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Internal Fraud – or how not to cheat yourself
| 22-02-2018 | Lionel Pavey |
Fraud is normally caused by false representation, failure to disclose information and abuse of power and position. As fraud is performed by people and their actions, a first step to prevent fraud would be to look at the current working environment within a company. If a company is putting extra stress on employees – bigger targets, loss of overtime payments, reductions in secondary benefits, no pay rises nor promotions etc. whilst the directors receive bonuses– this can lead to employees becoming aggrieved and seeking retribution. Furthermore, employing more temporary staff and external contractors, can distance the remaining employees and challenge their allegiance and loyalty.
Internal procedures
One of the least sexy components within a company is internal procedures. They need to be drafted, amended, agreed, published, implemented and reviewed on a rolling basis. Very few people enjoy writing these manuals, but they are essential to ensure that everyone is aware of the correct procedures that have to be followed to perform any tasks. Often there is talk of a “four eyes principle”. Personally, I have always believed in a “six eyes principle” as it requires more independent control and makes fraud less easy to perform. Most of the procedures are, of course, built around common sense. Duties should be segregated – different departments have different roles to perform in ensuring the complete procedure is followed throughout the company. Even within a single department, attention should be paid to segregating duties.
An example would be the administrative function relating to a purchase. There are 4 distinct stages – procurement, arrival, warehousing and dispatch/shipment. If one member of staff was responsible for the relevant data input for all 4 stages, there is an increased risk that fraud could take place. This is not to say that work should be segregated that one employee only ever does one function – this could also lead to fraud either through disenchantment or over familiarity of the systems and procedures used at one specific point in the production chain.
External procedures
Certain departments within a company have contact with external sources – suppliers, clients, financial institutions. Anyone who has contact with an external counterparty can be swayed by opportunity if the controls are not in place. In respect of purchasers – what contact do they have with suppliers outside the office? Are they entertained – restaurants, sports events etc? How often do they have contact? In respect of sales – are they responsible for determining the sales price? How often do they see clients and spend money on them? The same also applies to treasurers, cash managers, risk managers etc.
The necessary checks and balances need to be put into place. A record of all contact with external parties needs to be kept, updated, verified and stored. Temptation can be caused by personal hardship, flattery or grievance at how the person is perceived to being treated by the company.
Standing up to the boss
As stated, a healthy company should have procedures and statutes in place. These need to be adhered to at all times – there can be no exceptions. However, a mechanism for escalation is often missing. Example – someone sends in an expense claim approved by their manager. The treasurer or controller might question the veracity of a particular entry. A proper mechanism to escalate the discrepancy needs to be firmly established. That a manager has signed off on the expense claim does not mean it is correct.
Even directors have to make sure that their claims are signed off by other members of staff. Being at the top does not mean that the procedures do not apply. Requests for a priority payment outside of the agreed procedure should always be questioned. If everyone has agreed to the standard procedures, then there can be no justification to make a payment outside of the normal procedure, just because it has been deemed a priority. If truly deemed necessary, then authorisation must be given not only by management and directors, but also by the legal department. If this occurs, then the existing procedure needs to be examined as to why the incident occurred and where the procedure broke down. This all has to be detailed in writing – fraud can happen at the highest level as well as low down with an organisation.
Static data
Every contact both inside and outside of the company should be recognised and recorded in a data system. Static data refers to all relevant data concerning an entity – full name, registered address, bank details, contact details etc. This data should be fed into all other systems, but data input should be restricted to a small number of employees. These employees should not have access to any of the systems that are used to input data relating to daily operations.
Another key area is in the cash management side – book keeping can be complex and differences not noted until the yearly audit. However, cash movements contain plentiful details – name of beneficiary, account numbers etc. This can be reconciled against the prevailing static data – are the bank account numbers the same?
Fraud can never be eradicated, but by being open, allowing questions to be asked, even performing unexpected checks on the system and its integrity, and creating an atmosphere where staff know that they can question without fear of reprisal, then at least everyone will know that the company is alert and vigilant.
That knowledge and awareness will make a potential fraud think twice.
