDO’s Not-for-Profit Fraud Survey 2010 survey, a total of $1,071,851 of fraud was suffered by respondent organisations. Two years later this amount has grown to nearly $3 million. According to the results, 40% of reported fraud was related to the theft of cash (up from 24% two years ago) with an average of $31,000 per instance. The average loss associated with online payment fraud was $370,000.

So, what are the driving factors associated with the increase in fraudulent activity? According to Accounting For Your Future Pty Ltd, increasing concerns about the state of the global economy are linked to the prevalence of fraud.

Past reports have suggested that the key motivations for committing employee fraud are greed and gambling, some experts believe that the prime motivation for much of today’s fraud stems from financial strain.

They write, “…[e]mployees faced with financial difficulties such as being unable to make mortgage repayments or struggling with their children’s schooling may be tempted to ‘borrow funds’ from the business. Generally, the individual will begin with a small defalcation with the size of the offences escalating as he or she discovers that they have not been caught out.”

According to the BDO’s 2012 survey, respondents in the not-for-profit sector “indicated that financial pressure and maintaining a lifestyle were the most common motivators for fraud.”

Methods used to defraud your business

Today, the variety of schemes used to defraud a business is astounding and can range from falsifying expense claims to setting up a secondary business and submitting false or inflated invoices. Some of the most common fraudulent practices include:

• Falsifying invoices

• Falsifying expense claims

• Manipulating computer or online payment data

• Electronically transferring funds into personal accounts

• Receiving kickbacks from suppliers

• Payroll fraud including the creation of ‘dummy employees’; and

• Misappropriating company assets or funds.

An employee misappropriated $1.5 million from his employers, a major Australian charity organisation, to fund his pathological addiction to sports betting over a two year period, a court heard.

In what was virtually a 24-month period the employee misappropriated the money which he used to gamble online and used three methods to misappropriate the money – inflating invoices and paying the extra to him, paying invoices twice - to legitimate creditors and himself, and paying invoices to himself.

The Additional Costs to Your Business

Nearly 80% of respondents to the 2012 BDO survey felt that fraud would not only damage their reputation, and more than two thirds of these indicated it would have a direct impact on their future income.

For a non-profit organisation, undetected fraud (of detected fraud that has been badly managed) can result in the negative perception that members’ contributions, donations and government grants are not being managed adequately and that that the organisation cannot manage its assets. Such perceptions of failure, whether well-founded or not, can damage stakeholder’ confidence in the organisation’s ability to deliver quality services or meet the objectives of its mission.

Organisations who regard crime and fidelity insurance is a ‘luxury’ they can’t afford are putting themselves at the risk of business failure.

In 2007 and 2008 RailCorp was investigated by the Independent Commission against Corruption (ICAC). In a series of seven reports released during 2008, the ICAC reported findings of more than $21 million in improper contracts and deals through the procurement of services in just three years. The Rees government abolished Rail Corporation New South Wales when this evidence of corruption came to light.

Minimising the Risk of Fraud

Not surprisingly, organisations who fail to respond to instances of fraud generally become victims of it again. Of the respondents to the BDO survey that experienced fraud, 49% had suffered fraud previously.

The below table summarises some of the strategies available to every business - whether it employs just two individuals or has a workforce of over one thousand.

Implement a code of conduct	The code of conduct should make clear that fraudulent activity on all levels will not be tolerated and will be dealt with severely. It should outline the steps to be taken if an employee suspects another individual of fraud and provide a guarantee of anonymity for any employee reporting fraudulent activity.
Review internal controls	It is important that employee activities are carefully monitored and controlled no matter how well trusted an individual may be. Comprehensive cross checks should be implemented including those of weekly bank reconciliations and monthly accounts. All cheques over an agreed amount should require two signatures. Organisations should also adopt a continuous monitoring and improvement framework covering prevention, detection and response. Prevention controls can help reduce the risk of fraud occurring while detection controls are designed to assist in identifying fraud once it has happened. Finally, response policies are intended to provide guidance to organisations about how to deal with fraud once detected.
Segregate cash handling and financial reporting duties	No single individual should be responsible for, or have access to, more than one of the following: The ability to make entries in the accounting records; Access to cash or business assets; The ability to authorise transactions above an agreed amount The ability to move business assets.
Spot check outgoing invoices and electronic funds transfers (EFT)	In a busy working environment it can be difficult for the authorising officer to check the bank details and amount of every outgoing payment. Often accounts payable are given little more than a cursory glance. It is, however, important to ensure that all outgoing invoices and EFT payments are spot checked regularly.
Conduct regular audits	The majority of fraud cases are discovered during internal audits. It is important to conduct audits on a regular basis. Not only will it increase the chanced of revealing any discrepancies but an audit also shows employees that the business is aware of movements in its inventory assets.
Screen new employees and suppliers	All new employees should be screened thoroughly and references should be checked. It may also be useful to screen suppliers and other related third parties where they work closely with the business.
Hold fidelity insurance	Fidelity insurance protects the business from loss of money, securities, inventory and assets that may result from a crime committed by an employee.

Jobs Australia’s Blanket Cover Program Solution

Twelve months ago Jobs Australia reviewed the Fidelity/Crime Insurance Policy contained in its Blanket Cover Insurance Program.

The Fidelity Guarantee Insurance Policy included in the Blanket Cover Program provides coverage for direct financial loss sustained by the member of cash, securities an any other property; belonging to the member or for which the member is liable. However, as part of the review, we were able to provide members (through our broker at Aon Risk Services) with additional insuring clauses to the policy that not only broadens the cover previously available, it meets today’s operating risks associated with the use of computerised accounting packages and systems as well as payments made by Electronic Funds Transfer.

Our cover also includes identity theft and credit card fraud.

Under normal market conditions, these additional insuring clauses would have added at least 20% to the cost of this policy but as we have already advised our members, they remain free.

If you are not currently a member of the Blanket Cover Program and you do not have a similar type of insurance policy in place, you are risking not just your business, but your reputation and future opportunities to attract the necessary funds to continue operating.

We urge you to contact your existing Insurance provider to check your cover. Or call Ross Mackay at Jobs Australia on (03) 9349 3699 to discuss the Blanket Cover Program and how your organisation might benefit by subscribing.