When fraud happens within an organization’s accounting system, there is often a paper (or digital) trail left behind. It’s unavoidable, as there is a record of something related to the fraud, whether it is a legitimate invoice that was later adjusted, an account balance that was changed, or a fake employee who was added to the payroll system.
Frauds involving bribery and corruption are different. They happen almost completely outside the accounting system, so they often don’t leave a paper trail. Management instead must rely on tips or other vague clues to the existence of such a fraud scheme.
Bribery and corruption typically arise out of relationships between people, so in order to detect them, management must often be aware of the personal relationships between employees and outside parties. That is clearly a difficult task, and often nearly impossible.
Bribery and Corruption Schemes
The most common types of bribery and corruption schemes involve kickbacks or other inducements to do business. The schemes aren’t limited to governmental entities, although those are the ones that consumers hear the most about. Bribery and corruption is at least as common in the private sector, and possibly occurs even more frequently than it does in the public sector.
Bribery schemes involve the giving of value in order to secure a contract or project. A kickback occurs when the cost of an item or service is secretly inflated, and some of the extra proceeds are given to a person involved in inflating the cost or covering up the scheme. Extortion occurs after the fact, with payment being demanded after work is done or a contract secured, in order to maintain a business relationship or conceal something about the relationship. Other fraud schemes can include inappropriate related-party transactions, undisclosed conflicts of interest, and bid rigging.
There are many types of off-books arrangements that could fall under the heading of bribery and corruption. Because they are often concealed so well, it’s impossible to accurately estimate how often these frauds are occurring or how much they are costing companies and consumers.
Bribes don’t typically involve the issuance of a receipt. Whatever happens between parties is generally not written on a piece of paper, and many times cash is exchanged to prevent creating a paper trail. Sometimes criminals are kind enough to write contracts between themselves, but those looking for bribery and corruption can’t count on this bit of carelessness to uncover the schemes.
Finding the Fraud
Now that we’ve established that bribery and corruption schemes are extremely difficult to find, what can companies do to increase their chances of finding them? The key to finding corruption schemes is monitoring relationships and looking for other clues.
The most effective way to do this is to have a mechanism in place for reporting suspicions of fraud. Anonymous fraud hotlines are very effective in this regard. Employees are excellent watchdogs, and companies should take advantage of their willingness to help ferret out fraud by giving them a way to report their suspicions.
Hotlines should not be restricted to only employees. Customers and vendors should also be made aware that the company has a hotline and that they are encouraged to report anything suspicious. An employee with an “unusual” relationship with a vendor might not be discovered internally, but it’s possible that someone at the vendor’s location would be willing to report their suspicions if given a way to do so.
In addition to hotlines, companies are advised to rotate duties and account management between employees. By rotating responsibilities, employees will have a decreased chance of developing a close relationship with a supplier or customer who might suggest a fraud scheme.
Generally, management should be on the lookout for small clues that might point to a problem. Even though an off-books fraud is difficult to detect, often there may be other signs that indicate an issue. Maybe an employee is uncharacteristically agitated or has started working unusual hours. Possibly the cost of certain raw materials has fluctuated when otherwise the cost was very stable.
Although bribery and corruption happens outside the books and records of a company, there can still be side effects within the company that might offer a hi