Forensic: financial fraud

How a business owner is able to detect fraud in their company

In Ukraine many business owners do not know the dangers of financial fraud. This is especially true in the areas of purchasing items, the production and sales of goods, as well as various non-production costs. Not only can cases of financial fraud happen in big businesses but it can happen in smaller ones as well. Lack of control within the workplace environment makes these businesses more vulnerable to experience financial fraud.

Main types of financial fraud

One of the most common fraudulent schemes is the purchase of fictitious, double or surplus raw materials for further resale. There are some situations when goods are purchased from a supplier of low quality or vice versa at a higher price in order to split the overpayment in half. If a big and medium-sized business has a tender committee or a purchasing department, then a small business can significantly financially suffer in terms of volume. Employees may even collude with these businesses in order to withdraw funds from the company. Unfortunately, there are even fraudulent activities happening when conducting official competitive biddings.

Another type of financial fraud is when different suppliers or contractors are provided with unreasonable advance payments for the services of counterparties with the intensions of further routine recognition of accounts payable as irrecoverable debts.

If a business owner has several founders, but is not very involved in the affairs of the company, there is a greater chance of money leakage in a parallel business scheme. This happens in situations when the receipt of an order is received and the company was able to provide the resources needed, but for some reason a subcontractor is hired. The subcontractor is a company owned by one of the heads of the joint venture. Therefore, funds are withdrawn from the business bypassing one of the founders.

How business owners can recognize the presence of financial fraud

Usually, it is well disguised, but there is a list of indicators that allow business owners to identify fraud with the use of financial resources in the company:

  • purchases of a larger quantity of goods with constant production volumes
  • identifying the low-quality of products in warehouses and customer complaints about it
  • decreases the volume of sales
  • discrepancy between the employee’s expenses and his income or rapid growth of quality of his life
  • significant growth in entertainment costs for staff.

Such situations should alert the owner of the business, and it is a sound decision to conduct an internal investigation in order to detect fraud. If the manager is not able to conduct this on his own or has no proper evidence, then forensic experts can help. They use specific procedures to conduct an official investigation into the questionable actions of employees.

How UHY Prostir helps with fraud investigations

Forensic specialists conduct investigations to identify unscrupulous actions of employees and send them to legal investigation.

What we do:

  1. Corporate intelligence for the reliability of legal entities and individuals, informational support of agreements and negotiations, settlement of litigation.
  2. Internal investigation of incidents to identify fraud of counterparties or employees, trading of insider information or its unauthorized use, withdrawal of money funds in other ways.
  3. A report is drawn up based on the result of the work.

Before starting the inspection, the forensic expert prepares a list of people who may be involved in fraud incidents. If this is an individual, then the analysis of passport data, movable and immovable property, current accounts for the last three years, credit history, media activity is carried out. This is how audit of every element of company structure is conducted. Then we collect information, study processes and documents, analyze financial data, conduct conversations with all the company’s employees.

Based on the results of such an investigation, the business owner finds out which of the employees were involved and how they withdrew funds in an illegal way, and they have the right to bring them to administrative responsibility. And even after that collect the withdrawn money from the guilty employees.

How to prevent financial fraud in the company

First of all, a business owner should identify unreasonable expenses, that contradict interests of business owner.  These can be regular payments of bonuses and benefit payments to the employees or payment of salaries to non-working employees; or overstating the cost of renovations, sudden property insurance, or charity donations.

Second of all, a business owner should regularly analyze and assess risk of bribery and fraud in the company, develop and improve internal control system.

Finally, a business owner should react to anonymous messages about possible violations in the company. It is important that the management of the company actively demonstrates involvement in establishing culture of “non-abuse” and if risks are realized, conduct transparent investigations. Usually, employees are pushed to commit financial fraud by the belief that no one controls them or that their salary should be higher. Therefore, the company should also have a transparent motivation system – but this is already the task of the HR department.

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