Trust account theft - case studies and risk management
Save your money, save your business
Sourced from the January 2017 Office of Fair Trading Smart Business Bulletin.
Employee fraud cases involving real estate trust accounts are under scrutiny by the Financial Investigations Unit of the Office of Fair Trading. Poor business practices and a lack of supervision can create environments in which dishonest employees use a variety of methods to steal from employers. The two main areas of risk include:
- cash handling procedures
- purchases and accounts payable.
Fraudulent activity may result in loss of revenue, damage to credibility, public criticism along with compromising confidentiality of clients. OFT wishes to warn businesses of the potential financial consequences of such fraudulent behaviour.
Case studies examined by OFT’s financial investigators include:
- An employed property manager, who was also a tenant through the same agency, who took rents paid by other tenants and used them to pay her own rent. The fraud cost the licensee more than $3000 in rent and bond payments, as well as a loss of reputation with the tenants and property owners.
- An agent who was required to make good a trust account shortfall of more than $14,000 caused by an employee making phony orders for property maintenance services provided by her partner.
- An agent who found a $200,000 shortfall in their trust account caused by an employee entering false business records and instead transferring the money to themselves.
As well as being obliged to make up the financial loss, agents subjected to employee fraud face legal action for failing to take reasonable steps to ensure employees are properly supervised. Additionally, in some past instances OFT has been forced to consider whether a receiver should be appointed over the business due to the state of trust account records.
Agents should take the following measures to minimise the chance of employee fraud and ensure they are meeting their legal responsibility to properly supervise staff:
- Know how to use your record keeping system.
- Prevent employees from being involved in transactions they are a party to.
- Authenticate all new creditors before authorising payments to them.
- Never sign blank cheques.
- Verify all payments with the cash book entries and appropriate ledgers.
- Where possible, have separate people receive, receipt and bank cash transactions.
- Spot check a random selection of trust account transactions.
- Verify all “adjustments” in the end of month reconciliation of cash book to bank statements and ledgers.
While these examples and tips are from the real estate industry, they are also applicable in any business where employees handle money and accounts.
More information and tips to avoid employee fraud can be found on the Queensland Police Service website.