21 July 2020

The Role of Corporate Governance in Preventing or Minimising Fraud

Chris Lillie

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.

 

 


Individual liability limited by a scheme approved under professional standards legislation (personal injury work exempted).

>
>
>
>

Stay in the know

Get our latest news and publications delivered straight to your inbox

  • This field is for validation purposes and should be left unchanged.