Managing Fraud Risks Related to Cash for Small Enterprises 101

You have quit your job to start an entrepreneurial journey with trusted friend (s). You each contribute some funds as capital. Depending on your strengths, you share out various roles within the start up. Some take up marketing roles, others finance and accounts, others communication etc. The business picks up and within no time the office is buzzing with new clients, meetings and a few hi five moments as you bag clients and deliver to clients

Things seem to be working great – regular salary, bills being paid, a growing portfolio of clients etc. Come the end of the year and you are eager to see how much profit you have made and decide whether to take a bonus or reinvent the profits. To your surprise, the partner in charge of finance tells you that in fact the company has made minimal profit or a loss. In addition, you are operating on a bank overdraft and the company car may be repossessed because of the overdraft areas. You sit back and ask yourself, how?? In your mind, the organization must be making profit even with basic understanding of the transactions. You know the estimate of your costs and you know how much is coming in…..so why you in loss territory and a negative cash are flow position?

Then you remember a few things – you have always been signing cheques without asking too many questions, you have never seen your period accounts or a bank statement, only the partner who is an expert in finance has full information on the company finances etc.

Does this sound familiar? It may or not, but this is not a theoretical case. This is actually something that has happened to a number of business where partners trust each other and focus has been on growing the business and less effort on financial management and controls. The right conditions for fraud.

For people in such businesses here are a few things that you should do or never do in relation to cash flow:

1. Cash flow is king in small businesses – never let your sight off on the cash flow position of the business. At end of every week, review the cash flow position and understand how every penny has been spent.
2.  Never sign blank cheques – never ever. Where possible use online banking.
3.  Let all payments require at least two signatories.
4. Reduce cash payments to the bear minimum – ensure that you can tract all payments to an account or person. Cash has no audit trail. So if your partner sys he paid X you can never prove it.
5. Insist on original documents - e.g. include your email in the banking transactions so that you receive bank statements form the bank. I have seen people editing soft copy bank statements in PDF to hide their fraud.
6.  Have a third party audit your accounts every year – select such an auditor competitively.
7. Have proper business registration and have transactions and assets in the name of the company and not individual partners.
8. Hire a staff unrelated to any of the shareholders as the accountant – trust is not an internal control. Many capable accountants out there will not cost much.
9. Deal with any case of theft ruthlessly.

Why Tone At The Top is Key in Fighting Corruption in Kenya

Kenya is presently in a grip of massive corruption scandals. Everyday there is news of a new scandal, with the amounts at play growing by the day. All these scandals relate to a government agency or a government owned corporation.

While the focus has been on how much has been “stolen”, how it was stolen and by who – I think the first question we should have asked is: How could such theft of public funds happen with a functioning government and in organizations that have seemingly strong controls and a seemingly strong governance structure?. What we are learning is that appearances can be deceiving. Even with all the government bureaucracy involved and the seemingly tight controls public funds will continue to be stolen as long as we do not have the right “tone at the top”.

The Association of Certified Fraud Examiners refers to Tone at the Top as the ethical atmosphere that is created in the workplace by the organization's leadership. Whatever tone is set has trickle-down effect on employees of any organization. If the tone set by managers upholds ethics and integrity, employees will be more inclined to uphold those same values. However, if upper management appears unconcerned with ethics and focuses solely on the bottom line, employees will be more prone to commit fraud because they feel that ethical conduct is not a focus or priority within the organization. Employees pay close attention to the behavior and actions of their bosses, and they follow their lead. In short, employees will do what they witness their bosses doing. 

In Kenya, appointment of key managers in government owned corporations and agencies is a political process. In most cases those appointed to these positions are not the best candidates but are appointed as a reward or part of the political patronage system. Even where such processes are competitive, the process is rigged to achieve the same results. In such a case, employees will replicate the same behavior by recruiting their relatives in the organization with little consideration to competence or experience.

Because of the nature of Kenyan politics, money plays an important role in elections. It is expected that an individual appointed to key government agency must find ways of contributing to the political party that appointed him. Because the individual feels “protected” by the appointing politicians, the floodgates for corruption, bribery and other unethical practices are open.

Ultimately, if the war on graft in Kenya is to be won, the ultimate beneficiaries of corruption must be made to account. As long as politicians and the powers that be continue to flaunt their ill gotten wealth (big cars, large mansions, helicopters, lavish lifestyles etc), without consequences or care of what ordinary citizens think, the war on corruption cannot be won.

Arresting middle and junior staff in state corporations is a waste of time. newly appointed once will simply continue from where the others left. The whole system of making appointments, assigning roles and responsibilities in government agencies must change. As long as the leadership at the political level and organization level sets the wrong ethical atmosphere, the war on corruption is dead on arrival.