23 Aug 2011

Fraud and legal risk: what employers need to know

Sally Sheppard and Dan Trindade talk to BRR Media about how employers should respond when they discover fraud in the workplace.

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Fraud and legal risk: what employers need to know
Sally Sheppard, Partner, Litigation and Dispute Resolution
Dan Trindade, Partner, Workplace Relations, Employment and Safety
David Bushby, BRR Media

David Bushby

Welcome to BRR. The incidents of fraud or white collar crime continues to be a problem for Australian and global businesses. According to KPMG's Fraud and Misconduct Survey of 2010 covering Australia and New Zealand, the incidence of fraud is on the rise, increasing from $301 to $345 million in the space of just two years. The survey also revealed that 65% of major fraud is committed by employees acting alone and they're motivated by greed and lifestyle.

So what does a business do when they detect a fraud in their organisation. Do they call the police? What steps can they take to protect their position?

Talking with us today is Sally Sheppard and Dan Trindade who are partners in the litigation and workplace relations practices at Clayton Utz.

Sally, thanks for joining us. From my perspective it seems fairly black and white - if you detect a fraud in a business you call the police and you let them deal with it. Is that the right way to go about it?

Sally Sheppard

David that sounds very sensible but there are a few traps involved. If you tell the police too early you could be causing some problems for yourself in terms of the investigation. If you don't call the police at all you could equally cause problems for yourself. So that is part of the strategic consideration you've got to give.

The first thing to understand this that in some States of Australia you must inform the police of a serious crime. So in New South Wales, for example, it's a criminal offence not to - but it's different in Victoria. But if you get the police involved too early, you may not be able to complete your investigation by the time they do theirs, and there might be all sorts of flow-on consequences of having the police involved early which really make it difficult to get to the bottom of whether there was a fraud and, if so, what you should do about it.

David Bushby

And Dan, what is the first thing an employer should do when they detect an employee has committed a fraud in their workplace?

Dan Trindade

We need to undertake an investigation, but really the steps in the investigation will depend on the particular circumstances. There are a number of factors such as whether you suspend the employee on pay so that you can take them out of the workplace and perhaps avoid, say, for example, evidence being tampered with or things being covered up. But at the same time you also need to consider factors such as fairness, and you need to consider factors such as how quickly an investigation can be undertaken. So speed and fairness are the two key elements.

David Bushby

And Dan once an investigation is underway what are some of the key risks from an employer's perspective that they need to bear in mind.

Dan Trindade

The two key legal risks are making sure that you don't treat people unfairly in the process or jump to conclusions, so prejudgment is perhaps the worst thing an employer can do.

On the other hand you need to take into account all of the factors that might be at play and come to the right decision. So it is important to get your process right and to document your process as well. Lack of documentation can quite often lead to significant risks down the track.

David Bushby

Sally, are there any other risks?

Sally Sheppard

There are a lot of competing considerations that people have in their circumstances. Often this will come to your attention as a complete surprise and you will have issues about protecting documents, protecting the company's property and making sure that you don't go around defaming people if you don't have evidence about what they've done, or looking after employees who might have been whistleblowers and might need their interests taken into account - as Dan says, all the employment issues.

You might find also that somebody has been defrauding the company by sending a whole a lot of money to a third party. You might want with the element of surprise to be able to go out and search and seize documents from that third party's premises. You can only do that if you keep everything confidential and you have got some sort of proof that there's been a fraud that they're involved in. So investigation making sure everybody is protected the company's protected, your employees protected, the information is protected are all really critical things.

I think the key message for people is to have a team assembled to deal with these sorts of issues so that you know who is the right person in HR, who in the company legal group, who in IT, who in internal audit if you've got it, and perhaps you want corporate comms involved as well. You also need somebody to lead this team to make sure all of the different divergent interests are taken into account and you weigh up the risks and you proceed accordingly.

David Bushby

And just finally, apart from the direct damage to business suffered as a result of a fraud, there are also other consequences including potential reputational risks. What are some of the things organisations need to take account of when managing the fall-out from a fraud?

Sally Sheppard

There are all sorts of issues that can arise. The focus is very internal when something like this happens. Everybody is very focused on getting to the bottom of it and trying to make sure they stop it, and get back whatever property has been taken.

But you have got issues for the rest of the employment space. Internally you've got issues potentially for external publicity. If you are publicly listed company and it's a very large fraud there might be material issues you have to report to the ASX.

So managing the internal and external perceptions of what's happened can be very important, both for sending a message internally that that sort of behaviour that you have uncovered won't be tolerated, but also to say to people in your marketplace that everything is under control, and it's been properly managed.

David Bushby

Sally, Dan thanks for talking with us.