Clive Peeters hit by $20 million employee fraud – how you can avoid getting stung

The mystery surrounding “accounting discrepancies” at electrical goods retailer Clive Peeters has been solved, with a female payroll officer allegedly admitting to defrauding the company of around $20 million and investing the money in over 40 properties around Australia.

Clive Peeters launched action in the Victorian Supreme Court against employee Sonia Causer on 6 August, claiming the payroll officer falsified entries in the company’s payroll accounts, transferred cash from Clive Peeters’ bank accounts to her own account and used the money to buy properties worth just under $20 million.

The legal action came just days after Clive Peeters suspended its shares from trade on the ASX after warning it had discovered discrepancies in its accounts.

According to court documents, Causer allegedly came clean to Clive Peeters’ managing director Greg Smith after the company launched an investigation into the missing money.

“I’ve stuffed up big time and just want to curl up in a ball and disappear,” Causer allegedly told a colleague.

Smith was unavailable for comment prior to publication.

Clive Peteers says she has cooperated in the investigation and has agreed to transfer ownership of the properties to Clive Peeters.

The portfolio, which was allegedly built up between November 2007 and June 2009, contains properties in Victoria, Brisbane and Tasmania.

Smith has said that the properties, many of which have been generating rental income, will now be sold and with the property sector booming across Australia, there is a fair chance that many will have appreciated in value.

The windfall will be welcomed by Clive Peeters, which has been struggling under the weight of falling consumer spending and high debt, a legacy of its rapid expansion over the past five years.

The proceeds of the fraud are almost double the operating profit of $10.3 million that Clive Peeters posted in 2007-08.

While this alleged fraud has had a surprisingly happy ending – most fraudsters simply spend or gamble the proceeds of their crime, rather than actually investing the cash in bricks and mortar – one big question remains: How did Clive Peeters allow this to happen?

According to reports, the alleged fraud involved the altering of online transaction details such that many funds destined for creditors (including the Australian Taxation Office) were redirected to the employee’s accounts.

Peter Sexton, audit partner at WHK Horwath, says the use of electronic funds transfers have created a new opportunity for fraud.

“I’ve felt for a long time that EFT is a sleeping giant for fraud,” he says.

“People were traditionally used to paying with a cheque with two signatures, but with EFT there seems to be a total misunderstanding of the process.”

Typically, companies set up a system for EFT payments whereby one staff member initiates a payment and another person authorises the payment using a different, secure PIN number.

But Sexton says he has seen many occasions where the same person can do both tasks, or has access to both PIN numbers.

“There is often a misunderstanding by management of the access controls that need to be in place,” he says.

He recommends two measures to cut down on the opportunities for fraudulent behaviour – one preventative and one detective.

Firstly, companies must ensure they restrict the ability for an employee to change creditors’ bank account numbers. “No-one in payroll or accounts payable should be able to change those account numbers,” Sexton says.

The second measure is to make sure the person charged with authorising payments has a master list of creditor accounts at their disposal. When the sheet of transactions is produced at the end of each week or month, this employee should spot-check a few payments to ensure the account numbers match the master list.

“It’s a combination of preventive and detective controls that will give you the best protection,” Sexton says.

KPMG’s National Head of Forensic, Gary Gill, highlights a number of “red flags” that companies should look out for. These include:

• People who don’t take holidays. Gill says it’s amazing how many frauds are discovered when the person involved goes on holiday and they can’t conceal their crimes.
• People living beyond their means. Is that lowly-paid accounts person driving a new BMW and wearing some expensive new jewellery? Might be time for some discrete inquiries.
• Unusual entries in the financial accounts. Gill says these may include transactions that end in round numbers.

Gill also argues that management from a board level down need to ensure that preventing fraud is high on their list of priorities. While it is unrealistic for the CEO to be checking individual transactions, directors and senior management need to have confidence that they have systems and processes in place to prevent, detect and respond to instances of fraud.

Another crucial element for fraud prevention is a whistleblower policy. This could even involve having an external hotline that employees can call.

“There’s always somebody else in the organisation who has a strong suspicion about what’s going on,” Gill says.

“Who do they tell? And who can they talk to if they suspect their boss?”