Reputational and financial damage by staff and payroll intermediaries can be mitigated

Karthik Prabhakar. Associate Director, Forensic
Karthik Prabhakar. Associate Director, Forensic

Recent fraud surveys point to the increasing scourge of financial fraud and white collar crime across the globe. Australia is no exception.

In the past few months, payroll related frauds have attracted significant media attention in Australia.

In many of these high-profile instances, moral responsibility, possible financial loss and reputation loss falls squarely on the clients and not the payroll company or the manpower contractor i.e. the payroll intermediaries. Subject to construct of the legal agreements, legal responsibility may lie with either the clients or the payroll intermediaries or both.

Organisations who engage with some form of payroll or staffing intermediaries are open to these risks. But there are ways to mitigate the risk and it is well worth the effort to implement them.

Due diligence

Many organisations undertake due diligence prior to contracting suppliers. Due diligence tends to take the form of obtaining financials, holding face-to-face interviews and carrying out reference checks. Whilst helpful, organisations should also consider obtaining intelligence on the ethics and integrity of these intermediaries. This can take the form of covert litigation checks, sanction checks and adverse media checks. In today’s digital world, there is a vast amount of information published online and a simple online check can throw up red flags.

Continuous monitoring

Due diligence tends to be a one-time exercise prior to on-boarding of suppliers. But due diligence needs to be performed regularly once a year or more frequently based on the risk profile. This doesn’t need to be a comprehensive check at every interval instead a regular integrity check comprising litigations, sanctions and adverse media may be all that’s needed.

Right to audit

Based on experience, in many instances ‘right-to-audit’ clauses are absent from contracts with intermediaries. Where these clauses exist, they tend to be restrictive and don’t provide access to enough information for a meaningful audit. Where they do exist, these clauses are rarely exercised over the lifetime of the contract.

Right-to-audit clauses should be included in all contracts with the provision for such audits to be conducted by a reputed independent expert.

Distributing risk

Organisations often use the same contractor over and over again with the obvious advantages of the contractor’s familiarity with the client business and not having to jump through legal hurdles time and again. However, similar to the investment strategy of not keeping all your eggs in one basket, it is better, where you can, to use two or more contractors to diversify and minimise the risk.

Whistleblowing hotline

Effective whistleblowing mechanisms are one of the key and most successful measures to detect frauds. In order to be effective, a whistleblowing hotline should be independent, easy to use, well-advertised and inspire confidence in the people reporting through those channels.

Whilst the flip side of increased irrelevant reports through an effective hotline can involve extra work, the cost of managing this is insignificant compared to the possibility of detecting fraudulent activity which may cost your business far more in financial and reputational loss.

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