Something to Consider November 2017 1

Why Accounting Fraud and Operational Failures Go Hand in Hand

In a recent case brought before the SEC, Alere Inc were forced to pay $13 million on charges of accounting fraud and overseas bribery. The two offences were linked, and it is becoming clear that there is a systemic connection between some accounting adjustments and the leadership and policy failures in business operations, far away from finance.

Under extreme pressure to hit aggressive targets, there are many examples of sales and operational behaviour that break policy, are unethical and sometimes illegal. Often these ‘unusual’ sales events require some eventual ‘massaging of the numbers’ through later adjustments, accruals and write-offs. The example used in the article is of products recorded as ‘sold’ but not leaving warehouses as reported, in order to inflate quarterly targets. But of course, the story does not end there.

A toxic sales targets environment, often in a subsidiary operation, combined with local managers turning a ‘blind eye’ while demanding ‘sales revenue at any cost’ and bonus hungry staff with an ineffective moral compass is a recipe for disaster. Although culture and awareness is improving, it is clear from current cases that we still have a way to go.

Constantly improving policies, procedures and controls, monitoring and assurance, together with a broader separation of duties, not just at the task level, but organisationally and geographically, with Shared Services for example, are working to reduce these behaviours and activities. However, this article reminds us to be vigilant, and be aware that where ‘errors and omissions’ can easily get disguised with a later accrual or adjustment, a deeper malaise may be at work. Fraud and accounting discrepancies go hand in hand.

The reality is that ‘it takes a village” to commit fraud and undermine values, principles and policies and we need to ensure that our finance and accounting teams are not unwittingly involved in creating a situation where the ‘numbers’ are not an accurate reflection of the business.

The article raises an important challenge – “do your team see themselves as a small voiceless cog in a larger organizational process?” – this may be the germ that spreads a more virulent disease.

But not only is this a leadership and culture issue – with the latest techniques we no longer need to rely on random samples. We should be monitoring all controls and policies as well as the activities in our business to monitor unusual vendor/partner relationships and transactions from an FCPA perspective but recognise that the corollary is in the financial accounts from an ICFR or SOX perspective.

You can find the full opinion piece here

Our ‘Something To Consider’ snippets are framed as small, digestible, ‘dashes of insight’ around the pillars of what we define as “World Class Finance” – Process Optimization, Financial Control and Compliance, and Risk Assurance, all underpinned by technology enablement and integration.