High Road or High Horse?
| 21-02-2018 | Pieter de Kiewit |
Now I am not known for being politically active or interested. Many of my clients are corporates that are in the line of fire following the whole Panama Paper affair. So understanding what is happening would make sense, perhaps I could even form an opinion. So far, this is what I see and think:
• Newspapers created news by publishing what has been known for a long time. As far as I can oversee there were no convictions in The Netherlands based upon the Panama Papers;
• Poor countries are put in off side position when it comes to receiving taxes;
• Politicians created the rules and now shout from their high horse that corporates, following their rules, lack proper business ethics;
• Large corporates are able to hire the best tax lawyers and enjoy the largest tax cuts;
• Newspapers pick the corporates with the most prominent brands as an example and do not tell the story of both sides.
This equation has (too) many variables. I think Joris Luyendijk’s remarks about being immoral or amoral (https://www.theguardian.com/sustainable-business/2016/jan/18/big-banks-problem-ethics-morality-davos) are very relevant. The difference between “I follow the rules” and “I follow the rules and think about if they are right and enough”.
Given the fact that the revenue of the large corporates is bigger than the GDP of many countries, we cannot solve the problem locally. We cannot decide for other countries but we can decide for our own. Do we want to be on our high horse and economically weak? Would that be taking the high road? I am afraid I do not oversee the full picture. If I do, am I willing to accept the consequences as a consumer, entrepreneur and employer?
Would you?
Pieter
Pieter de Kiewit
[email protected] / +31 6 1111 9783
Pieter de Kiewit
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EU Budget – the effects of fiscal policy
| 20-02-2018 | treasuryXL |
Furthermore, there are a number of correction mechanisms designed to rebalance excessive contributions by certain member states, including – the UK rebate, lump sum payments, and reduced VAT (BTW) call rates. On the expenditure side, Growth and natural resources – which include the common agricultural and fisheries policies – account for more than 90% of expenditure. Every country within the EU makes contributions and receives expenditure within their state from the EU. The difference represents the net contribution per country per year.
When a country pays a net contribution, the excess funds are redistributed within the EU to other member states. This payment to other member states is a fiscal transfer. Information relating to the sum of fiscal transfers used in this blog were sourced at – www.money-go-round.eu
This website shows gross payments, gross receipts and net balance per country per year from 1976. The top 5 net payers since 1976 have been Germany, France, the united Kingdom, Italy and the Netherlands. These 5 countries have contributed a net balance of EUR 925 billion. Conversely, the top 5 net receivers since 1976 have been Greece, Spain, Poland, Portugal and Ireland. These 5 countries have received a net balance of EUR 410 billion. This is a redistribution of both income and wealth.
Classically, the objectives of redistribution of incomes are to increase economic stability and opportunity for the less wealthy members of society. This should lead to a society where financial wealth is more evenly divided, increasing the standard of living among the poorer members. Without this mechanism, there is more risk of economic crises and less harmony between citizens of different social classes. One of the main questions has always been how long and beneficial this transfer should be. There is a danger that some people become permanently dependent on the transfer and do not actually improve their own living standards – they are seen to consume more, but not to improve their standard of living.
So how does it look within the EU?
The country that has received the most from fiscal transfers has been Greece. They ascended to the EU (in its previous incarnation) in 1981. They have been a net receiver of the EU budget for every year since 1981. In total, they have received EUR 118 billion in transfers. What Greece ever did with all this money is the subject of many articles – but it does not appear that the money was used to raise the living standards of the poor or invest in the infrastructure of Greece.
And therein lies the major problem for the EU – the mechanism used for redistribution has had no long term beneficial effect on the economy. There is no system of checks and balances to control what is done with the money. The ECB published a report at the start of 2017 about household finance and consumption in the EU. Its findings were that disparity was growing within the EU. Other reports have highlighted that whilst eastern Europe has seen large rises in GDP per capita growth, this added wealth has not been distributed evenly among all residents.
The ideals of the EU are worthy and noble – their implementation and management however, are not creating the society that they dreamt and spoke about.
Next – can fiscal union work?
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