Fraud is a serious threat to businesses of all sizes, causing significant financial losses and damaging the reputation of the affected company. Corporate fraud costs Australian businesses hundreds of thousands of dollars each year – and these are just the instances we know about. Fraudsters use various tactics to deceive businesses, including embezzlement, identity theft, financial statement fraud, and billing scams. As a business owner or manager, it is crucial to be aware of the risks to your business and take proactive steps to prevent them. In this post, we will discuss the most common types of fraud in the workplace and provide actionable tips to reduce the risks of fraud.

Types of Frauds In Business

Payroll Fraud

Payroll fraud, as the name suggests, involves the theft of funds from an employer via the payroll system. There are several ways that employees can commit payroll fraud in the workplace, including but not limited to, creating fake employees, stealing employee data, and manipulating time sheets or pay rates. While the payroll manager / team may have the easiest access to commit this type of business fraud, it is also possible for your payroll system to be hacked. Common types of payroll fraud include timesheet fraud, ghost employee fraud, and employee misclassification. Payroll fraud is a serious offense that can result in significant financial losses for the business.

Asset Misappropriation

Asset misappropriation is a type of business fraud where an employee steals or misuses company assets for personal gain. This can include theft of cash, inventory, or other company resources. Asset misappropriation is the most common type of fraud and can occur in any type of organization, from small businesses to large corporations. This type of workplace fraud can have a significant financial impact on a business, leading to losses and damage to the company’s reputation.

An example of asset misappropriation is an employee who steals cash from the company’s cash register and uses it for personal expenses. Another example is an employee who takes inventory from the company and sells it for personal profit. Asset misappropriation can be difficult to detect, as the perpetrator may cover their tracks by altering records or falsifying documents.

Businesses can prevent asset misappropriation by implementing internal controls, such as segregation of duties and regular audits, to detect and prevent fraudulent activities. Conducting background checks on employees and training them on fraud prevention can also help reduce the risk of asset misappropriation.

Identity Theft

Identity theft is a complex type of fraud where a criminal steals an individual’s personal information, such as their name, address, driver’s license number, or credit card information, to commit fraudulent activities. In the context of businesses, identity theft can occur when a fraudster uses an employee’s or customer’s personal information to access confidential data or make unauthorized transactions.

Financial Statement Fraud

Financial statement fraud is a type of fraud where a company misrepresents its financial performance or condition to investors, creditors, or other stakeholders. This type of fraud can involve manipulating financial records, inflating revenues, understating expenses or hiding losses. Financial statement fraud can have severe consequences for a company, including legal penalties, loss of credibility, and financial losses.

Billing Scams

Billing scams are a type of fraud in the workplace where a company receives a fraudulent invoice or bill for goods or services that they did not order or receive. Billing scams can be perpetrated by scammers posing as legitimate vendors or suppliers, or by employees who collude with outside parties to generate false invoices.

Preventing Business Fraud

Preventing business fraud in the workplace requires a combination of proactive measures, including implementing internal controls, conducting background checks and training employees on fraud prevention.

Implement Internal Controls

Internal controls are policies and procedures designed to prevent and detect fraud. These controls can include segregation of duties, regular audits, and oversight by management or a board of directors. By implementing internal controls, businesses can reduce the risk of fraud and ensure that fraudulent activities are detected and addressed promptly.

Conduct Background Checks

Conducting background checks on employees, vendors, and suppliers can help businesses identify potential red flags, such as criminal records or financial problems. Background checks can be conducted through third-party providers or by using online tools to verify credentials, employment history, and other relevant information.

Train Employees on Fraud Prevention

Training employees on fraud prevention can help them recognize potential fraud schemes and take appropriate actions to prevent them. This training can include topics such as identifying phishing scams, safeguarding confidential information, and reporting suspicious activities to management or law enforcement.

So what is your best form of protection against becoming one of the business fraud statistics?

