Liquidators find finance fraud on rise
A partner at PPB Advisory, Peter Morris, said he was seeing more financial statement fraud including staff fudging financial reports, excluding information, faking revenue or asset value, or understating expenses.
He expects to be able to reveal in coming months that financial statement fraud has been found in several recent collapses.
"Through the restructuring process we are finding that there are issues of financial statement fraud that is going on and have been going on for a number of years. [The fraud has] a mask of profitability that tricks people into thinking the organisation is performing better than it really is," Mr Morris said.
"It is usually people working in finance who are responsible for the fraud. From a chief financial officer to a staff member who was given instructions such as 'we are expecting to meet these performance hurdles'."
KPMG Forensic's recent survey of fraud, bribery and corruption in Australia and New Zealand found an increase in collusive behaviour, which also made it harder to detect fraud because several people were covering it up.
KPMG partner David Luijerink said staff in the financial department "know how the accounts work and know where the weaknesses are [and] know how to exploit it".
Financial statement fraud was often committed by someone in a position of trust who produced work that was too complex to be double-checked by anyone else, he said. For example, the same group of people was often asked to produce and reconcile the company's accounts.
"I think we are seeing a little bit more, but it is often tied to economic cycles ... [we are] not talking about normal consumer fraud. We are talking about stuff that is not picked up for two years after it starts."
The top contributors to corruption were a "lack of senior management commitment to ethical conduct" and companies operating in "inherently unethical" industries.
Corporate management fraud accounts for just 1 per cent of incidents, but 18 per cent of the value. Similarly, fraudulent statements account for 6 per cent of incidents, but 20 per cent of total value, according to KPMG's report. While financial statement fraud was usually committed by a group of people for the sake of the company, individuals were still personally liable.
Mr Morris said it can be a shock to finance department staff to realise something they did to help their employer could land them in jail.
He has found the fraud helped companies stay within their loan conditions, or get a larger loan, or window-dress ahead of a merger.
Frequently Asked Questions about this Article…
Liquidators and restructuring advisers are finding more cases of financial statement fraud in recent corporate collapses. Examples include staff fudging reports, excluding important information, faking revenue or asset values, and understating expenses. Advisers expect more instances will be revealed in the coming months.
The article says financial statement fraud is often committed by people working in finance — from chief financial officers to finance staff following instructions. It’s frequently carried out by someone in a position of trust who produces work that’s too complex for others to double‑check.
Fraud is often concealed through collusive behaviour where several people cover it up, and by using complex accounting work that isn’t independently checked. KPMG Forensic’s survey found an increase in collusion, and advisers note these schemes can go undetected for years because staff know how accounts work and where the weaknesses are.
Financial statement fraud can create a false ‘mask of profitability’ that makes a company look healthier than it is. That can mislead investors, affect share prices and value, and influence lending or merger decisions. The article also notes that while some fraud types are a small share of incidents, they can account for a large share of total monetary loss.
Yes. The article says individuals can still be personally liable for involvement in financial statement fraud. Advisers warn some finance staff are shocked to learn that actions intended to help their employer could lead to serious personal consequences, including criminal penalties.
According to the article and KPMG’s findings, top contributors include a lack of senior management commitment to ethical conduct and companies operating in industries described as ‘inherently unethical.’ The advisers also note fraud can rise and fall with economic cycles.
KPMG’s report highlighted that corporate management fraud made up just 1% of incidents but 18% of the total value lost, while fraudulent statements accounted for 6% of incidents but 20% of total value—showing these types of fraud can be disproportionately costly.
Investors should be wary of a persistent ‘mask of profitability,’ opaque or overly complex accounting practices done by a small, unreviewed group, signs of collusion or lack of transparency, and a clear absence of senior management commitment to ethical conduct. These red flags were highlighted by liquidators and KPMG as common in companies with financial statement fraud.
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