Stephen Graham: Trusting staff

FRAUD'S been in the headlines over the last week - a new report on public sector fraud, charities nationwide thronging to fraud prevention workshops and real-life cases.

A key message from them all is that we're way too trusting. The gist is we tend to believe having a 'trustworthy' staff and good workplace culture means we won't get hit. Yet, as the evidence shows, trust is not enough.

Indeed, the perception that 'trusted' workers mean we're safe from the risk is actually perpetuating the problem. In the charitable sector for example, 77 per cent of frauds are carried out by paid staff with the typical fraudster profile being a middle-aged woman, according to the 2012 BDO Not-for-Profit Fraud Survey. www.bdo.co.nz/resources/2012-not-for-profit-fraud-survey

The perfect fit popped into the headlines last week with the case of a 50-year-old mother of two who stole more than $331,000 from Hoani Waiti Marae charitable trust - where she had worked for 17 years - using a combination of credit, payroll and cash theft.

Clearly, this was a case of a 'trusted' employee taking advantage of a lack of internal controls to defraud this charitable organisation of precious money, devastating its reputation and ability to continue community work.

Again, this illustrates the strong message around complacency revealed in BDO's survey - while 86 per cent of charities agree fraud is a problem for the whole sector, only 8 per cent believe it's a problem for their individual organisation.

But charities are clearly very keen to get help, as is evidenced in the overwhelming demand for free fraud detection and prevention workshops which BDO and the Charities Commission have been running nationwide over the last month.

The majority of the 21 regional workshops were booked out within a week of being offered, and interestingly, around 15 per cent of attendees at each workshop have acknowledged they've experienced fraud.

Attitudes are similar in the public sector. A report released last week by the Officer of the Auditor General - Fraud awareness, prevention, and detection in the public sector www.oag.govt.nz/reports/2012/fraud-awareness cites surveys showing that "although people identify fraud as a risk for other entities, they are much less concerned about risk in their own entities".

The report states that one quarter of New Zealand's public servants say at least one incident of fraud or corruption has taken place in their workplace in the last two years. More than 80 per cent of known frauds have been committed by one internal person acting alone - "trusted employees until their betrayal of that trust was discovered" - doing it because they thought they would not get caught.

The private sector is no less vulnerable to this type of fraud, especially small entities where intimacy and trust can be much stronger than in larger organisations. Even low level fraud of a few thousand dollars can be devastating not only for the bottom line, but company culture and reputation.

Taking the "she'll be right" approach simply isn't good enough.

People, not systems, commit fraud. Appropriate internal policies and procedures must be put in place and to be effective, managers need to make sure employees know about them and how to use them.

It's also advisable to openly discuss these checks and practices to discourage the "I won't get caught" mentality that is currently empowering the perpetrators.

Stephen Graham is a partner at BDO Rotorua chartered accounting and advisory firm.