Fraud has always been a risk to businesses, but during the good times often management fails to question good news. We see it time and time again, with businesses being cavalier with regard to risk in boom times, but wondering where it all went wrong when the rug is pulled from under their feet by a recession.
For instance, in several cases we have investigated this year, we have seen seemingly profitable enterprises falling flat when questions are asked about a particular deal or contract. Sadly, the best salesman may turn out to have been the best fraudster - in collusion with the best customer - to bill fictitious sales which are reversed after the accounting year end.
I often find that management’s most powerful defense is continuing to ask the question 'why?'. Managers and business owners need to keep asking why something is happening, especially when it sounds like good news, and they will sadly often unearth a much more unpleasant truth.
Below are my ‘Top Ten’ of the most pertinent questions for businesses when it comes to identifying fraud:
1. Why are we spending so much on marketing?
2. Why is our gross margin decreasing?
3. Why is the property we took as security worth only 50% of what we thought?
4. Why is our bonus structure linked to revenue not profit?
5. Why are we making so much profit – are we being hoodwinked by management at a remote location?
6. Why didn’t I see this sooner?
7. Why didn’t I check the Financial Director’s CV in more detail?
8. Why didn’t I have better controls?
9. Why did I put so much trust in someone who I knew nothing about?
10. Why do certain potential suppliers not reply to our requests for tender?
Our advice for business owners – question the good as well as the bad.
If you would like to discuss this topic, or for more information on FraudTrack please contact Simon P Bevan, Partner, Forensic Accounting at BDO.