Fraud Prevention During Organizational Transformation
For most corporations, organizational transformation is a continuous process that enables adaptation to an ever-changing global business environment and encourages advances in technology, science, competition, customer demand and government regulation. The most common form of change is corporate restructuring (outsourcing, offshoring, etc.). The most complicated, dramatic and challenging form of change is mergers and acquisitions.
Change is inevitable, but it exposes companies to significant financial, occupational and compliance fraud risks. In some instances, senior managers have used restructuring or mergers and acquisitions as vehicles to commit fraud.
From the time a company announces an organizational transformation until its full integration, the organization’s internal control structure becomes fragile — it engages in unusual business activities, and associates are exposed to significant uncertainty, including fear of losing their jobs and pressure to deliver positive financial results. If the organizations don’t manage change well or aren’t fully transparent, it will exacerbate fraud risks.
The ACFE’s 2014 Report to the Nations on Occupational Fraud and Abuse point out that in 26.4% of financial statement fraud cases and 11 percent of corruption cases, excessive pressure from within the organization was a motivation to commit fraud.
A transition can pressurize senior management to meet or exceed objectives or financial targets. They often try to hit such financial targets as increased or sustained profitability, revenue, positive cash flow generation and cost reduction — all while maintaining high levels of quality and productivity.
Employees also might be subject to personal financial pressure because of excessive debt due to living beyond their means, gambling or addiction problems. Also, worsening general economic conditions might induce pressure.