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
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How did we get here ?
What happened ?
The use of external assistance
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
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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
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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
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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
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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
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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
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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
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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:
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Full and prompt disclosure of possible fraud by CFO to
Managing Director and Chairman of the Audit Committee
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Summary of suspect transactions (contract / orders)
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Ongoing updates with CFO on investigation
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CFO briefing with MD, Board and Audit Committee
Chairman + Property Development Director)
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Conduct a site visit / video.
Call in the Experts:
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Its about credibility, process and assurance
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Collect evidence with assistance of company audit firm, i.e.
payment documents, file server data, email records.
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Where are the policies (code of conduct, staff purchasing,
induction)
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Employee contracts
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Being aware of potential privacy issues
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Considering possible explanations
Using External Assistance
Preliminary Investigation (Before Police Involvement)
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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)
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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
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Advice sought on possible approaches to dealing with the
matter, i.e. internal or police involvement (fraud squad)
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Solicitors draft correspondence to terminate employment
contracts
After Police Advised
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Formal termination of employment contracts when police
served search warrants
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Supreme court application for “freeze” of assets as part of
civil proceedings. Solicitors / Accountants collated details of
defendants assets and liabilities
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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
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1st and 2nd mentions in Oct and Nov 2009 in local court as
brief of evidence finalised.
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3rd mention in Dec 2009 a committal hearing date set for
10th – 13th May 2010.
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Witnesses served with summons to appear at committal
Where Does It End
Criminal Proceedings
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Committal Hearing 10th – 13th May
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Have pleaded “Guilty”
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DPP prepare and serve indictment
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Sentencing hearing in district court on 13th October
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Received sentences of 7yrs with non parole of 2yrs
Civil Proceedings
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Court order permits funds for day to day expenses
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Proceeds of any agreed assets sales will be paid to
Solicitors Trust
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Listing of other matters identified during investigation
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Calculation of interest on funds
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Review of any payments into superannuation since the
termination of employment.
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Initiate a mediated settlement conference which resulted in
a deed of settlement between the parties.