Fraud in Business: Recognising the Signs

In terms of business-related crimes, fraud is among the more common. However, recognising fraud is more challenging than most realise. All fraud offences are predicated on an element of dishonesty. But that is generally the extent of their similarities. Fraud offences are, in fact, varied quite markedly in their nature. As a result of that, recognising fraud in certain circumstances is difficult. Nevertheless, maintaining a suitable distance from fraudulent activity is a matter of priority for all businesses. The penalties imposed on entities and individuals engaged in fraud are severe, as are the implications of such conduct. It is therefore vital to maintain an expansive knowledge of the boundaries surrounding commercial conduct.

Fraud takes many forms in business. Here is a general overview

It is widely accepted that fraud involves a high degree of dishonesty. However, the forms taken by such dishonesty are significantly different across the range of fraud offences seen in Australia. Take, for example, the most basic iteration of fraud: making misrepresentations for financial advantage. Such conduct is clearly fraudulent, and is comprised of two simple steps. But it differs notably from fraud that might occur in tendering processes, government contracts, and other, more complicated financial arrangements. An important aspect of fraud offences is the positive obligations their governing provisions impose on individuals and companies. The most notable of those obligations is the obligation to keep financial records. That is not extended by all fraud-related provisions; however, it is something of which all businesses and individuals ought to be aware.

Securities fraud

Securities fraud is rendered an offence by virtue of the Corporations Act. The Corporations Act is the principal legislation governing market misconduct, which extends beyond fraud alone and deals primarily with financial products. Financial products are defined extensively in the Corporations Act, and they include securities. In the Act, making false or misleading statements in respect of financial products is a crime. The notable tenets of that crime are more than false or misleading statement alone, though. Whether a statement-maker intends to mislead is not entirely a matter in issue. Rather, it is enough that a statement-maker knows, or ought to know, that a statement is false or materially misleading. It is even enough to constitute fraud if a false or misleading statement is made by an individual or entity that does not care if it is true or false.

Accounting fraud

The positive obligation placed upon businesses to keep accurate accounting records is most relevant to accounting fraud. Any failure by a business – whether intentional or not – to record its transactions accurately is an offence. Given the irrelevance of intention in this provision, accounting fraud is a crime of strict liability. As such, those who engage in accounting fraud are liable irrespective of their intentions or state of mind. The obligation on businesses pursuant to the Corporations Act is twofold. Firstly, a business must keep accurate financial records. Those records must record, among other things, all transactions made by that business. Accounting records must also be of such a nature as to allow the preparation of true and fair financial statements. Secondly, a business must not dishonestly destroy or conceal records, or make any false or misleading financial statement. To do otherwise is, according to the Act, accounting fraud capable of attracting criminal liability. Accounting fraud is an interesting variety of fraud, due to its reactive, as opposed to proactive purposes. Unlike other examples of fraud, accounting fraud itself does not bring a financial gain; rather, accounting fraud most often conceals other fraudulent conduct undertaken for financial gain.

Government contracting fraud

Government contracting fraud is distinct from other iterations of fraud. Most significantly, it is governed primarily under the Criminal Code Act (Cth), among other corruption-related provisions. The purpose of those provisions, collectively, is to prevent the dishonest gain of financial advantage at the expense of the Commonwealth. Unlike accounting fraud, though, it is not an offence of strict liability. The Criminal Code Act makes an offence of anything done with the intention of dishonestly obtaining gain from a Commonwealth entity. Although it might seem like an expansive definition, the operation of the terms ‘dishonestly’ and ‘intention’ place strict parameters on this offence. Specifically, those terms exclude from the provision any conduct undertaken with honesty, or inadvertence.

Recognising and responding to fraud in business is important for a range of reasons

Broad as it, the Commonwealth Criminal Code’s definition of fraud follows largely the same approach as that of the Corporations Act. The element of dishonesty is what distinguishes fraud in any case; the legislation under which it is managed depends solely on the circumstances surrounding the conduct. Recognising fraudulent conduct is then a relatively complex matter. Any given example of fraud likely attracts liability under numerous Commonwealth or state statutes. For that reason, firm procedures and professional legal input is vital in commercial transactions. Given the strict liability of some fraud offences, a high degree of care is necessary in commercial dealings to avoid fraud, and any connected liability.