We recommend every business undertakes a few vital steps:

1) Stay abreast of actual business fraud cases

The best way to know where the threat lies is to learn from other organisation’s misfortunes. Did you know that 36% of frauds in Australia last year were carried out by an organisation’s own management? Clearly having strong internal controls is critical in your bid to reduce the risk of undetected fraud occurring in your business.

2) Audit your fraud risk and implement strategies to reduce the chance of undetected fraud

The good news is that there are a number of strategies to reduce the risk of fraud occurring and going undetected in your business. Some strategies include having the proper internal controls in place, ensuring segregation of duties and spot checks and strengthening IT security.

MGI’s have developed a quick and easy fraud risk quiz that helps you understand your potential exposure to business frauds.

3) Have a disaster recovery plan

Particularly when it comes to cyber security you need to have a back-up plan to minimise the impact if you do end up the victim of a business fraud attack.

Some of Australia’s largest organisations are now facing fraud attacks as frequently as every four seconds (Sydney Morning Herald). While the threat to SMEs is not at this level, the threat is still very real.

Conclusion

How confident are you that your company or organisation is not exposed to the risk of fraud occurring?

Complete this quick, easy fraud risk assessment to identify the likelihood for fraud to occur and whether your current internal control environment is likely to identify this.

Business fraud is a serious threat that can have significant financial and reputational consequences for businesses. By understanding the most common types of fraud and taking proactive steps to prevent them, businesses can reduce their risk of falling victim to fraudulent activities. Remember to implement internal controls, conduct background checks, and train employees on fraud prevention. If you suspect fraud, report it promptly and seek legal assistance to protect your business and its stakeholders.

MGI South Queensland’s audit and assurance team works with clients to help them stay abreast of current fraud threats and implement controls and safeguards to reduce the risk and impact of fraud. We conduct internal controls reviews, which can provide a summary of areas your organisation may be more prone to fraud attempts. Avoid becoming one of the business fraud statistics and contact us now on 07 3002 4800 to start protecting your business today.

Company Limited by Guarantee Or Incorporated Association: Which Legal Structure Should You Choose for Your Non Profit?

So you are thinking of setting up a not-for-profit organisation and not sure what legal structure to utilise? Or you have an established Non Profit organisation but not sure if your current legal structure is the most effective for you to achieve your NFP purpose? In this blog, we explore the two most common legal structures for NFP organisations in Australia: Non profit Company Limited by Guarantee and Incorporated Associations, and highlight the pros and cons of each option.

The two most popular forms of incorporated structures are Incorporated Associations (IAs) and Non Profit Company Limited by Guarantee (CLG). In a number of cases, entities may start out as IAs but will later restructure themselves as CLGs as their operations and needs change.

Choosing the right incorporated structure for your organisation is a very important legal decision, as it has consequences for:

• where your organisation is allowed to operate (ie. only in one state or across Australia);
• your ability to attract external funding and obtain finance;
• who your organisation must provide information to (ie. a government regulator); and
• what kind and level (detail) of information your organisation must provide.

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Incorporated Associations

Incorporated Associations were introduced as a legal structure to provide a simple and inexpensive means of incorporating not-for-profit groups. All States and Territories have their own, slightly different, laws to set up associations.

IAs can only operate within the State that they are registered – so for Queensland under the Associations Incorporation Act 1981 (Qld), an IA can only have operations within the QLD state boundaries. If your NFP has, or is planning operations in multiple states (including fundraising in other states, e.g via a nationwide internet appeal), then an IA model is unlikely to be appropriate to meet your needs.

The Government Regulator of IAs in QLD is the Office of Fair Trading. If you are registered as a charity, you will also be registered with the Australian Charities and Not-for-profit Commission (ACNC), and must also report to the ACNC. This means IAs that are registered charities will report to at least two regulators.

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Reporting and Audit Requirements – Incorporated Associations

Reporting and audit requirements are on a tiered basis, with tier 1 IAs (current assets or revenue greater than $100k) having a requirement to prepare financial statements and have them audited.

