Understand Assets Misappropriation & Financial Statement Fraud in
Fraud Tree(Part 2/2)

It might be that you pay your distributors commissions, and that’s what everyone in your industry is doing. And then one day the government decides they don’t like that. And then they’re going to put your CEO or your C-level employees, your board of directors, people in jail.

So this is something that’s really important that we think about human loss. So it might be like, OK, maybe the CEO going to jail is not going to break down the company or something. But we are responsible for those people to try and help them to know that they shouldn’t do any corruption, but also to put in place all those data analytics so that they don’t even have the chance to do it.

So sometimes what happens is, and this is a while back in China, I was doing a stock take project. And before we were doing the stock take, there were some interns doing the stock take. So the interns doing the stock take were going to the warehouse and they were counting up all of the stock. And it was a fast moving consumer goods stock. And they weren’t really looking very hard. They weren’t looking in the boxes.

They weren’t checking for counterfeit products or anything like that. They were just relying on what people were telling them. And that was all fine. 

But then we decided to take our really qualified subcontractor accounting company, who are very good at stock takes, and get them to do the stock take properly. So they went in and they were like, none of this nonsense of like, we can’t look over here, we can’t look over there. They looked inside all the boxes and they checked all the counterfeit things on all of the items. 

And they found a lot of issues and a lot of fraud was going on in that warehouse. And actually, the warehouse staff got very angry and started complaining. And then the CEO of the company, who’s not Chinese, he was a foreign person, got a bit scared and then decided that he should get rid of us.

So but that kind of situation is actually quite dangerous because he’s in a situation where he is risking some issues with the Chinese law. And he might even go to jail for that. So what we want to do is to have in place data analytics whereby we can actually help these people to not be able to do fraud or even their staff and not even able to do fraud. 

So what about the value, the financial impact? So we’ve talked about financial statement fraud. We’ve talked about corruption. But if we are only looking at asset misappropriation and this is the asset misappropriation part of the fraud tree, then what are the most important things? Where’s the biggest risk? We’ve got a heat map on the left. And you can see that billing has high risk because it’s a lot of the percentages of fraud cases happening to do with billing. And it’s also the mean value of those fraud cases is quite high.

So we’re up at 100,000 for a fraud case and it’s about 20 percent of the cases. So billing is quite important. And what do we mean by billing? Now, it’s a bit weird because maybe this because it’s done by the Americans. I’m not American, I’m British, but it might be that this is like the American definition of billing. I normally think of billing as like being to do with customers. You know, your customer billing.

But for them in the fraud tree, it’s more about shell companies, non-accomplice vendors that means like using a vendor to do some fraud without them even knowing and then personal purchases. So I guess a shell company can also be at the same time a customer and a supplier. But all of those things to do with invoicing, whether you’re invoicing that shell company or you’re invoicing a shell company for like as a supplier or a customer, you can you can use that shell company to get free products or very low discounted products with very low invoice values.