By Hayes Knight – 11 April 2013

It is the season for annual fraud surveys. Sadly they never show the problem is going away. However not every organisation ends up taking action. We look at the implications.

Fraud is insidious and destructive on an organisation in many respects; finances, the human toll including the loss of trust, reputational damage etc. Frustratingly though, many organisations seem to think it is something that just applies to other organisations and couldn’t apply to them.

Every year there are surveys regarding fraud and it seems to be the season for them now. While surveys of such a topic are always challenging as regards accuracy of information and getting a complete picture; they are all consistent in showing that fraud continues to occur in NZ organisations. And in our view any fraud is too much!

While not the result of a survey our informal observations from our wide client base sadly also show that while commercial organisations are by no means immune from fraud that fraud instance is more prevalent in not-for-profit organisations. Generally this is a function of factors such as less focus on finances, weaker internal controls, and often a greater expectation of trust in NFPs compared to for-profit corporate organisations.

Another factor we commonly and frustratingly see is that when fraud is discovered many NFPs are not motivated to take Police action against the fraudster. Generally this is due to a misconception that their organisation will be adversely affected if other stakeholders, especially funders discover a fraud has occurred.

If you discover a fraud; you must take action.

Our advice with any instance of fraud against an organization is that the governing body must take an action against the fraudster. We realise that this can be difficult but unless the fraudster is pursued with Police action then there is no effective deterrent.

In our line of work we see too many instances of frauds perpetuated against worthy organizations. Sadly we have direct experience of a number of cases where the fraudster had been discovered committing a similar fraud against a previous organization. On discovery they had been required to repay the money and dismissed from the organization. However with no Police action being taken they were able to take on similar roles with subsequent organisations where they committed further frauds. The worst case we are aware of the fraudster had apparently been discovered by three former organisations before an action was taken and the Police involved. Tellingly, and perhaps unsurprisingly, the scale of their frauds grew in each instance. On reflection this is understandable as the fraudster had a chance to practice and perfect their skills.

To make this situation even worse we are aware of some fraudsters also receiving references from their previous employers as part of their “agreement” to pay the money back and leave. We have also heard of a subsequent victim entity taking legal action against a former employer for providing a reference and not informing them in reference checks.

We fully recognize the concerns and nervousness of governing body members. Boards commonly are embarrassed that it could have happened to them and on their watch. However the reality of fraud is that there will always be a small percentage of the population motivated to commit fraud. No matter how good an organisation’s internal control systems are, a motivated fraudster is usually able to commit fraud via circumventing internal controls, abuse of trust, and sometimes collusion, at least for a period of time.

In addition, boards commonly cite reputational damage with funders as a reason to do all possible to suppress awareness of the fraud. However in our experience most funders are much more realistic about the occurrence of fraud. As such they are more concerned that an organization takes prompt and appropriate action. Taking action earns respect.

As regards the general public, our view is that the adverse PR risk of not taking action and this subsequently coming to light is much greater than the perceived negative impact potential of taking Police action and this becoming known.

The difficulty of taking an effective Police action is sometimes cited as a reason not to act. Sadly the Police also see examples of repeat offending due to no-one taking action. In our experience the Police, while busy, are very helpful. Especially when the fraud situation has been well investigated and detailed for them with appropriate supporting documentation.

A relatively low dollar level of proven fraud is also sometimes cited as a reason not to take a Police action. However we have concern with this from our active involvement in a number of fraud investigations. Fraud is often compared to an iceberg with only a small portion showing clearly above the water. The investigations team is often left with the uneasy feeling that they have only been able to prove part of the possible defalcation.

Hence in summary we strongly recommend that in any fraud discovery that the governing body takes the appropriate Police action to act as an effective deterrent to the fraudster, and others who may similarly be tempted.

While often painful in the short term taking action is the right thing to do and in the long run your organisation’s stakeholders will respect you more for this.