Tier 2 IAs (current assets or revenue between $20,000 and $100,000) have a requirement to prepare financial statements, have them signed by an approved person who can certify that financial records show that the IA has adequately controls in place. These financials are also required to be lodged with the Office of Fair Trading, but no requirement for an audit.

Tier 3 IAs are also required to lodge financial statements, with the IA’s President or Treasurer preparing a signed statement stating that the IA keeps financial records in a way that properly records the association’s income and expenditure and dealings with its assets and liabilities.

There is no requirement for the accounts to be audited or reviewed.

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Non Profit Company Limited by Guarantee

Although we often think of a ‘company’ as being a business, a non profit Company Limited by Guarantee (‘CLG’) is a special type of company structure for not-for-profit groups all across Australia. Just like a business company, it has ‘directors’, but unlike a business, has ‘members’ instead of ‘shareholders’. Some of the provisions of the Corporations Act (eg. directors’ duties and penalties) that apply to ‘for-profit’ companies also apply to CLGs.

This structure is most commonly used for NFPs wanting to operate across Australia (or in multiple states), or larger NFPs, including those that only operate in one state.

Some legislation requires the non profit Company Limited by Guarantee structure for certain types of organisations (eg. registered housing and aged care providers). A CLG structure is also suitable for a wholly owned subsidiary organisation, as it can be set up with just one member (but does need to have three directors).

The Government Regulator of CLGs for registered charities is the ACNC, but certain Corporations Act 2001 regulations still apply to registered charities.

If a CLG is not a registered charity, but still meets the definition of a NFP entity, then currently this type of non profit Company Limited by Guarantee is still regulated under the Corporations Act 2001 and is required to lodge financial statements with ASIC. This may change in the future as the ACNC extends its coverage across NFPs in Australia.

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Reporting and Audit Requirements – Registered Charity

Reporting and audit requirements are again on a tiered basis, with either a large, medium or small charity ranking under the ACNC.

ACNC CLGs with revenue greater than $1M per annum are classified as a large charity requiring a full audit and lodgement of financial statements with the ACNC.

ACNC CLGs with revenue between $250,000 and $1M per annum are classified as medium sized charities and can adopt to have a ‘review’ rather than a full audit, which provides a lower level of assurance from the auditor. Financial statements must be lodged with the ACNC.

ACNC CLGs with revenue less than $250,000 are classified as small sized charities, and can choose whether to submit financial statements to the ACNC. No review or audit is required.

All sized ACNC CLGs are required to lodge an Annual Information Statement with the ACNC annually.

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Reporting and Audit Requirements – Not for Profit (not registered with the ACNC)

CLGs that meet the definition of a not-for-profit but that are not a registered charity currently still lodge financial statements with ASIC.

If the CLG has turnover of greater than $1M per annum, an audit is required. If the CLG has a turnover of less than $1M per annum, a review is required to be performed.

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Which Option is Correct for Your Organisation

Generally speaking, if your NFP is only operating in one State and is not deemed to be a large (*) not-for-profit, then an IA model may be an appropriate structure for your organisation.

N.B.(*) ‘Large’ in this sense is generally accepted to follow the tiered classifications under the ACNC Act 2012– e.g revenue greater than $1M.

However, if your NFP is operating in multiple States across Australia, and/or your organisation is of a larger size, the CLG model may be a more appropriate structure for your organisation.

Other benefits of considering a move to a CLG include:

1. Removal of dual reporting – a CLG legislated under the ACNC would only need to report to the ACNC once per annum, not to 2 separate regulators (as under an IA model);
2. Ability to attract independent directors to your Board may be easier in a CLG rather than attracting Committee Members to an IA. The advantages include a greater certainty of legal obligations and the ability for a company to indemnify its officers;
3. CLGs are arguably a more readily understood and accepted commercial legal structure than IAs. Consequently, it may be easier for a CLG to raise finance from creditors or receive funding from government or philanthropic trusts than IAs.

