The management of accounts in a public sector organisation includes functions such as accounts payable and accounts receivable, as well as the general use and management of financial accounts. The need for employees to manage the organisation’s money, and the fact that some degree of discretion is often required, creates corruption risks common to most agencies.
|Putting pressure on accounts payable staff
An ICAC investigation into allegations of fraud found that in excess of $650,000 worth of false invoices had been corruptly paid by two hospitals. The accounts payable unit shared by these hospitals was understaffed but under pressure to pay invoices in a timely fashion.
An individual exploited this situation by creating false invoices, backdating them so they appeared to be overdue, falsifying signatures or otherwise improperly obtaining “approval” for their payment, and then telephoning specific accounts payable staff to demand that they urgently pay the “overdue” invoices. The individual in question had a hidden undisclosed interest in the company whose invoices were paid.
Source: Investigation into corrupt conduct involving alleged fraud on two Sydney hospitals, August 2011.
Common corruption risks around accounts management include:
- a supplier providing false invoices resulting in payments for goods not received
- an employee manipulating the system to make payments to a non-existent supplier, and then indirectly to their own account
- an employee and a supplier colluding to overbill the agency, typically also sharing the excess profits
- an employee colluding to purchase goods or services from a supplier in return for kickbacks
- an employee approving invoices for their own private expenses, or colluding to do so for others
- an employee submitting, and receiving payment for, a false travel or petty cash claim
- an employee purchasing goods for private use through the agency’s accounts system
- an employee stealing incoming cash and cheques by establishing an account set up to look like it is an account for the agency, when it is actually controlled by the employee.
Developing a strategy
As a minimum, an agency should have an accounts management system in place that meets the standards of the NSW Public Finance and Audit Act 1983 as well as an internal audit program that covers accounts management. Fraud and corruption control around accounts management should be an element of an agency’s risk management plan.
Following an assessment of the corruption risks around accounts management, consider the following measures:
- ensure managers and employees in an accounts payable unit are competent by recruiting qualified experienced staff
- structure an accounts payable unit so each employee reports to a single manager for supervision and approval processes
- ensure delegation limits are specified so that there are appropriate approvals in place for each level of spending
- validate invoices with supporting documentation, such as requisitions and purchase orders, to ensure payments are for legitimate goods and services
- segregate duties between the officer who incurs expenditure and the officer who authorises payment to ensure controls over purchasing
- ensure regular reconciliation of transactions to decrease the risk that inappropriate transactions occur and to identify anomalies
- control electronic payments with passwords, and by using secure emails and websites
- where possible, limit the number of cost centres and accounts in the general ledger, so that the accounting system is clear and straightforward enough to be able to track payments
- monitor and review by a finance committee, or equivalent, the monthly financial performance, budgets and budget transfers, allocations, financing of projects and significant financial transactions
- ensure there are adequate controls around the creation of new vendors (for example, by requiring independent verification of vendor details such as bank account numbers)
- establish an internal audit regime that covers the payment of accounts.
|Poor invoice payment processes facilitate substantial corruption
The ICAC investigated a number of allegations involving a local council that uncovered the corrupt payment of over $5 million in invoices. Each respective invoice was either entirely false or for inflated amounts, and their payment was facilitated by a range of weak processes, such as:
- purchase orders that were created without checking that the purchase was justified
- payments that were approved by council officers who lacked any financial delegation
- non-verified vendor details that were entered into the council’s systems
- a council officer who would approve a payment to a supplier and then certify that this supplier had delivered the goods or services.
Source: Investigation into the conduct of the former City of Botany Council chief financial officer and others, July 2017
Accounts payable officers are on the frontline of fraud prevention, and yet they are sometimes not able to identify a false invoice. They may also be pressured by colleagues pushing for the speedy processing of a supplier’s payment. Specialised training, mentoring, on-the-job training from colleagues, and discussion of fraud cases, can build the competence and confidence of accounts staff to deal with fraud and corruption risks.
The first step in detecting fraud is to ensure that all purchase orders can be matched to an invoice, and to check that goods or services were actually provided. Red flags for potential fraud (indicating that further investigation may be needed) include:
- the supplier was only incorporated recently but purports to have many years of experience
- their date pre-dates the date when the purchase order was raised or the goods delivered
- the relevant identifying number (for example, the order number) is not provided or is incorrect
- the supplier has not provided a street address on the invoice and/or uses a gmail-type email address
- invoices are consecutively numbered, have low numbers or do not itemise good or services delivered.
Public officials within a unit that orders goods or services from a supplier sometimes pressure accounts payable staff to make exceptions to the agency’s required processing standards and procedures, such as paying a supplier on the basis of a faxed invoice. These pressures can be difficult for employees to navigate, especially if applied by a more senior person. Having an accounts payable manager who supports staff to consistently apply processing protocols is important.
Clear procedures that apply to the whole organisation and are communicated to staff who order goods and services also help to reduce complaints and pressure. If the size of the team allows, assign a dedicated person to resolve complaints about invoice payment and to shield staff members who are actually processing invoices from these pressures. This arrangement will make it easier to enforce standards, and protects staff from unreasonable or improper influence.
Accounts payable staff who feel uncertain or compromised should consider approaching a manager or nominated disclosure officer, or using a reporting hotline, to make a formal complaint or to receive advice on whether to make such a complaint.
Small agencies need to observe the same public sector principles and standards in accounts management as larger agencies. There is a cost associated with such systems, but it is a question of maintaining integrity around the expenditure and management of public money. Some smaller agencies do this by getting external assistance or support to manage their accounts, although there are risks to consider in doing this (for example, those associated with outsourcing).
The ICAC’s publication, Safeguarding public money: The importance of controlling invoice payments (November 2014), contains specific advice on controlling corruption related to invoice payments.
The ICAC also has a number of investigation reports detailing corruption in accounts management, including:
- Investigation into corrupt conduct of Sydney Water employees and others (March 2011)
- Investigation into the conduct of a university manager and others in relation to false invoicing (June 2015)
- Investigation into the conduct of officers of the NSW Rural Fire Service and others (December 2015)
- Investigation into the conduct of a TAFE NSW ICT manager (March 2016)
- Investigation into the conduct of a Casino Boolangle Local Aboriginal Land Council CEO and administrative officer (February 2017).
NSW Treasury’s Treasurer’s Directions outline financial management requirements for public sector agencies under s 9 of the Public Finance and Audit Act 1983. Standards Australia has published AS 8000-2003 Corporate governance as its standard on this topic.
Reviewed November 2018