Fighting Fraud

Major prevention initiatives include:

Recognition: Identifying fraud as a business risk, and putting in place systems to manage this risk, should help reduce the level of fraud. Simply communicating to staff that such systems are in place will help.

Tone at the top: The culture in an organisation can play an important role. Those in charge should set the example and make sure it is known that fraud, or any other illegal behaviour, will be immediately prosecuted.

Whistleblower mechanisms: A number of frauds are only uncovered because of a tip-off from someone in the organisation. In many cases, people within the business know that fraud is taking place but aren’t sure how to report it, whether to take it seriously, or even whether the activity is fraudulent or not. It’s therefore worthwhile setting up a process for people to report fraud or suspected fraud, and have protection. By defining and communicating what fraud is, organisations can make their employees aware of what is acceptable behaviour.

Other simple tactics for making it harder to perpetrate fraud include putting in place security measures such as passwords on computers and locks on cupboards; keeping records and financial information in a secure location; shredding any sensitive documents before discarding; checking the details of any potential staff, for example credit ratings or police records; and separating duties so one person isn’t responsible for all financial activities.

Tax Deductions

In some situations, the monetary losses resulting from fraud are tax deductible, provided there is a connection with income-producing activity or a business and the money is included in assessable income.

Situations where tax deductions have been allowed include loss of business profits as a result of theft by an employee and loss of investment earnings as a result of theft by an agent, theft of cash takings by persons unknown from the business premises prior to banking, and loss of cash takings as a result of theft while on the way to the bank. There are also expenses (such as accounting fees) relating to the fraud or theft where they can be regarded as management of tax affairs or satisfying regulatory requirements.

But there are also exceptions where tax deductions have not been available. These include loss of money given to an investment broker for purchasing shares, where the money was misappropriated by the broker and the shares never purchased; loss of business takings misappropriated by a sole trader’s spouse, where the spouse was not acting as an employee or agent of the taxpayer; and legal and investigation fees incurred by a partnership, relating to misappropriation of funds by one of the partners.

In general, whether a tax deduction will be allowed depends on whether the loss or expense was an ordinary incident of the taxpayer’s business or income-producing activity, whether the theft or fraud was undertaken by an employee or agent of the taxpayer, or whether the money lost had been included in the taxpayer’s assessable income.

However, business owners and managers should always keep in mind that the cost of preventing fraud by putting in place a few simple systems to reduce the possibility of fraud is significantly lower than that of trying to claim money back once it has taken place.