​Fraud Fliers

Multiple frauds at a drone company highlight the corruption risks for fast-growth companies.

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​Multiple employee fraud cases may cost Chinese drone manufacturer SZ DJI Technology Co. $150 million in losses, Bloomberg reports. An internal probe discovered extensive corruption and a lapse in internal controls at the company, which is the world's largest consumer drone maker. DJI says it has fired multiple employees as a result of the ongoing investigation by the company and Chinese authorities. Among its remedies, DJI says it has established channels for employees to confidentially report workplace conduct violations.  

Lessons Learned

A statement from DJI's management sums up the essential reason why this fraud may have occurred: "While mature companies have established the training, controls, and management protocols to limit these issues, DJI has in the past emphasized corporate growth over new internal processes." If so, this is a critical lesson for startup companies in rapidly developing business environments: balance speed with control.

DJI has acknowledged it needs to strengthen its internal controls, establish clear policies governing employee ethical behavior, and implement effective whistleblower programming. However, at the heart of the corrective measures needed may be those aimed at detecting and deterring purchasing price manipulations and outright theft. While DJI has not reported the specifics of the frauds committed, the company may need to address these apparent types of asset misappropriation and vendor fraud. Measures DJI should implement include:

  • Train all employees on bribery and corruption prevention.
  • Reward employees for ethical behavior and discipline employees — including senior managers — who breach the company's code of ethics.
  • Conduct thorough background checks on new employees and renew those checks periodically.
  • Conduct a risk assessment, including fraud risk, to identify areas to watch more closely.
  • Implement checks and balances and use data mining to uncover anomalies and patterns in product purchasing and pricing. These areas should have strict financial and systems controls that specify purchase pricing and contract limits, and raise flags about pricing anomalies. For example, if invoices reflect significantly higher prices over negotiated contract prices, previous contracts, or industry standards, the invoices may not be legitimate. Running spending analysis reports also can help identify unusual or excessive spending.
  • Separate the functions of the company's purchasers and check signers, and rotate the duties of employees in these areas.
  • Conduct random audits of company purchasing accounts and vendor files.
  • Implement checks and balances on purchasers and payments to vendors. This includes not paying invoices unless goods or services have been delivered, and verifying invoices, including pricing — preferably using three-way matching and periodic audits. Look out for fake orders. While it may seem impossible for this type of fraud scheme to work, it can be accomplished easily in organizations with decentralized purchasing and a disorganized process. This is especially the case where there is no procurement software to verify orders from purchase order though delivery, invoice, and payment.
  • Conduct due diligence on vendors by verifying information such as business name, tax identification number, phone number, post office box and street address, and bank account.
  • Look for signs of vendor/employee conflicts of interest or collusion, including bid rigging, preferred supplier schemes, kickbacks, and bribes. Scrutinize unusual bid patterns and business relationships by comparing vendor addresses with employee addresses.
  • Implement a dual-review process for master vendor file management. Also review the master vendor file to check that the volume and pricing of billing is reasonable and consistent.
Art Stewart
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About the Author

 

 

Art StewartArt Stewart<p>​Art Stewart is an independent management consultant with more than 35 years of experience in internal audit, financial management, performance measurement, governance, and strategic policy planning.​​​</p>https://iaonline.theiia.org/authors/Pages/Art-Stewart.aspx

 

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