Any decisions to adopt/change your NFP structure should be run past a qualified not for profit legal advisor who can consider your organisation’s specific circumstances.

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Transitioning a CLG to an IA

If you are operating an IA and are considering changing to a CLG structure, the transition may be simpler than you think. Organisations can now transfer directly to a CLG from an IA, subject to passing a special resolution of members and being approved by ASIC.

There may be tax consequences of doing so (for example – stamp duty) – so it is advised to consult a qualified NFP accountant to discuss.

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Conclusion

A number of factors will influence an organisation’s decision about whether to become an IA or a CLG. There is no quick and easy answer, but weighing up the various factors will help you to determine which structure best suits the activities, circumstances, direction and resources of your particular group.

MGI South Queensland are not for profit accounting and audit specialists. If you would like to find out more about Non Profit Company Limited By Guarantee or Incorporated Association structures, contact us today on 07 3002 4800 today and let us shout you a coffee to discuss your requirements..

Business fraud statistics show that while 90% of Australian businesses were targeted by cyber fraud in 2017, as many as 72% of SMEs do not believe cyber fraud is a considerable risk to their business (MGI Fraud Review 2017). This is an alarming statistic which highlights how underprepared Australian small and medium businesses are to deal with a business fraud attack.

So why is there such a disparity?

Perhaps smaller businesses believe that they will fly under the radar of fraudsters who will be drawn to larger, more lucrative organisations.

But that’s not actually the case. Reserve Bank’s Cyber Security Chief Andrew Pade has said that fraudsters are now turning their attention to ‘easier prey’ at the smaller end of town.

Cyber fraud is of course not the only form of business fraud that you need to be on the lookout for.

Fraud currently costs Australian businesses hundreds of thousands of dollars each year, and this is just the instances that have been accounted for.

Fraud can occur in any organisation, no matter what size, industry or sector.

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So what is your best form of protection against becoming one of the business fraud statistics?

We recommend every business undertakes a few vital steps:

1) Stay abreast of actual business fraud cases

The best way to know where the threat lies is to learn from other organisation’s misfortunes. Did you know that 36% of frauds in Australia last year were carried out by an organisation’s own management? Clearly having strong internal controls is critical in your bid to reduce the risk of undetected fraud occurring in your business.

MGI produces an annual fraud report which highlights recent cases of business fraud.

2) Audit your fraud risk and implement strategies to reduce the chance of undetected fraud

The good news is that there are a number of strategies to reduce the risk of fraud occurring and going undetected in your business. Some strategies include having the proper internal controls in place, ensuring segregation of duties and spot checks and strengthening IT security.

MGI’s  annual fraud report provides a number of recommended actions to prevent fraud from occurring in your workplace.

3) Have a disaster recovery plan

Particularly when it comes to cyber security you need to have a back-up plan to minimise the impact if you do end up the victim of a business fraud attack.

Some of Australia’s largest organisations are now facing fraud attacks as frequently as every four seconds (Sydney Morning Herald). While the threat to SMEs is not at this level, the threat is still very real.

MGI South Queensland’s audit and assurance team works with clients to help them stay abreast of current fraud threats and implement controls and safeguards to reduce the risk and impact of fraud. Avoid becoming one of the business fraud statistics and contact us now on 07 3002 4800 to start protecting your business today.

ASIC is in the midst of a concerted campaign targeting private companies that have outgrown the reporting exemptions. So what exactly are the ASIC reporting requirements for private companies?

ASIC requires companies to prepare and lodge a financial report and a directors’ report each financial year, and have the accounts audited unless the company is exempt. Most small companies are exempt from the compliance requirements as are small foreign owned companies in certain circumstances.

Utilising data from the Australian Taxation Office (ATO), ASIC is contacting companies that have moved beyond or not complied with the exemption and are now in breach of their reporting requirements.

