• Fraud in Focus: Fraud and corruption in the retail, food and beverage sectors

Fraud and corruption, in particular involving underpayment of wages and inadequate working conditions, is a continuing area of concern for the retail, food and beverage sectors.

Last year a number of scandals resulted in Senate inquiries and Fair Work Ombudsman (FWO) investigations.

These cases highlight the ongoing need for business to be vigilant in ensuring compliance with labour laws, applicable awards or enterprise bargaining agreements and employee rights and working conditions. In particular, organisations need to understand how fraud and collusion can occur in outsourced labour, as organisations can be liable for the poor practices of related entities – i.e. franchisees, subcontractors or suppliers. In addition, the responsibility for businesses to comply with these requirements has recently been extended to professional advisors, highlighted by a recent case brought against an accounting firm by FWO.

Underpayment of wages and labour hire risks

An emerging area of fraud and corruption risk is the underpayment of wages and the integrity of labour hire arrangements. It is important to note that while there are cases of genuine accidental underpayment of wages, there are also cases of systemic fraudulent underpayment of wages. The difference between accidental underpayment and wage fraud is the intent. Wage fraudsters act with intentional dishonesty and deceit in underpaying wages for financial gain, while organisations that have genuinely made an error act with integrity to correct the error once identified.

Organisations often at greater risk of wage fraud are franchisors and those who have outsourced labour contracting arrangements, and also those who allow contractors to engage subcontractors without their prior approval, as it can be unclear whether the subcontractor is of sound reputation and has the appropriate processes in place to ensure compliance with all relevant Acts and Awards.

The business impact lies not only in the legal breach, the associated costs (remediation; validation, calculation and the management of back-pay process) and financial penalties, but also the disruption to the business and, perhaps most significantly, the potential impact of reputational damage (internal and external).

Employee and labour fraud and corruption risks

Organisations need to be aware of risks of fraud and corruption arising in following circumstances:

  • Where subcontracting arrangements are in place there is a risk that subcontractors may actively circumvent controls implemented by the organisation for unlawful gain.
  • Where contractual arrangements may inadvertently encourage a type of behaviour, e.g. unrealistically tight profit margins.
  • When employing international students where their working hours exceed the conditions set out in their visas and unlawful advantage is taken of their vulnerable circumstances.
  • Organisations sourcing products or manufacturing overseas need to thoroughly understand their supply chain, in order to protect their brand and reputation, employee rights and standing as good corporate citizens.

Traditional fraud and corruptions risks

Aside from emerging employment fraud and corruption risks, it is important for organisations to consider more traditional forms of risk, including:

  • Skimming – the use of a separate and offline cash register, which is not connected to the business’ main point of sale system 
  • Lapping – when management or an employee steals cash from a day’s takings and records cash from subsequent cash sales against that day’s banking records
  • Deliberate misreporting of sales
  • False timesheets and payroll fraud
  • Poor quality substitutions
  • Non-approved suppliers
  • Inflated and/or diverted customer rebates
  • Theft of intellectual property.

What can organisations do to protect themselves?

Leaders need to drive an ethical culture by demonstrating continuing integrity. Key strategies for franchisors and companies involve the prevention, detection and response to fraud, corruption and other serious wrongdoing including:

  • Know what you don’t know – conduct risk assessments to identify risks of wages fraud and non-compliance
  • Not knowing leads to seeing nothing – provide adequate training to relevant staff members and contractors to ensure they are aware of their responsibilities and the applicable awards/enterprise bargaining agreements
  • Know who you’re dealing with – conduct integrity due diligence on contracted labour suppliers and subcontracted labour hire firms
  • Out of sight, not out of mind – conduct periodic forensic reviews, including fraud analyses of sites and business units, particularly those which are geographically distant from a central point of control
  • Caught red handed – carry out surprise forensic reviews at random sites or business units and enforce compliance
  • Let off steam – provide a protected avenue for workers, suppliers, contractors and customers to report concerns and a protocol for responding
  • Know thyself – carry out periodic self-assessments and testing of payroll and operational processes
  • Put your own house in order– conduct proactive forensic review of processes and controls.