Smart Business asked Lawrence Simon to explain the practical steps that middle-market companies can take to implement fraud deterrence programs and otherwise protect from fraud.
Has public awareness and recent criminal prosecutions deterred fraud?
There is no question that the tougher laws, jail time and improved internal controls have made an immeasurable impact in deterring fraud in our society. However, human instinct will always give in to the temptation to steal or falsify accounting records for personal monetary gain. That’s why it will always be critical to implement specific fraud deterrence programs to safeguard the assets, value and reputation of a company.
What types of pressure points exist for individuals to commit fraud?
Several, for both large and small companies.
Incentive and pressure - We have seen from the fraud committed by the Enrons, WorldComs, and other large public companies that greed for personal gain is a driving factor. For instance, a company may buffer revenues and profits so that key executives or shareholders will benefit from stock or bonus programs or even the continued appreciated value of their company’s publicly traded stock
Opportunity - Poor oversight and weak internal controls can provide plenty of opportunity for an employee to commit fraudulent activities. We find in too many instances that companies have not regularly reviewed their own internal controls, which have provided significant gaps available for an individual to steal assets.
Rationalization - Many fraud perpetrators find no difficulty justifying their fraudulent behavior. For instance, we have seen reasons in employee theft situations justifying their actions with a comment such as, ‘I borrowed the money, and was going to pay it back.’
What are some steps for management to protect their company against fraud?
There are practical steps that all companies can take to prevent and deter fraud from occurring. Recent studies have shown that fraud deterrence programs can reduce or cut fraud losses significantly. For example, The Association of Certified Fraud Examiners 2002 Report to the Nation indicated that ‘the most common method for detecting occupational fraud is by tips from an employee, customer, vendor or anonymous source.’
Measures can be taken to counteract or deter any potential fraudulent activities.
- Management must lead the tone of ethical behavior. Establishing a ‘Code of Ethical Conduct’ will reflect the ethical values of the company. This written code is an excellent way for management to communicate the ethical rules that they must follow, along with all corporate employees.
- Implement a fraud detection program. Specific procedures can place to detect fraudulent activities. These procedures can be performed by an internal audit group or certain designated individuals. Interestingly, these types of audit steps tend to discourage employees from committing fraud because they realize that their acts could be detected.
- Establish an employee and vendor hotline. Establishing a confidential hotline operated by a third party can be the best method of detecting fraud. Over the past several years, it’s been shown that an employee/vendor hotline represents a critical tool that can be anonymously used for reporting suspicious activity. Once reported to the hotline, the tip is extensively investigated to gather all of the supporting evidence for the claim.
- Educate your employees about fraud. It’s extremely critical to provide your employees with the knowledge as to the different types of fraudulent activities, and how they might identify occurrences of fraud in the work place. In addition, the message of ethical behavior should be continuously communicated to your employees through e-mail messages, newsletters, posters and other repetitive methods. Constant communication can be a key element toward enhancing your company’s corporate culture.
LAWRENCE A. SIMON is a Certified Public Accountant and director of Doeren Mayhew, a regional accounting firm in Troy, Mich. Doeren Mayhew provides a wide range of professional services to middle-market companies. Reach Simon at email@example.com or (248) 244-3225.
For today's supplier to be profitable, it must efficiently operate the entire value chain.
Original Equipment Suppliers Association (OESA) recently conducted an eye-opening survey to identify the operational issues facing automotive suppliers. This diagnostic survey was distributed to more than 200 automotive suppliers and focused on various categories of supply chain manufacturers for refinancing, restricting and optimizing the supply chain.
To summarize the findings, it's important to put supply chain management in perspective. A decade ago, total supply chain inventory was roughly 200 days. As earnings pressure began, original equipment manufacturers tried to improve margins and reduce inventory.
A first wave of supply-base transition led by GM and Ford spun off their in-house supply bases, creating megasuppliers with increasing systems integration responsibility. Concurrently, many smaller Tier 1 suppliers were merging and altering business models in order to compete at the Tier 2 and Tier 3 level, or divesting their automotive supply businesses.
To make the necessary cost reductions in a fierce, price-driven environment, the surviving suppliers turned to lean manufacturing and, to a lesser degree, toward leaning out their own supply chain.
Today, surprisingly, the industry has improved marginally to 180 days of inventory, still far too many. A new, second wave of supplier rationalization, driven by the mega-Tier 1 suppliers created in the first wave, underscores price competition at the Tier 2 and Tier 3 levels, as many have already "leaned out" their organization.
The data collected from the OESA Small and Medium Suppliers Council survey revealed that more than 90 percent of companies believe a large opportunity lies in supply chain management (SCM); however, only 10 percent of small suppliers have formal SCM systems. These same suppliers are committing to more stringent requirements up the value chain to customers.
The survey found that 69 percent provide verbal encouragement to suppliers on performance requirements such as customer service levels and quality. Respondents also indicated priorities are primarily driven by direct cost, quality and delivery requirements. However, the survey reveals that companies are managing only the first level of direct costs and not aggressively addressing indirect costs.
In the imperfect world of the automotive supply industry, one of the few elements in relative control is inventory. The survey found that inventory represents a significant cost reduction opportunity.
On average, 48 days of inventory is carried in the supply base. However, when broken down by size of company, that number changes dramatically. A company with revenue of $100 million, carrying a 35-day inventory, can save more than $200,000 by reducing inventory by just one day.
Likewise, a company with revenue of $25 million, carrying a 60-day inventory, can save more than $55,000 by reducing inventory by just one day. An effort to manage inventory effectively will drive attention to the most appropriate (but not all) SCM issues. There will be a follow-on effect that drives improvements throughout the organization and creates a supply chain that will be very visible and have significant impact on the bottom line.
Suppliers are advised to bring a war-room mentality to the challenge of honing a laser focus on inventory reduction. This will point to the necessary enablers in technology, lean manufacturing and supply chain initiatives. The war-room mindset creates a mechanism to remove inventory, time and cost from systems.
To find profitability through the value chain, suppliers must challenge everything about their organization. They must get the entire organization focused on clearly defined and easily measured objectives.
They must install, manage and communicate through a daily metrics reporting system in a war-room environment. Lastly, they must chart, understand, manage and challenge the entire supply chain to reduce total inventory.
Joseph M. Bione, TMA, CPM, CPIM is the managing member of Doeren Mayhew/Whitehall LLC, providing operational improvement and restructuring services to companies in transition or trouble. Doeren Mayhew/Whitehall, LLC is an affiliate of Doeren Mayhew, located in Troy, Mich., providing a wide range of professional services to middle-market companies. Reach Bione at firstname.lastname@example.org or (248) 244-3159.