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Never Go To War With A Man Who Has Nothing Left To Lose – Company Risk Checklist

Tying The Tourniquet
by Jacques van Wyk

As our long lockdown continues, with no immediate end in sight, the edges are starting to unravel. We hear more and more, on various media platforms, how people are growing increasingly restless and frustrated, challenging the Government’s decisions on what is and isn’t permissible under level 4 restrictions. Why, for example, can we buy winter clothes but not underwear? Why can’t we buy cigarettes? Of course, these are only some of the frustrations for South Africans.

Underneath it all, a deep and dangerous fear is growing. Companies are cutting jobs, cutting salaries or putting people on unpaid leave. Livelihoods are being threatened. People are hungry. As is often the case, individuals will bear the brunt of any recession, and we can expect to see an increase in improper conduct as people cross the line to protect their positions. The longer the lockdown continues, the more the pressure will build.

When we talk about fraud risk and unethical behaviour, one of the theories we refer to is the 10-80-10 principle. This is based on the assumption that 10 percent of the people are ethical all of the time, 80 percent could behave unethically – depending on the situation or the pressure(s) being applied – and 10 percent have no, or a severely broken, moral compass and will pounce on any opportunity to commit fraud.

Given the current COVID-19 lockdown and the resultant economic contraction, people are under increasingly severe financial pressure. As and when things start reopening, businesses’ focus will be largely on cost containment and cost cutting, and not so much on fraud. This is understandable, but it also inadvertently creates a lush breeding ground for unethical behaviour.

Forewarned Is Forearmed

Unfortunately, even your longest serving and historically most trustworthy employees might now pose a risk to your business – purely because of the financial pressure they’re currently under. The old adage, “Desperate times call for desperate measures” has never been truer than in this kind of scenario.

Employees with long company histories may also feel they’re in a better position to get away with any skullduggery because you’re less likely to suspect them, and so won’t scrutinise any queries or issues too closely. This is why it’s so important to query every anomaly, no matter how small it is or whom it concerns.

Here are a few ways in which your staff might try to generate money for themselves.  This is by no means an exhaustive list, given the wide range of business and industries out there. But hopefully, by giving you an idea of some the common scenarios that play out in situations like this, it will help sharpen your fraud detection senses:

  • A client claims their deliveries were short (they didn’t receive all their stock).
  • Stock counts don’t balance, but with very small variances (Stocktakes are done, but the discrepancies are within stock loss tolerances).
  • Clients complain about receiving invoices without a corresponding service having been carried out, or stock having been received/delivered.
  • Clients complain about payments not showing on their statements.
  • New, unknown suppliers suddenly appear on your books, being paid small amounts for alleged services rendered.
  • Suppliers complain about not being paid, although your bank records show payments have been made.
  • Bank recons don’t reconcile, and the explanation is that it’s a delayed deposit or a payment not yet reflecting.
  • Company credit cards are used for personal expenses. The explanation is that the wrong card was used by mistake, and the expense will be refunded.
  • Company fleet cards are used to purchase personal fuel and tyres, or pay for vehicle servicing or repairs.
  • Use of company accounts for personal travel and accommodation.
  • Alleged loss (by theft) of company laptops or cell phones, when they were actually sold illegally.
  • Purchasing data and airtime for personal devices using the company cell phone accounts.
  • Small amounts go missing from petty cash with no printed or handwritten receipts.
  • An unexpected increase in the price of items (hints at suppliers and staff in collusion).
  • Fictitious sales. These are later reversed, but the salesperson has claimed commission in the meantime.
  • New clients, that are not properly vetted, who place big orders and then don’t pay.
  • Receiving a phone call from SARS claiming that they have received no, or only partial, payments for VAT, PAYE, UIF, SDL, taxes etc.

Individually, these may all be relatively small losses. But if committed regularly, they can collectively snowball over time, killing businesses as they come out of the lockdown.

So, What Can We Do?

There’s no substitute for vigilance. You have to sleep with the proverbial one eye open, and query any and every anomaly – no matter how small. It may be the tip of a business-sinking iceberg.

Remember: Everyone thought the Titanic was unsinkable, and that the seemingly small iceberg up ahead was too little to cause any real damage. Well, we all know how that story ended….

Glug Glug Glug! Iceberg 1 – Titanic 0.

Questions that companies should be asking at this time include:

  • Do our staff and suppliers feel empowered and protected enough to bring any suspicious goings on matters to our attention?
  • Do we have an ethics policy in place that encourages our employees, suppliers and contractors to behave in a certain way and report any misconduct?

Being aware of the potential fraud risks, having robust systems in place and remaining vigilant during this crisis will help you avoid fraud losses and the possible damage to your reputation this could cause.

Please stay safe and stay vigilant during this lockdown. Use the time to relook your business models, policies, procedure and risks!

JGL Forensic Services is a multidisciplinary team of experienced forensic accounting and investigation professionals. We strongly believe in the rule of law and the scientific method as it applies to forensic accounting and investigation. Talk to us in confidence, and let’s work together to prevent corporate corruption and fraud.

We are working remotely throughout the lockdown period and can assist you!

Please take care, and look after yourself and your loved ones.