FRAUD PREVENTION STRATEGIES IN LOCAL GOVERNMENT (1). 1 Background 1.1 Introduction Fraud is the crime of obtaining financial or another benefit by deception. The Australian Standard for fraud and corruption control defines fraud as: ‘Dishonest activity causing actual or potential financial loss to any person or entity including theft of moneys or other property by employees or persons external to the entity and where deception is used at the time, immediately before or immediately following the activity. This also includes the deliberate falsification, concealment, destruction or use of falsified documentation used or intended for use for a normal business purpose or the improper use of information or position for personal financial benefit’. Fraud can be perpetrated by employees, customers, contractors and external service providers, acting alone or in collusion. Research indicates that around 65 per cent of fraud is perpetrated by an employee. 1.1.1 Major frauds by type There are many different types of fraud. Examples include: • theft of cash or assets • unlawful use of equipment including misuse of vehicles, telephones and other property or services • creating dummy or duplicate vendors to process fraudulent payments • falsifying expense claims • obtaining ‘kickbacks’ or bribes from suppliers or contractors • creating a ‘ghost’ employee and depositing their salary into the fraudster’s bank account • unauthorised use of a credit card • disclosure of sensitive or confidential information, with the discloser obtaining some benefit • falsifying academic or training credentials in an employment application. Figure 1A and 1B show the incidence and value of major fraud types in Australia and New Zealand based on the aggregated results of KPMG’s biennial fraud and misconduct survey of private and public sector entities from 2006, 2008 and 2010. KPMG’s survey results show that the theft of cash, followed by the theft of assets, and accounts payable fraud accounted for almost 60 per cent of reported fraud incidents during the last three reporting periods. Similarly, these accounted for 70 per cent of the total value of all reported major frauds. 1.1.2 Fraud in local government Fraud is a significant problem for private and public sector entities worldwide. However, quantifying the extent and cost of fraud is difficult because of its concealment by perpetrators, and the lack of reliable reporting. The Australian Institute of Criminology (AIC) estimates that for every fraud identified, there are three that go unreported or undetected. Each year, local government collects $7 billion in operating revenues, expends $6 billion, and manages assets with a total value of $60 billion. These resources are at risk if councils are not active, vigilant and effective in dealing with the risk of fraud. AIC estimates that all fraud costs the Australian economy around $8.5 billion per year, which includes reported and estimated fraud and associated costs. This represents around a quarter of the total cost of crime nationally. In Victoria, fraud is estimated to cost over of $640 million per year. The incidence and cost of fraud in the Victorian local government sector is unknown as there is no requirement for councils to compile and centrally report this information. However, research by PriceWaterhouseCoopers indicates that government and state-owned enterprises, on average, experienced a higher incidence of fraud than private entities. This suggests that fraud is an issue local government should be vigilant about. Incidences of fraud in local government Councils are custodians of significant public funds, and it is important that the public has assurance that these are adequately protected from fraud. Fraud can adversely impact a council’s ability to meet its legislative obligations and achieve its objectives. It can damage its public image and reputation and adversely impact on business continuity including service delivery and financial stability. A council’s finances may also be significantly impacted by fraud as usually only a small percentage of losses are recovered. A number of incidences of fraud have occurred recently in Victorian local government: • More than $377 000 was stolen from inner city council parking meters over a 15-month period from 2007 to 2008. The thefts were committed by contracted employees responsible for collecting the council’s parking revenue. The offences were uncovered when an audit identified discrepancies in the revenue collected. In addition to the stolen money, the council incurred costs of over $76 000, including the repair of meters. The accused were all prosecuted and received sentences ranging from two to four years prison, suspended sentences and community-based orders. • A senior compliance officer at another inner city council took bribes of more $134 000 between 2002 and 2010 from brothel operators. The officer agreed not to investigate breaches and to tip off operators about compliance inspections by the council. The offender was prosecuted and received a 20-month prison sentence. • An accounts payable clerk at another inner city council used 88 blank council cheques to steal a total of $596,868 over a two-year period between February 2005 and March 2007. The theft was found when the council changed computer software and reconciled its cheques. The offender was prosecuted and sentenced to two years and eight months jail. To be continued.
Posted on: Mon, 27 Oct 2014 11:04:57 +0000
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