If your company has never had to lodge financial reports with ASIC in the past, it’s very easy to breach the rules without realising it. The ASIC reporting requirements for private companies are hard and fast and they are not overly sympathetic to “oops” as a reason for a breach.

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What is a small company?

Small companies are exempt if they satisfy at least two of the following:

• The consolidated gross revenue for the financial year for the company and any entities the company controls is less than $25 million
• The value of consolidated gross assets at the end of the financial year of the company and any entities it controls is less than $12.5 million, and
• The company and any entities it controls have fewer than 50 employees (full time equivalent) at the end of the financial year.

No longer a small company?  Then you are classified as a large company and are required to lodge audited financial statements.

Will the auditor want to audit the previous year’s figures when you were still a small company? Yes.

This exemption is for companies not controlled by a foreign entity or disclosing entities.

Failure to lodge annual accounts with ASIC may result in penalties and potentially the company being deregistered.

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The rules for foreign controlled companies

Small companies controlled by a foreign company may also be exempt in some circumstances.

For small companies that are not part of a large consolidated group, the directors must resolve to rely on relief provided by ASIC and lodge this resolution (form 384). Timing is everything to be eligible for this exemption. If the right form is not lodged between the period starting 3 months prior to the start of the financial year where relief is first applied and ending 4 months after the end of the relevant financial year, the exemption is unlikely to apply.

ASIC warns that, “in most cases, relief is not granted for financial reports that were due in the past”.

Foreign companies that fail to lodge the appropriate financials and are not exempt may be deregistered.

Again, if you have a requirement to lodge financial statements with ASIC, they must be audited.

MGI South Queensland’s specialist audit and assurance services are able to assist any business requiring audited financial statements and would be happy to provide you with more details regarding the ASIC reporting requirements for private companies.  If you are uncertain about the requirements for your company, please contact MGI and we’ll work with you to ensure your company is compliant.

News that a Seven Network senior manager has admitted to falsifying invoices is a timely reminder for all businesses of the prevalence of business fraud.

While the amount of the alleged fraud hasn’t been quantified the Seven Network has revealed that the uncovered payments go back over a number of years.

MGI Audit Manager Stephen Greene said fraud is a real risk for any business from large corporations like Seven Network to SME businesses.

“Every year in Australia instances of fraud cost businesses hundreds of thousands of dollars and these are only the ones we know about,” Stephen said.

“47% of Australian organisations experienced in excess of 10 fraud incidents in the last 24 months according to the latest reports,” he said.

MGI has released a report that analyses specific cases of fraud in 2015 and provides key strategies that can implemented by businesses to deter and detect similar fraud situations.

To download the full MGI report click here.

Have you recently read through your clubs financial statements and been confused as to what it all means? If you have, don’t worry, you’re not alone.

As an external auditor to many organisations in the hospitality and not-for-profit sectors, I often hear that the financial statements now are too complex, no longer relevant to our members and why can’t we just go back to having a simple profit and loss and balance sheet like we use to?

While I’d love nothing more than to be able to tell you that financial statements will return to less complex days, unfortunately that isn’t the case. Australian Accounting Standards (which in many ways mirror the International Financial Reporting Standards) are here to stay and generally need to be applied in preparing your financial statements. However, there is good news afoot.

Recently the accounting standards settings approved the reduced disclosure regime framework, which allows your financial statements to have significantly less disclosure than before (however you still must apply those sections that are integral to the valuation or measurement of any asset or liability). As a result of these changes financial statements can now remove much of the detailed disclosure including:

• Removal of most (in some instances) of the disclosure surrounding the clubs financial instruments (which the exception of information around any borrowings and credit facilities your club may utilise.
• Removal of the capital management disclosure, future capital and expenditure commitments, auditor remuneration and new accounting standards for future periods
• Removal of the cash flow note reconciliation of operating cash flows
• Removal of the property, plant and equipment roll forward for the prior year (however, you must still have that information disclosed for the current year)
• Removal of large sections of key management personal remuneration and some related party transaction disclosures
• Some disclosures of impairment, particularly around goodwill, intangibles and some property, plant and equipment

From our experience, the application of reduced disclosure has removed has helped the number of pages within the financial statement to reduce by up to 20%. We still believe these can be reduced even further, however, the debate still continues with the profession and our accounting standard setters as to whether it should go further. My advice to you would be to watch this space! If in doubt, talk to your auditor or accountant as he/ she should be aware of these developments.

