The need for checks and balances on cheques and bank balances: Understanding and preventing employee financial misconduct

Financial misconduct committed by employees is unfortunately all too common in Australian businesses. It can range from invoice forgery to stealing from the register to abusing expense reimbursement entitlements or corporate credit cards.

Financial misconduct is, essentially, a form of theft from an employer but unlike most kinds of theft it can go undetected for long periods of time and in some cases, continue while the offender remains an employee.

This month alone, Fairfax Media have reported on two cases of alleged financial misconduct - one involving more than $1.2 million worth of fraudulent invoices and the other concerning at least 20 employees of a top university.

So, how does financial misconduct become an issue?

There are a number of ways and reasons why employees commit financial misconduct.

Obviously, there are financial motivations, particularly where an employee is directly siphoning money. But, there are also workplace culture and abuse of trust issues that come into play.

At law, a term is implied into every contract of employment (in whatever form, including verbal contracts) that an employee will faithfully serve their employer and act in their employer’s best interests. Breaching this implied term amounts to a breach of contract, entitling an employer to seek a remedy. So, in many respects, this implied term should give employers confidence that their employees will do the right thing by them, particularly when a high degree of trust is placed in those employees.

Unfortunately, where a business does not have the necessary checks and balances in place, employees can abuse the trust and confidence placed in them by their employer and seek to avoid detection.

Consider, for example, a financial accountant in a medium sized business who has responsibility for the day-to-day payment and processing of invoices, as well as responsibility for periodic financial reporting to senior management.

In this scenario, the employer places a great deal of trust in the financial accountant to both use the employer’s money for the right purposes and to report honestly on its accounts.

If the financial accountant decided to abuse their employer’s trust, they could pay fake invoices into their own account and disguise their wrongdoing as a legitimate use of their employer’s funds.

This kind of financial misconduct can occur in all types of businesses – take for example a retail manager who writes-off perfectly good stock and takes it home to resell online for their own profit.

One of the most challenging aspects of this kind of behaviour for employers is the tendency of a misbehaving employee’s colleagues to stay quiet either for fear of reprisal, because they are receiving some benefit, or in some cases because they do not know that the conduct is wrong or outside of their employer’s expectations.

This last example of financial misconduct was the kind reported by Fairfax in regards to a group of employees of a university department who are alleged to have misused university funds to purchase an excessive number of birthday cakes, coffees for students, a table tennis table and large amounts of alcohol for entertainment purposes. The expenses incurred were all approved internally, so the conduct was not flagged as out of step with the university’s policies.

In this scenario, the real issue is workplace culture. If no employee, senior or junior, views the conduct as an abuse of the employer’s trust, then how can it be adequately addressed?

How can employers prevent financial misconduct?

Having clear expectations, developing clear policies and procedures and regularly training and assessing employees against these is essential.

Employers should conduct regular checks on the decisions and approvals of employees in positions of trust. This is not to say that those employees should not be trusted to perform their duties, but rather that employers should apply their approach to checks consistently – just as a CEO’s decisions are monitored by a board, a manager’s decisions should be regularly reviewed by their peers.

Where internal culture may prevent honest feedback, or to avoid any conflicts, external auditors can be brought in to conduct reviews.

Another useful way to prevent financial misconduct is to implement a whistleblowing policy where employees, regardless of their level of seniority, can report incidents of financial or professional misconduct without fear of reprisal.

Ultimately, avoiding an incident of financial misconduct comes down to setting the right cultural values and encouraging employees to conduct themselves accordingly to those values. If an employee knows from the outset that they are expected to conduct themselves with integrity and that their decisions (and approvals) will be reviewed regularly regardless of how well they are performing, they are less likely to chance the possibility of getting caught stealing from their employer.

And finally, employers should not be hesitant to report incidents of financial misconduct and theft to the authorities. As was the case with the employee who created $1.2 million worth of fraudulent invoices, the police and other authorities should be informed so that a proper investigation can be conducted and charges laid if warranted. 

Setting an example of what will and will not be tolerated in the workplace can go a long way.

Shane Koelmeyer is a leading workplace relations lawyer and Director at Workplace Law. Workplace Law is a specialist law firm providing employers with legal advice, training and representation in all aspects of workplace relations, employment-related matters and WH&S.

02 9256 7500 |

Information provided in this blog is not legal advice and should not be relied upon as such. Workplace Law does not accept liability for any loss or damage arising from reliance on the content of this blog. Where applicable, liability is limited by a scheme approved under Professional Standards Legislation.

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