Accounting Investigations & Performance Fraud

JMW's accounting investigation solicitors have well established links with specialist accountants in this field and can provide pertinent and timely advice when any issue arises that calls for expert knowledge and involvement in this highly intricate area of the law. Consideration needs to be given on how to best resolve matters of this nature by putting the needs of the client first, and initial advice at that stage can be given. In order to assist that process, specialist practitioners need to be brought on board to assist in the identification of the actual "evidence".

Rob Parry of Tenon forensic identifies a topical issue on the matter of Performance Fraud and key performance indicators and processes that are employed in order to assist and preserve the client's position.

Performance Fraud - the downside of KPI's

By Rob Parry, Director, Tenon Forensic.

In recent years, most businesses have introduced KPIs (key performance indicators) - targets or benchmarks for driving results. Performance against KPIs may affect remuneration or even decide if someone keeps their job. The motivation to manipulate results to achieve KPIs is clear.

When setting up incentive plans, the objective is to improve profitability. If performance doesn't improve, but incentives are paid out, then either the plan was badly devised or results are being manipulated.

Investigating performance fraud differs for different business. The following is a general illustration only. Consider a sales incentive scheme, where the sales force have modest salaries, topped up by bonuses. The management accounts show increasing sales and bonuses, but profit is not increasing as much as expected.

Our first investigation step would be to retest the operation of the scheme - are there flaws in the mechanics? We'd check the incentive calculations were accurate. These early enquiries need to be done quickly and, ideally, discretely. In one case we were called out to investigate, it was quickly apparent that a bookkeeper was guilty of poor arithmetic, nothing more sinister.

If initial enquiries do not find legitimate error, then consideration ought to be given to who else may be perpetrating the fraud - an individual or group. We would look for those that were performing significantly better than their peers or had experienced a marked improvement in performance, but with no obvious explanation. In addition further examination and investigation of relevant ledgers would be merited in order to establish whether invoices were being raised for fictitious sales.

Assuming sales were actually being made and paid for; prices would need to be checked to ensure high sales weren't being made at unprofitably discounted prices. In one case we investigated, a young salesman was told to give discounts to clear some stock, so he acted on his instructions and sold the stock at below cost. Incompetent? Yes. Dishonest? Possibly not.

In order to build a complete picture of the fraud, areas of further investigation would include looking into issues of unofficial inducements to buy more at full price, checking stock movement records, analysis of management controls in place, third party assistance whether internal or external.

As soon as a good reason to suspect a fraud is identified, it is imperative that further legal advice is taken to satisfy the client objectives. The best outcome might include dismissal, recovery of over-payments and criminal prosecution, if appropriate.

With so much value resting on achievement of KPIs, it's no surprise they're abused as a result of "playing the system", greed or desperation. As with any dishonest activity, manipulating performance indicators needs careful prompt investigation, with appropriate action taken to protect the business and all its stakeholders.

By Rob Parry, Director, Tenon Forensic. 
January 2007.

Should you wish to discuss any issue raised in this article then please contact 0845 872 6666.

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