The role of corporate governance in preventing or minimising fraud – Corporate/Commercial Law | #employeefraud | #recruitment | #corporatesecurity

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The role of corporate governance in preventing or minimising fraud


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Commercial Property Cleaners case


A recent matter
in which Richard Gordon MacKenzie was committed
to stand trial on charges of fraud and theft related to the alleged
manner in which the defendant ran a small
business
, Commercial Property Cleaners, which had seen one of
its directors pass away and the remaining director unavailable due
to injuries and a mental breakdown.

The allegations include that MacKenzie, the former CEO of the
company, among other things, increased his pay from $10,000 to
$25,000 and misappropriated company monies. All told it is alleged
that MacKenzie stole in excess of $3.3 million and brought the
business to its knees.

This case raises some important questions about the role a
strong corporate governance model can play in the prevention of
fraud.

Important takeaways

Regardless of the outcome of those proceedings, there are some
important takeaways for corporate governance in any business
– particularly one that is heavily reliant on one or two
people for decision making and approval processes:

  • Minority shareholders should ensure that any shareholder
    agreement provides for a right of access to the books and records
    of the company and that they exercise this right from time to time.
    If the shareholder is not themselves financially literate, an
    accountant or auditor may perform this role in their stead.

  • Directors must ensure that they fully understand their
    fiduciary obligations and ensure that they exercise the necessary
    oversight in respect of the financial position of the company.

  • Ensure that relevant staff are trained in identifying potential
    fraud. Consider to whom an employee may report a fraud being
    perpetrated against the business.

  • Boards and/or key management should conduct a risk analysis and
    put in place a fraud prevention plan, systems and policy for the
    absence of a key person.

    • Consider who would have authority and oversight in relation to
      the running of the business in your absence?

    • Do they clearly understand those responsibilities?

    • Have they had the necessary training?

  • Consider appropriate limits on the powers of any person who is
    tasked with running the business in the absence of a key
    individual.

    • Put in place specific transaction limits on access to
      electronic funds transfers.

    • Provide for a process where any larger transactions require two
      or more signatories (in these days of increasing email hacking and
      cyber crime this should be a critical part of your business).

  • If it is not practical to limit those powers, consider whether
    there are any ways for other parties to exercise oversight.

    • Dangers may arise where only one person has the day to day
      access to the company’s banking records or accounting
      systems.

    • These might be mitigated where, for example, another person who
      has a close understanding of the day to day business of the company
      has read-only access to bank or accounting records (such as a
      trusted family member who is financially literate, bookkeeper or
      accountant) or such information is subject to periodic review by
      such a third party.

  • It is also possible to grant limited powers of attorney to any
    person who may be able to exercise those powers in your
    absence.

It can be difficult to stop fraud entirely. However, fraud is
more likely to be identified and reported and its outcomes
minimised in companies that have strong internal systems and a
management culture that encourages employees to speak out about
their concerns.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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