“How do hired managers siphon money from the company and what can be done to prevent this from happening?”, — write: www.epravda.com.ua
Over the past year, requests from owners of medium and large businesses to conduct official investigations against top managers of companies have increased. In 90% of cases, the complaint is the same: my top manager does business in my business.
The following answers are given to my question, which indicates this: a sharp decrease in the company’s financial indicators, the lack of transparency in determining the financial result, a sudden increase in the company’s costs, failure to fulfill key KPIs.
The following three cases, which I had to investigate, vividly illustrate the situation in Ukrainian business in terms of the existing risks of unscrupulous actions.
Case number 1The owner of the business is not in operational control, and has not distributed dividends since the beginning of the great war. When he decided to distribute them, it turned out that dividing nandwhy, because the financial result is a loss.
Most companies “did not look under the hood” since the beginning of the great war. Some did not conduct a financial audit, because the law allows not to report to the tax authorities up to 90 days after the end of martial law in the country.
Most business owners have decided that the company follows a single vector to victory. It turned out that this is not quite so. A forensic audit showed that the amount of risky transactions reached 41% of the company’s revenue. No, you didn’t hear me.
Forensic audit is an independent investigation that is conducted to identify financial violations and prevent economic crimes in the company. One of the effective tools of business protection.
The identified risks affected all three main risks according to the fraud tree, which in one or another combination are found in 100% of companies.
RisksLack of accounting for non-current assets (fixed assets) and, accordingly, write-offs, which the owner did not know about. This is a fairly common scheme, according to which assets are depreciated and written off at an accelerated rate.
The shortest term of their useful use is taken, as a result of which the market value of written-off assets significantly exceeds their book value. After that, they are successfully sold at the market price, and the difference is pocketed.
Bad debt. A classic of the genre: sell products controlled by a related person and forget about the “debtor” for years until the debtor company is liquidated. Where were the company’s accountant, commercial director, CEO and lawyers? A question that has not been answered.
Regular payments of round sums to the wife of the CEO, who is nominally registered with the company, but does not actually work there. Scheme – debiting funds for dead souls and related persons. By the way, half a million hryvnias each month, Karl.
A set of unclear purchases of products (fuel and spare parts) from FOPs at inflated prices. For some reason, the manufacturer did not like it, FOPs were needed.
Off-balance sheet sales of products and income, according to which the distribution was in favor of the CEO and his relative, who is the chief accountant of the enterprise. Conflict of interests – family ties – also a red flag.
Impossibility of determining the real financial result due to poor accounting quality. This is another classic scheme of illegal alienation of financial flows, a mess in accounting – a red flag.
So, we have about UAH 200 million with an exclamation mark. I’m not talking about a number of tax risks. Do you remember one of the axioms of forensics? Internal risks generate external risks – it turns out double risks & double trouble.
RecommendationsRestore the accounting of fixed assets – minimization of illegal alienation of assets.
Restore accounting, dismiss the accountant’s relative. Until a new chief accountant is found, accounting is outsourced to an international account company under the supervision of an international auditing company – minimizing the risk of illegal distortion of financial results.
Adjust procurement policies, transparently conduct tenders – minimization of corruption. Create a vacancy for a financial controller and agree the largest amounts with the owner. Create a record of the terms of renegotiation of lease agreements with shareholders – minimizing the risk of alienation of the land bank.
Create a new staffing schedule, carry out personnel restructuring. It is mandatory to conduct a tax audit – minimization of the external risk of tax assessments. Carry out sudden inventories, adjust the budgeting process, conduct a financial audit every six months by an international company.
Wartime is a time when people’s strongest instinct is activated – the instinct to survive and preserve the family. The company is not always a family for your top manager or business partner. This is a means of survival, unfortunately, quite often at the cost of a long-standing reputation and the implementation of fraudulent schemes. It is worth remembering this and the financial security of your company – a forensic scientist.
Case number 2The company’s annual revenue is impressive – 6 billion dollars.
Tasks of the projectAnalysis of external and internal threats; verification of the partner and top management controlled by the partner; analysis of the level of the system of internal controls; detection of risk schemes, the purpose of which is the illegal alienation of the company’s assets; providing recommendations on correcting accounting errors and strengthening the control system; increasing business transparency; improving the level of cyber security.
Main findingsLack of accounting policy; decentralization of the budgeting function, which led to a distortion of the financial result; presence of non-commodity transactions; lack of signed NDA, NCA contracts from C-level; insufficient accounting automation and the ability to change accounting data retroactively.
Conflicts of interest between employees in terms of related parties; salami scheme when concluding contracts; lack of accounting of fixed assets; non-transparent procurement; lack of SHA and partnership agreement. The amount at risk is USD 16 million. The amount is insignificant compared to the revenue, but fundamental for the owner.
In addition to the objective benefit in terms of structuring financial flows and business processes, forensics has the function of reassuring the company owner. After checking, it is clear what needs to be treated, so there is no more uncertainty.
Case number 3The majority shareholder (75%) left operational control even before the start of the war. For the past four years, the company has not shown an operating profit, accordingly, the customer has not distributed dividends.
Since competitors in this region demonstrated operating profit, the customer had a question about the reality of the financial result. Forensics revealed risky transactions, the amount of which amounted to about 10% of the company’s revenue.
RisksAbsence of an accounting policy that distorted the financial result; incorrect calculation of depreciation; lack of primary documents from a number of material transactions with counterparties; the presence of off-balance sheet assets not placed on the balance sheet; realized existence of cash transactions that could not be reflected in the accounting.
Incorrect fuel accounting; problem receivables with which the legal department does not work; incorrect formation of the cost of production, which led to distortion of the financial result.
Different display of VAT in the declaration and accounting of the company; fines for late payment of taxes; the risk of non-commodity transactions; the risk of product sales for cash.
RecommendationsConduct tax and financial audits at least once a year; prescribe the accounting policy at the enterprise; control receivables; regularly conduct an inventory of current and non-current assets; to restore primary documents and partial accounting; for the owner to appoint his financial controller instead of a relative of the partner – an obvious conflict of interests.
Exiting operational control equals loss of business. In order to prevent this from happening, you need to undergo a regular financial forensic audit. According to statistics, each of us spends a significant part of our vital energy on questions of uncertainty. The forensic audit procedure helps to identify uncertainty.