Management complacent in the face of an epidemic of corruption
Established businesses are often burdened by a veil of complacency — management believes that the business is sound and operates seamlessly.
Senior directors often don’t visit key sites; they presume that controls written by an auditor 10 years ago still apply and that staff are up to date with these systems. In most cases, the staff are clueless.
Then an incident occurs, often a minor one. An investigative team is dispatched and very soon a far bigger story involving corruption, theft and fraud unfolds. After an initial suspect is identified, panic ensues and others come forward (often looking for the best possible deal from the National Prosecuting Authority).
According to the 2016 Report to the Nations on Occupational Fraud and Abuse by the Association of Certified Fraud Examiners, a typical organisation loses 5% of annual revenue as a result of occupational fraud.
The organisation analysed 2,410 cases of occupational fraud across 114 countries (13.4% of these cases occurred in sub-Saharan Africa). It found “asset misappropriation was by far the most common form of occupational fraud, occurring in more than 83% of cases, but caused the smallest median loss of $125,000.
“Financial statement fraud was, on the other end of the spectrum, occurring in less than 10% of cases but causing a median loss of $975,000. Corruption cases fell in the middle, with 35.4% of cases and a median loss of $200,000.”
The association calculated overall losses from these cases of more than $6.3bn.
In SA, the most widespread form of fraud involving senior accounting staff is the change of banking details on payments by electronic funds transfer.
Some banks still don’t verify the name of the account holder against the account number when an electronic funds transfer is made. This presents fraudsters with an opportunity to make payments that, at face value, look to be in order when they are not going to the intended recipient.
Corruption involving transporters and transport managers is an epidemic; they regularly collude to overcharge or to receive tenders dishonestly. In many instances, management in procurement departments has a vested interest in a particular supplier. When goods are purchased from this supplier they receive backhanders or a share of the profit. In some instances, fake purchase orders are created to purchase nonexistent goods.
Financial statement fraud is very difficult to detect as it normally involves the senior directors in charge of reporting these numbers. They convey this information to a board that depends on their honesty. Conventional financial audits won’t pick up these activities because auditors often rely solely on the numbers provided to them by these directors.
It is not an auditor’s responsibility to pick up fraudulent activity. A typical audit of financial accounts provides only an opinion on whether the accounts are a true reflection of the company’s financial position.
Commercial crime investigators know where to look; they understand the criminals’ mind-set and how they hide from auditors and management. But many businesses are reluctant to pursue an investigation as it is usually unforgiving in exposing weaknesses and can result in multiple criminal cases.
The best advice companies can heed is to implement a proper segregation of duties. Don’t have a single employee collecting and depositing monies. Employ password control: create numerous levels of authorisation so that different people load, verify and release transactions — it is basic logic not to have the same person loading and releasing funds.
Companies should not rely on one stock-take a year, especially at factories filled with fast-moving goods. They need to know what’s there and what’s been stolen.
Anonymous tip-offs brought to light 39.1 % of the cases in the study, with companies that had reporting hotlines faring far better than those that didn’t. When businesses implement suitable systems and controls, attempted fraud can be picked up significantly faster.
At some point, every business needs to have a good, honest look at itself. It needs to take precautions across all divisions and ensure the proper segregation of duties, building an environment that is conducive to honesty and integrity, ensuring transparency and ongoing profitability. If you don’t look in the safe, you’ll never know what is missing.