ACTUARIAL LENSE: Let’s take a look at corporate fraud

Source: ACTUARIAL LENSE: Let’s take a look at corporate fraud | The Financial Gazette July 14, 2016

IT is often said that more money has been stolen with the tip of a pen than at gun point. Indeed, these days we rarely hear of the convectional ‘hey this is a stick up’ type of bank robberies. With the state of liquidity in our economy, bank robbery threats are no longer as ‘lucrative’ to would be perpetrators. The fancy doors installed by banks also act as a deterrent to any offenders. Fraud however has quickly arisen to become the greatest threat to the survival of not only banks but every company in general.

Corporate fraud is a serious issue in Zimbabwe and sadly, it looks like we are losing the battle. Every week there is a headline of a company, parastatal or government ministry that is up for a forensic audit. The bottom line is; we are taking a reactive stance to fraud rather than taking a logical risk management viewpoint to this issue. I have lined up a range of articles on this issue of corporate fraud in a bid to bring to light that we have a lot of options that we can take to prevent this ever growing threat. This week, we take a look at the general features that most cases of corporate fraud have.

One thing that I find amusing is the fact that for every case of fraud, there is almost always someone who knew that something fraudulent was going on. You hear people say ‘oh I always knew that Timothy was siphoning merchandise from this company, he always came in for work very early and was the last to leave’. Sadly though, people are rarely inclined to voice their suspicions out of fear of being segregated against. This is more so when someone suspects that the boss is engaged in fraudulent activities. Do you report to the boss’s boss? What if they too are in the act? There is need to ensure that employees are given safe channels that guarantee that they won’t suffer any reprisal if they point out anything fishy going on in the company.

The toughest nuts to crack are cases of fraud where everyone knows that fraud or bribery is taking place. These can be cases for example where an intricate syndicate is used to ensure that one cannot get a driver’s license without paying off their instructor – even when they don’t know in advance who their licensing instructor is going to be. They can also be cases involving billions of dollars. Nigeria and Zimbabwe are missing $16 billion and $15 billion respectively from their oil and diamond sectors. Such issues are unlikely to be the works of small groups of people. Such mega cases are synonymous with the drug trades in the US and Mexico. You can launch an investigation and get lucky to catch a couple of culprits but even they would not even know the full extent or names of all the perpetrators involved.

Another issue I noticed is the lack of a laid down protocol on how to handle fraud procedures. I know of a company where an employee was sure that his boss was stealing money from the company but wanted to get proof before making a report. The employee hacked the boss’s personal computer and phone but this turned out to be a bad move since all that evidence was inadmissible in court. A lack of documented procedures on how a company should handle fraud cases means that when fraud occurs, the company will be ill prepared. Naturally, such companies want to get it over with and end up deciding to quietly fire the perpetrator without seeking any recompense.

Pointless company procedures or rituals are also to blame for some of the fraud we see. For example, Zimbabwean companies are very fond of compelling their employees to open an account at a bank of the company’s choice. At one institution, payroll staff worked in cahoots with a small number of bank employees to cash out fraudulent pay checks. A lack of a formal procurement procedure has also been capitalised to defraud companies and state institutions. At one pension administrator, a senior manager would always make sure that his investment advisory company would always win the tenders from the pension funds.

Some have said that in America, 5% of corporate revenues are lost to fraud. I wonder what the figure is like here in Zimbabwe. If there is any doubt about the importance of ERM, I am sure that the insufficiency of internal and external audit, compliance and all other corporate functions from preventing or detecting fraud is a clear sign of the need for Enterprise Risk Management to work hand in glove with these functions. In the months to follow, I will be releasing articles on how to take a proactive stance against fraud and how each and every one of us has a duty that needs to fulfilledif we are to nip fraud in the bud.

Thomas Sithole is an Actuarial Analyst (Enterprise Risk Management) at Bluecroft Actuarial Solutions. Please refer to his corporate profile on this web address to contact him: