Article by the Forensic and Investigation Services
A Chinese perspective
Despite the Chinese government's efforts to combat fraud and
corruption, statistics emanating from Tsinghua University would
suggest that fraud and kickbacks have totalled approximately 15% of
China's GDP in the past decade.
Multinational companies are often more exposed to frauds in
China. Unfamiliar with the local language, culture or business
environment, expatriate management usually relies heavily on
"trusted" local management. Relationships
("Guanxi") open the door to the Chinese market for these
companies, but these relationships may subsequently lead to real
problems, as "normal business practices" result in
significant losses through fraudulent transactions and bribes.
When we have been called in by US and European parented groups
to investigate their operations in China, it is not uncommon for us
to find bogus transactions used to cover up cash and expensive
gifts made by the companies' sales executives to certain third
parties as "facilitation fees" for helping to secure
business. Expensive gifts in many cases were also considered part
of staff remuneration. Our investigations have often been triggered
by whistleblowers or are issues identified through staff compliance
A further dimension is added where payments have been made that
potentially are in violation of the US Foreign Corrupt Practices
Act or local bribery laws, and in such situations the company may
be liable to pay substantial financial penalties and may suffer
serious reputational loss as a consequence.
So, our top recommendations to help multinational companies
manage fraud risks in their Chinese operations are:
Be professionally sceptical – "trust but
"Know who you are dealing with" – know your
customers, suppliers, distributors and your other business partners
well. Have formalised vetting procedures.
Set up and monitor a formal internal control system.
Look out for red flags, items that are abnormal, such as
significant cash transactions.
Put in place an ethical corporate culture and a fraud averse
An Irish perspective
The announcement by the Irish quoted Greencore plc that it had
uncovered a significant and deliberate concealment of costs in its
mineral water business will raise concerns with senior management
in many companies around Ireland who will be asking themselves
"Could this happen to us?".
This is not the first time that a high profile company has
suffered unexpected financial losses as a result of accounting
irregularities that have arisen in the main from a breakdown in
fundamental internal control procedures. But, in addition to the
financial cost of such an event, the loss of reputation and
shareholder and market confidence can also have a significant
impact on the organisation. In most cases, the issues in question
appear to have slipped under the radar of senior management, and
the internal and external auditors.
So what controls and risk management procedures can
organisations implement to minimise their exposure to such losses?
As a starting point, the following fundamental controls should be
A lead-by-example culture of compliance should be established
with best practice that filters down throughout the
A clear fraud risk management strategy should be in place,
devised following a comprehensive review of the organisation's
The internal control environment should be stringent and not
easy to manipulate or override. All key accounting processes should
be subject to regular review and challenge by senior financial
management. There must be sufficient segregation of duties in all
core accounting processes throughout the organisation.
It is important that there is a culture of regular and active
involvement from head office at remote business locations,
particularly where local management may be heavily incentivised by
performance related bonus arrangements or previous owners are still
involved in the business and subject to earn out arrangements.
A recognition of the importance of the internal audit process
to risk management. Afford it a direct reporting line to the board
of directors. Of course, many businesses will not have the luxury
of a dedicated internal audit team but such businesses should
consider outsourcing this function to a third party or extending
the scope of the external audit process to cover a review of areas
of perceived risk or concern.
An embracing of the external audit process as an important
component of the risk management process. It is important that the
audit methodology is a risk based approach, agreed between the
auditors and the management team, or audit committee where
existing, and focuses on the key business risks. The auditors
should meet with management and the internal audit team on a
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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