Spate of recent fraud cases sounds alarm for investors

THE arrest of a former CBA IT executive on bribery allegations points to a widening of corruption on the ASX.

CBA executive Keith Hunter was arrested over alleged kickbacks for IT contracts.

IT has become apparent that the scale and sweep of corrupt and dishonest dealings across Australia’s investment landscape may be a lot worse than investors ­realise.

The vast majority of investors and company executives detest corporate malpractice, not just for moral reasons but also for the much more pragmatic reason that fiddling the books in any fashion creates unfair markets: put simply, the investor is immediately disadvantaged by the omission of key information.

While we can never really know the full extent of corporate misbehaviour, it’s fair to say in recent decades the reports of corrupt activity have largely been confined to the margins. Typically it’s found in situations where local companies are dealing in offshore locations. Alternatively, it occurs at the fringes of mainstream domestic commerce with occasional culprits emerging where history suggests they feel most comfortable — pushing ‘‘related party’’ off-the-plan property developments, for example.

But now we are faced with what appears to be an upsurge in rogue activity at major listed companies, which is exasperated by what seems like habitual tardiness in reporting from the corporations involved and often made worse by a lack of prompt action from regulators.

This week’s spectacular arrest of Keith Hunter, a senior CBA executive, on charges relating to alleged kickbacks received for IT contracts, is a watershed. Major listed companies moved towards enormous multi-year IT contracts in an effort to become more efficient but the sheer sums of money that were then linked to these contracts clearly opened the gates for corruption. The CBA IT upgrade was worth in total $1 billion.

How common are kickbacks in IT services? And, what does this unfolding affair mean for the quality of service, not to mention the authenticity of dealings at a string of IT and telco companies across the market?

The one thing we do know for sure is that the company at the heart of a financial scandal — CBA — was again slow in reporting a matter to outside regulators. So slow that NSW Fraud Squad Superintendent Arthur Katsogiannis made the point that Hunter’s alleged accomplice, Jon Waldon, had time to leave the country. The Commonwealth Bank — which is one of the world’s biggest — is already in deep trouble over its very poor handling of the ­financial planning scandal, highlighted by rogue financial planner Don Nguyen, who was allowed to advance his career in the bank while whistleblower Jeff Morris was strenuously trying to alert authorities to what was going on.

Low standards in financial planning have also been an issue both here and in Britain for National Australia Bank, but this week the issue for the ­Melbourne-based bank was insider trading.

A NAB employee, Lukas Kamay, got seven years and three months — the longest ever insider trading sentence handed down in Australia — for exploiting statistics that were fed to him by an accomplice at the Australian Bureau of Statistics, Christopher Hill, who received a sentence of three years and three months. In fact the organisation in the spotlight here is as much the Australian Bureau of Statistics for its lax standards as NAB. Separately, the RBA is now investigating recent suspicious trading in the dollar in the hours before a recent rates decision.

One further example from the smaller end of the market is the recent story of outright fraud at the biotech company Phosphagenics. For investors there is even more to be concerned about — from a financial perspective — when there is fraud in small cap companies, because their share prices are more volatile. At Phosphagenics, where the ex-CEO Esra Ogru was on the take and has now been sentenced to six years in prison, the share price has nosedived from around 10c a year ago to about 4c today.

But the crucial point to be made is that these events are happening as we enjoy a relatively healthy economic landscape — though there is concern at soft patches in the wider economy, the plain truth is that house prices and share prices are rising at the same time and that implies buoyant investment conditions.

If we get a decline in conditions, the inclination for fraud and malpractice immediately escalates as more people find themselves in more situations of financial difficulty ... we need to see companies report faster, regulators to accelerate their policing actions and, more than anything else, investors have to watch these reports very carefully because they can be the trigger for share price movements that no stockbroking analyst will ever spot in advance.