Six Steps to Prevent Trust From Being Betrayed

Posted on Monday, July 16, 2018

In order to effectively run a company, senior managers are entrusted with tremendous power and authority. But what if they decide to use it to line their own pockets? Investigations of executive management can be highly contentious and fraught with difficulty. It is imperative that they are conducted with the utmost discretion by highly trained and trustworthy fraud professionals. 

Of course, the goal is to prevent management fraud from happening in the first place. As part of a concerted effort, consider implementing the following six steps at your organization:

The Costs

Not surprisingly, senior management fraud is extremely costly. Here are some statistics from the 2018 Association of Certified Fraud Examiner's Report to the Nations on Occupational Fraud and Abuse:

When it comes to internal fraud, the more senior the employee, the more severe the loss. Executive/upper management fraud generated a median loss of $729,000 — significantly larger than frauds committed by employees in the purchasing department ($163,000), the sales department ($90,000), or the customer service department ($26,000).
Executive level frauds also take much longer to detect.
Using an anonymous tip hotline is helpful when it comes to cases involving senior management.
Fraud losses increase with the tenure of employees. With less than one year of tenure, the report found the median loss was $40,000. With more than ten years of tenure, the median loss increased to more than $241,000.
Education also plays a role. The median loss generated by a perpetrator with a high school education was $75,000. The median loss increased to $230,000 when the perpetrator possessed a postgraduate school degree.

1. Conduct periodic reviews of management overrides. Given the level of trust placed in senior managers, it is important to verify that they are using their power to override company policies or procedures properly. Overrides can take many forms. The simplest test is to periodically determine the underlying business reasons for them. On occasion, it is also appropriate to ensure that overrides are fully documented and verified by the superiors of senior executives. 

2. Audit reimbursement exceptions.Violations of your company's travel and expense policy can easily occur and be extremely costly. They can also serve as a method of payment that senior management uses "to buy silence" from co-conspirators, or people within the firm that have may have stumbled across fraudulent behavior. For example, an executive may approve a country club membership for a supervisor in the accounting department even though the person is typically not eligible to receive such a perk. Consider creating reporting procedures that detail all departures from company policy that have been authorized by senior management.

3. Ensure management compensation is competitive. A motive for theft can be rationalized when senior managers feel they are under compensated. Consider engaging a professional services firm to independently evaluate your management compensation plan. Alternatively, if your company has competitors of a similar size that are publicly traded, consider reviewing the annual filings that detail the compensation packages offered to senior management.

4. Review end-of-period accounting activity.In many cases, the timing of revenue and expense recognition can be easily manipulated. In general terms, if revenue is realizable and earned, then it should be recognized within the company's financial statement. Further, if the work to "earn" the revenue is to be performed in a future accounting period, it should not be reflected in the current period. In addition, generally accepted accounting principles mandate that expenses be "matched" to revenue. Be alert for expenses that do not fit this description. 

5. Monitor personnel decisions involving executive management. Senior management can inappropriately assert their influence in hiring, firing and promoting decisions. If a candidate appears unqualified for a position, and yet a manager intercedes and strongly recommends the person be hired or promoted, investigate further how the two people are related. It may be a simple abuse of power. However, the manager may be hiring or promoting the unqualified candidate because he or she is aware that fraud is being committed within the company. Or worse, the manager may be hiring someone into a trusted position to steal in the future. Another scenario:A manager may stop an employee from being fired even though he or she is incompetent or not following company procedures because the employee is crucial to ongoing management fraud.

6. Conduct random reviews of senior management e-mail messages. Your e-mail policy should clearly state that the company reserves the right to read messages. Once management fraud is suspected, it's a good idea to perform a review. 

Messages from managers rarely provide the "smoking gun" that spell out knowledge or specific details about fraud but they often contain obscure references about suspicious activities. Be alert for e-mail messages that appear to be encouraging or pressuring staff members to ignore company policies. If an e-mail discusses an explicit violation of company procedures, and an executive fails to respond disapprovingly, it may simply be because he or she failed to read the message. Or the manager may be fully aware of the policy violation because he or she initiated it. A valuable tool to support an e-mail review is a timeline detailing who knew what, when they found out, and what they did with the information.

There is no magic bullet that can prevent all incidences of management fraud. Highly motivated, intelligent senior executives can often find ways to steal. Nonetheless, the steps described above can discourage those who are currently undecided about whether or not to commit fraud — and may help detect fraudulent activity earlier.

Posted in Fraud & Forensics Group, Tax And Accounting Topics For Business

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.