Having modern and robust accounting and purchasing systems is an important step in mitigating the risk of fraud occurring. The importance of strong system controls was highlighted during a recent fraud matter we investigated.
In this recent case our client had identified irregularities in their manual purchasing system and wanted to know why. Our investigation focused on a six-year period and identified multiple fraudulent manual purchasing transactions in excess of $800,000.
How the fraud was perpetrated
The subject (who was a site manager for a council run accommodation/camping ground) was responsible for the overall management of the site including maintenance and client purchases of accommodation sites. The subject’s family members were the only other paid employees who worked on the grounds. The subject utilised a manual purchasing system to record payments for accommodation and for outsourced maintenance services. The subject was informed by the local Regional Council on required site and accommodation cost amounts for seasonal periods and length of stay. The subject would receive a base salary, whilst family members were paid as casual employees. Outsourced maintenance work was managed by the subject and billed to the local Regional Council. The subject was a long term and trusted council employee and as such was afforded independence in the management of the site. Client site payments would be made to the subject who would subsequently provide the council with a register of sites paid for, with the corroborating payments. The same would occur with maintenance costs.
However, the subject was under informing the Council on how many sites were being purchased verses sreality. For example, the subject would inform the council via his manual payment register that 50 sites were paid for in a week at varying costs, when in reality there were 100. The subject would then transfer the required monies to the council as agreed with a copy of his register, indicating 50 paid for sites. The subject would fraudulently divert the other 50 site payments to different family members accounts as inflated employee payments.
In addition, the subject would outsource maintenance and cleaning work as cheap cash payments, or work was completed by family members. The subject would then create false and overvalued invoices to the council for reimbursement.
As the site was large and popular there were over 50,000 payments/invoices with the fraudulent transactions remaining undetected for six years.
How BDO helped
BDO interrogated all 50,000 transactions against required payment guidelines and the manual purchasing system. BDO prepared a detailed report and brief of evidence which was used for criminal and civil purposes. BDO also worked collectively with the client in designing and implementing controls to help reduce the risk of fraud reoccurring. Specifically, system purchasing controls were modified to a digital format and additional cross checks and reconciliations were also implemented in order to ensure the ongoing monitoring of purchases/invoice payment.
A key reminder from this investigation is that organisations need to regularly review their systems and controls to ensure they remain effective. While on the surface organisations may believe they have adequate trust in staff and control of payments and purchases, if ‘control gaps’ exist, there will always be an increased risk of fraud occurring.
For more information on how to prevent or respond to allegations of fraud in your business, feel free to connect with me.