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Key Areas

While the core of your financial statements remains much the same, there are areas that all Board members should look out for in their clubs annual report, which reveals the fundamental health of the organisation. Some of the key areas I regularly discuss with my clients include:

• Gross profit margin (particularly on food and bar operations): The gross profit is calculated as the gross profit (being sales less purchases) divided by revenue. If this ratio has a trend of declining it could indicate that either costs are growing faster than revenues and it might be time to review your prices or possibly that there is an increase in spoilage of stock, due to poor inventory management, over ordering or product or slippage of stock.
• Cash flow from operating activities: operating activities are the core of your club. It represents your bar, kitchen, gaming and other key operations of the club (such as sporting activities etc). Cash flows from these operations are key as they show whether your club is generating enough free cash flows to fund its operations, as well as key expansion/ refurbishment plans.
• Wages to income ratios: Wages represent one of the single biggest costs to any club. A simple analysis of total wages costs divided by total income will give you a quick and easy way of assessing whether your club is over/ under staffed, or whether wages are rising at a faster pace than revenues. This can be a powerful tool in assessing the future staffing needs of your club and one that should be monitored on a regular basis.
• Current Asset Ratio: The current asset ratio is calculated as current assets dividend by current liabilities. It should generally always be greater than 1, which indicates that your club has at least $1 of current assets to cover every $1 of current liabilities. This calculation helps assess the solvency of the club and the ability of it to trade comfortably into the future.
• Loan Requirements: If your club does have external debt (particularly if you have financed a recent refurbishment or extension), the bank will generally impose a number of requirements on you.

Generally speaking these include a loan-to-value ratio, an interest times cover and a debt coverage ratio (earnings divided by total loan repayments). In addition the bank generally undertakes an annual review, which includes not only looking at the past year’s results of the club, but also at your forecasted budgets for the next 1-2 years. Obviously when dealing with any bank, it is critical to ensure that these covenants are monitored regularly to make sure the club has a happy and successful financial future.

By looking at the above 5 areas within your financial statements, management and yourself can get a significantly better understanding of what’s going on in your club and can form strategies to improve the financial results. Your financial statements are much more than just your profit and I’d encourage you to have open and regular communication with both your management team at the club and your external advisors such as your auditor or accountant. They can help you understand and walk you through the complexity that is your financial statements.

If you would like a free consultation or support in this area, don’t hesitate to contact me.

Every year in Australia, instances of fraud cost businesses hundreds of thousands of dollars, and these are only the ones we know about.

Fraud doesn’t just happen on a large scale. Fraud cases can be minor in isolation, but have a surprisingly large impact on your business’ finances if left unresolved over time.

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Key fraud findings

A recent report by auditors MGI indicated 47 per cent of Australian organisations experienced in excess of 10 fraud incidents in the past 24 months.

51% of all corporate frauds that occurred in 2015 were committed by internal fraudsters.

MGI Audit Manager Stephen Greene said it was concerning that economic crimes in Australia continued to increase and is higher than the global average.

“In the last 12 months we have seen clients uncover incidences of accounting fraud, fraud by trusted people within senior management and external fraud,” Stephen said.

“In some of these instances the fraud went undetected for multiple years and accumulated to a significant cost to the business,” he said.

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What can businesses do to protect against fraud?

The good news is that there are certain strategies that businesses can adopt to reduce the likelihood of fraud going unnoticed within their business.

MGI has released a report that analyses specific cases of fraud in 2015 and provides key strategies that can implemented by businesses to deter and detect similar fraud situations.

To download the full MGI report click here.