Do employees steal at your company? Yes, they do – be honest with yourself
A high-profile security service, spontaneous inspections, removing cash from turnover are only part of the methods not to overlook.
– You see a fraudster?
– No, why?
– Because no doubt your company has one.
As a rule, this is the type of dialogue we have with owners of the largest Ukrainian companies.
Most of them deny the facts of fraudulent activities performed by managers inside the company.
Here are the most common answers to such questions:
“Out of the question. Being an owner, I am engaged in the operations management of my company and I control the matters directly”.
“My management team and I work alongside for ten years. We have built the company from scratch together and it is extremely loyal to me. Fraud is out of the question”.
“My management has a salary above average, it values the company and would never decide to commit fraud. Doing is against the logic”.
“My relatives take key positions at the company, thus, making the fraud impossible”.
“My company is subject to systemic financial audit procedures conducted by a representative of the global auditing network — out of question”.
“The management knows my authoritarian attitude and would not strain my confidence”.
I call all these words and formulations — “out of question”, “impossible”, “would not strain”, “illogical” — a forensic catch. They lead to an incomprehension of problems behind the regular fraud in the company.
As global practices show, companies incur 5-10% losses of the annual turnover every year as a result of fraud.
Ukrainian practice shows that 25% of annual earnings get misappropriated as revealed through financial investigations conducted by Kreston GCG in 2017.
These are horrifying numbers, aren’t they? This is the price of denial that owners pay for to managers’ benefit every year.
Most common ways and areas for fraud
Procurement department — procurement from related and unrelated parties at overstated price bypassing tender procedures.
Financial and accounting departments — intentional misrepresentation and distortion of financial statements, understatement or overstatement of financial performance. Chaotic accounting of fixed assets — risk of intentional misappropriation of assets.
Production — overstatement of products cost.
Marketing department — ineffective, uncontrolled spending of marketing budgets.
Inventory accounting and storage — plain misappropriation of products and inventories caused by poor organization processes or a lack of physical security and inventory accounting systems.
Sales department — sales through related and unrelated parties at an uncontrolled selling price, poor management of non-performing receivables. Large receivables are indicators of problems in your company.
Legal department — ineffective litigations against counterparties can also be indicative of problems at your company. A defaulted customer can outbid your in-house lawyer.
Security and IT departments — risk of information leakage.
All these moments constitute main risk points for your company.
Fraud cannot be examined, but it can be reduced to a minimum. Internal corporate fraud can be countered by specific measures.
Systematic spontaneous inspections of your management without warnings.
Well-considered financial and non-financial motivation system. Once your manager gets a percentage of business earnings, he/she will become extremely loyal to you and the company performance will directly depend on his/her own results.
Create a security department that would be accountable only to you.
Implement a whistleblowing system. Intracompany statistics show that one out of two cases gets identified through whistleblowing.
Avoid large numbers of duties and responsibilities being assigned to a single manager.
Aim for the process automation.
Follow the functional utility principle and implement a KPI system.
And above all, avoid cash as managers always find it quite sticky to their hands.
What is the key conclusion? There are no ideal methods to minimize losses caused by fraud inside business structures, but there are proven methods not to be scorned as many of them worth millions of dollars.
Artem KovbelPartner, Head of Financial Investigations