Session 6: Recent fraud examples in Australian and New Zealand organisations

Presented by:• Kevin Hannan Devine

Frontline of a Fraud Investigation

Kevin Hannan, Manager Internal Audit

Areas to Cover

1. How did we get here ?

2. What happened ?

3. The use of external assistance

4. The role of Internal Audit, Management and the Board

5. The legal process

6. Where does it end ?

Media Update

The Current Status

Legal Position• Two former employees and their wives charged with up to 11

counts of fraud.• Their initial plea was “not guilty” and they were released on bail. • Assets have been frozen by the supreme court pending the

outcome of legal proceedings• Committal hearing in May 2010 – Pleaded Guilty and charges

against their wives dropped.• Entered into a confidential deed of settlement to recover funds

in lieu of taking civil actions.

Devine’s Position• Ann St project and ICB Herston projects both completed on time

and within budget• New Construction Manager appointed and Site Manager

promoted• Voluntarily repaid GST on amounts where no service provided.• Claim under fidelity insurance policy resolved• Business as usual.

Time Line

Background

Devine Constructions• Setup in late 2004 for the purpose of constructing high-rise

residential and commercial projects rather than outsourcing.• Using their own system with a full contract management module

(CHEOPS). Manual update of results to company’s core system• Documented formal policies and procedures for managing all

aspects of the business• Run by two key managers both with a high level of authority and

influence and significant building & industry experience

Devine Limited• Payments predominately by cheque (2 signatories) with some

manual EFT’s• Runs a legacy system built on a DB2 database and

programmed in Cobol. It requires overnight batch posting of some transactions but does have a new modern interface to replace the green screen and is extremely reliable and flexible.

• Formal monthly Project Control Group (PCG) meetings held to oversee large scale projects. Focus of project status and cost control.

• Audit Committee and Internal Audit function in place

What Happened

The Red Flags that Existed• Consistent staff turnover• Office “issues” existing that impacted on staff moral• Unauthorised “arrangements” in place with some staff• Reporting on budgets, actual results and forecasts was

becoming vague and delayed• Password controls believed to be compromised.• Invoices signed off by senior managers and not project staff• Extremely tight control over costs and approvals limited to

senior management

The Controls That Worked• The National Accounting Manager followed up anomalies when

signing cheques (look / format / value of an invoice)• Performed a company search• Checked the payroll system using read only access• Off on a Roller Coaster Ride (I went to Movie World)

The Invoices that weren’t Invoices• Payments made to a company for work that was not done• The Directors were related to the two senior managers

What Happened

Assess what has gone on:

• Full and prompt disclosure of possible fraud by CFO to Managing Director and Chairman of the Audit Committee

• Summary of suspect transactions (contract / orders)

• Ongoing updates with CFO on investigation

• CFO briefing with MD, Board and Audit Committee Chairman + Property Development Director)

• Conduct a site visit / video.

Call in the Experts:

• Its about credibility, process and assurance

• Collect evidence with assistance of company audit firm, i.e. payment documents, file server data, email records.

• Where are the policies (code of conduct, staff purchasing, induction)

• Employee contracts

• Being aware of potential privacy issues

• Considering possible explanations

Using External Assistance

Preliminary Investigation (Before Police Involvement)

• Assistance in reviewing file server documents• Review of Mail Files• Documenting Critical Evidence• Performing property searches• Helping to understand what the evidence was telling us• Providing advice to the board and instruction solicitors• Preparing a 36 Page preliminary report within 3 weeks

Detailed Investigation (After Police Involvement)

• Police exercise search warrant on homes and offices, seize computers, documents and equipment.

• Further reviewing of project documentation• Imaging and review of computer equipment• Providing advice on material uncovered• Prepare a Second Preliminary Report covering new matters• Helping to piece together what was happening

Key Parties Involved

The Board

The key decision maker to determine what action to take based on the evidence available.

The Audit Committee

Involved in the early investigation processes and discussions.

Managing Director

Involved in the early investigation processes and discussions providing advice and direction on managing the processes and decisions on who to involve.

Chief Financial Officer / Company Secretary

Initial company officer advised on the matter. Managed the initial investigation processes and involved in the decision to obtain external advice and assistance from relevant forensic accountants and solicitors.

Key Parties Involved

Construction Division

Briefed on the situation (as were all staff) but allowed to focus on the construction projects in progress.

Internal Audit

Provided the key resourcing for performing the investigation under the guidance of the CFO and Ernst & Young and to a certain extent the police. Tasks undertaken included:

– Collecting cheque payment documentation

– Review and follow up of matters identified during the review of computer and email files

– Cleaning out offices and dealing with supplier enquiries (skip bins / invoices)

– Liaising with the police on queries, files, system data

– Providing a key witness statement

– Gathering project documents from archiving

The Legal Process

Initial Stages

• Advice sought on possible approaches to dealing with the matter, i.e. internal or police involvement (fraud squad)

• Solicitors draft correspondence to terminate employment contracts

After Police Advised

• Formal termination of employment contracts when police served search warrants

• Supreme court application for “freeze” of assets as part of civil proceedings. Solicitors / Accountants collated details of defendants assets and liabilities

• Police lay changes (Late 2009) and have approximately 4 wks to submit a brief of evidence as part of process to seek a committal hearing date from the local court magistrate

• 1st and 2nd mentions in Oct and Nov 2009 in local court as brief of evidence finalised.

• 3rd mention in Dec 2009 a committal hearing date set for 10th – 13th May 2010.

• Witnesses served with summons to appear at committal

Where Does It End

Criminal Proceedings

• Committal Hearing 10th – 13th May

• Have pleaded “Guilty”

• DPP prepare and serve indictment

• Sentencing hearing in district court on 13th October

• Received sentences of 7yrs with non parole of 2yrs

Civil Proceedings

• Court order permits funds for day to day expenses

• Proceeds of any agreed assets sales will be paid to Solicitors Trust

• Listing of other matters identified during investigation

• Calculation of interest on funds

• Review of any payments into superannuation since the termination of employment.

• Initiate a mediated settlement conference which resulted in a deed of settlement between the parties.