How Safe Are You From Employee Dishonesty?
Employee fraud remains a significant issue and represents a substantial cost to Australian businesses. In its 2017 report, KPMG reported that fraud costs Australian businesses $482 million each year and business ‘insiders’ (employees) pose the biggest threat.
In a recent NSW decision  a company was held liable for fraudulent orders of mobile phones by a senior IT employee. This was the person who normally ordered any phones, and there was a course of dealings between the business and the supplier that made it reasonable for the supplier to believe that the IT employee had sufficient purchasing authority for the fraudulent orders.
The phone supplier’s reliance on the orders was held to be reasonable – despite the orders being “out of the ordinary” being a 6-fold increase in purchasing quantity over a 4-week period. It was the informal nature and content of email orders previously exchanged between the parties that lead to this conclusion.
The NSW case is a reminder that financial and reputational risks from employee fraud are very real and require ongoing vigilance.
The business had purchased mobile phones and other products from the same supplier since 2011.
The supplier’s Sales Manager usually received orders by email from the business’s IT employee by email, and the correspondence did not usually attach a purchase order. Over the period from 2011, there were 3 different senior IT employees who purchased mobile phones using this method. The last employees was appointed in March 2016.
On 23 August 2016, the senior IT employee placed a genuine order with the supplier. This order was confirmed and paid by the business. Then, between 29 August and 23 September 2016, this same senior IT employee sent 14 orders for 197 mobiles to another employee Sales Manager at the supplier.
Over the previous 5 years, the business had ordered 29 phones. The 197 now being ordered by the senior IT employee were said to be because the business was expanding and that it required additional and replacement phones. The senior IT employee also wrote in the email that he had “50 techs arriving today”.
The Court held that the explanation given for the increased order was plausible and it is not unreasonable that the order did not raise suspicion.
The new Sales Manager at the supplier asked for a purchase order. He did this twice, but each time was told that he would get one shortly and that payment was arranged for a particular date. In the end the IT employee did not send any purchase orders and the phones were dispatched. The senior IT employee also:
- fraudulently generated documents evidencing payments; and
- manipulated the business’s email account, so that any invoices issued by the supplier were redirected to an email address that only he could access.
The court described the fraud as “not an unsophisticated one”, but it was still critical of the business’s lack of corporate governance. It was this lack of governance that facilitated the fraud, and not any failure by the supplier. The fraud was identified with the benefit of hindsight.
What you need to do
- Assess (and re-assess) your corporate governance framework to ensure proper supervision and auditing of purchases and other expenses.
- Ensure that employees are regularly and properly trained in your processes, especially if there is a high degree of staff turnover. Training should include a clear acknowledgment that employee fraud and/or human error is a significant risk.
- If appropriate, identify the monetary purchasing limits of individual employees with suppliers and review your purchasing procedures and arrangements with suppliers.
- Provide suppliers with contact details of another, more senior, contact from the business and encourage them to contact that person if there is a change to the usual ordering pattern or quantity of goods.
It can be difficult for a business to protect itself from dishonest acts by a dishonest employee. Having properly formulated purchasing procedures, including spending limits, applying them and making sure suppliers know about them, will reduce the opportunity for purchasing fraud and at the same time better protect the employer from liability if fraud of that kind does occur.
Warning for suppliers
Cases regarding employee fraud are based on the circumstances. Suppliers cannot assume that they will always be protected by the “ostensible authority” of an employee within a purchaser’s organisation.
Despite finding for the supplier the Court highlighted a warning for suppliers. If anything about an order or collection of orders appears unusual, the supplier and its employees must be comfortable raising this as an issue to check with the purchaser or another employee. A supplier may also be required to have taken steps to mitigate against potential losses, where employee fraud is involved.
 Wilh. Wilhemsen Investments Pty Ltd v SSS Holdings Pty Ltd  NSWCA 32
For further information please contact the author or a member of our Employment, Workplace Relations & Safety team
This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.