South Africa: A corporate fraud checklist

Last Updated: 28 July 2010
Article by Dave Loxton

Among the many varieties of white collar crime prevalent in South Africa today, the three most common are theft, financial statement fraud, and bribery and corruption, probably in that order.

All three kinds of crime also tend to be exacerbated by an economic downturn, which often provides one of the three points in the classic fraud triangle – the incentive to commit crime. When jobs and bonuses are on the line, profits are down and business and personal debt are piling up, employees are more susceptible to cutting corners and exploiting weaknesses in organisational controls.

Such loopholes represent the second point of the fraud triangle, the opportunity to commit fraud. It tends to be easier to commit an undetected economic crime during a recession because companies, in an effort to cut costs, often inadvertently weaken their own internal controls through injudiciously targeted retrenchment. For instance, if there used to be three people doing requisitions, payments and reconciliation and two of the three are retrenched, only one person would be left to handle all three functions. This is ill-advised as it removes the segregation of duties, which is a crucial element of good internal control.

If both the opportunity and incentive to commit a crime are present, it is all too easy to complete the fraud triangle by connecting the third and final point, rationalisation. Simply put, people are more likely to commit a crime if they can justify it to themselves. Extending the retrenchment example above, it is quite conceivable that the lone employee left doing all the work could steal company money and rationalise it away because his or her workload has trebled.

How can employers break the triangle of incentive, opportunity and rationalisation? With human nature being what it is, it is unlikely that corporate crime will ever be completely stamped out. But the risks of it occurring can certainly be managed and minimised.

The following corporate fraud checklist is not exhaustive, but provides examples of best practices that can be employed to minimise the risk of corporate fraud.

Streamline payment systems: These systems should be as simple as possible so that outflows of money can be swiftly and transparently tracked. It is surprising how many companies have such convoluted payment systems that it can take days, if not longer, to identify where payments are being made and why.

Segregate duties: Do not consolidate duties that should be split or distributed among a number of employees so as to ensure effective control. The example of separating requisitioning, payment and reconciliation comes to mind.

Test controls: Regular checks need to be done to ensure that all company internal controls are in good working order.

Train staff on their ethics policy: Companies should actively train their employees to understand and apply their ethics policy. Two of the most important aspects to emphasise in training are the company's stance on offering and accepting gifts and on employee attendance of suppliers' marketing events.

Introduce clear sanctions and enforce them ruthlessly: The companies with the least corporate crime are usually those that practise (and not only preach) zero tolerance. These companies make it clear to all employees that anyone who crosses the line into crime will be dismissed and prosecuted. They then carry this out, often in the most visible possible way, such as having the police arrest and handcuff an employee caught stealing. In this way, they send a powerful zero tolerance message. They also do not make exceptions for anyone.

Undertake proper screening of all new hires: Never employ a person on the basis of word-of-mouth referrals. Only a proper forensic check will reveal hidden secrets such as insolvency or falsified qualifications.

Go the extra mile to follow up CV claims: Prospective employers should follow up with previous employers and make direct contact with people listed as references on CVs.

Reserve your rights to talk to a current employer: Many job applicants ask a prospective employer not to approach their current employer as they do not want it to be known that they are job hunting. While potential employers usually agree to respect such requests, they should nevertheless be aware that this can be used as a ruse to prevent them from discovering unfavourable information. It is a good idea to reserve the right to contact the current employer when the person starts their new job. The person should be told upfront that this will be written into his or her employment contract. In most cases, a job applicant with something to hide will not accept the job.

Longstanding relationships are not immune to fraud: Many economic crimes are committed by longstanding employees, business partners and agents who are tried and trusted by the company. Do not fall into the trap of thinking that a person is beyond reproach because they have worked with the company for a long time.

Implement a tip-off line: Every company should have a formal tip-off line that whistle blowers can use to report suspected incidents of fraud or misconduct. Not only is a lot of fraud discovered this way, but it is also invaluable in assisting employers to meet their legal obligations under the Protected Disclosures Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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