Discovering and Preventing Fraud

‘SHOW ME THE MONEY’: Yansons accuse each other of misusing VTI’s money!

That’s the screaming headline in a Daily Guardian article penned by Dolly Yasa. This accusation is one of the many thorny issues plaguing the ongoing conflict between warring family members. Olivia Yanson, the matriarch of the Yanson family, even asked one of her daughters, Ma. Lourdes Celina Y. Lopez who heads the Finance Division, to account for the alleged missing P380 million from VTI’s coffers. Olivia made the demand to Celina in a signed letter which was distributed to reporters.

Olivia pointed out in the letter to Celina that “while you speak of measures to protect the company from any unexplained and unliquidated expenses that would eventually pull the company down, you conveniently forgot or omitted the fact that sometime in May 2018 your division, the Finance Division of which you are the Chief Finance Officer, was and continues to be unable to explain the loss of P380 million, more or less.”

Very sad and unfortunate and would have been avoided had internal controls been put in place.

Trust is Key

Trust is inherent in business. But that trust which is so necessary to the operation of a business is also the impetus for thieves to profit. Every entrepreneur must have experienced company fraud in his lifetime and from the most unlikely source…his or her most trusted subordinate or family member. To prevent expense report fraud, it is important for the business leader to require all expense reports to be checked and audited by an officer who is inherently thorough and objective. For family owned business, audit should be assigned outside the blood circle to avoid any semblance of bias or emotion.

I am sharing a few examples of how fraud happens in organizations especially amongst the MSME’s (Micro, small and medium sized businesses):

  • Ghost employees.The executive member overseeing payroll creates “ghost” employees that do not exist and arranges for their paychecks to be directly deposited into his own bank account.
    • Inventory fraud. Key executives with easy access to inventory steal it and then sell it themselves for profit.
    • Credit card abuse. Trusted executives especially family members put personal expenses on the company credit card.
    • Cash skimming. A family employee steals by slowly skimming cash from the cash register or cash box before it’s recorded in the company books.
    • Fictitious vendors and suppliers. A trusted executive creates a fake supplier or vendor—perhaps even a shell company—and then directs payment via check or wire transfer.

Weak Internal Systems 

The reason why it’s so easy for these types of fraud to happen is primarily the weak internal systems due to the neglect of the entrepreneur in instituting basic controls systems.  Additionally, for family-run businesses, the family treats the business too informally because it’s run by family members and nobody wants to suggest they don’t trust one another. If you’re not careful, fraud can eat away at your finances and eventually lead to the company’s cash flow being compromised.

The key is hiring accounting personnel preferably a CPA who can help design the following controls:

  1. Avoid signature stamps for checks. Businesses should consider requiring two signatures on large checks.
  2. Separation of financial duties. Bank statements should be opened by a different officer other than the one preparing the bank reconciliations. Transactions and cancelled checks should be reviewed by someone else. Bank book should be confined to another person. Duties must never be mixed nor shared. Independence of assigned employees must be protected.
  3. Review of supplier and vendor lists. The list of vendors should periodically be checked for fictitious names, and, if suspicious, should be further investigated.
  4. Review of payroll. Payroll should also be reviewed for unauthorized employees and unapproved pay by someone other than the person preparing payroll.
  5. Have more frequent business meetings about finances. Make sure all financial reporting is transparent. Even if the accounting staff are not CPA’s, they should still make an effort to try to understand.
  6. Establish clear expectations among key personnel. Be upfront with officers on issues such as expectations, rate of pay and other benefits.

Exacerbating the normal fraud risk factors is the likely scenario that some managers are inexperienced and may not be qualified to detect and manage fraud. For family owned businesses, underperforming heirs may treat the business as their own personal piggy bank.  Compensation is best addressed through payroll, not by siblings and children paying themselves via expense reports. To prevent expense report fraud, require all expense reports to be approved by someone other than the person requesting reimbursement.

Instituting financial controls may feel like you’re compromising the trust among executives by questioning it. But you shouldn’t view it that way. Establishing internal control systems can actually build more trust because it allows the team to feel confident that the business books and records are accurate and that everyone is being treated the same.


Prof Enrique Soriano is a Book Author, World Bank/IFC Governance Consultant, Senior Advisor of Post and Powell Singapore and the Executive Director of Wong + Bernstein Family Advisory Group, a research and consulting firm in Asia that serves family businesses and family foundations. He was formerly Chair of the Marketing Cluster at the ATENEO Graduate School of Business in Manila, and is currently a visiting Senior Fellow of the IPMI International School, Jakarta.