Fraud. It’s a dreaded word for any organisation, but the harsh reality is that the potential for fraud exists for businesses worldwide. For multinationals, the risk of fraud is amplified as the geographic dispersion of their subsidiaries makes it challenging to oversee internal controls at the local level. However, preventing fraud in global subsidiaries is not an impossible task. Here are five measures that international businesses can implement to minimise fraud risk in their subsidiaries, branches and regional offices.
Five measures for preventing fraud in global subsidiaries
1. Ensure effective management oversight
At the heart of preventing fraud in a subsidiary is the involvement of key senior managers and those charged with governance. Senior group management plays a key role in mitigating the risk of fraud by:
- Ensuring high level management reports, including budgets, forecasts and financial reports are subject to periodic senior review.
- Implementing effective procedures over the consolidation process in particular. This enables group management to identify potentially fraudulent financial irregularities at the subsidiary level before they occur.
- Establishing a ‘tone at the top’ which manifests itself as culture of honesty, openness and integrity, all of which are fundamentally important in mitigating the risk of fraud.
2. Maintain robust internal controls
A robust system of internal controls is generally the most effective way to mitigate fraud risk in any entity. These controls are even more important when the operations of a subsidiary are remote or at an early lifecycle stage.
Generally, internal controls at the subsidiary level will mirror those of the group’s parent entity. However, depending on the autonomy of the subsidiary’s operations, deficiencies in implementation can arise at the local level. Inadequate segregation of duties, a lack of clearly defined staff responsibilities and unrestricted access rights to sensitive systems and data are just some of the common precursors to fraud that arise from poorly developed controls.
3. Implement a centralised treasury function
The core objectives of an organisation’s treasury function are to manage various financial risks and determine the optimum capital structure with the ultimate goal of increasing the organisation’s profitability and value.
While the link to fraud prevention may not seem obvious, a centralised treasury function indirectly helps with preventing fraud in subsidiaries because it facilitates effective control of group cash flow and the structuring of finance across all individual subsidiaries. This implicitly allows the organisation to mitigate potential risks at a local level that may arise from the misappropriation of entity funds through unauthorised and potentially fraudulent transactions.
4. Conduct external audits
It is a common misconception that external audits are a foolproof way to discover fraud due to misappropriation of entity assets or fraudulent financial reporting. They are not – but external audits are inherently beneficial for identifying potential fraud and recommending how to mitigate fraud in the future.
Financial statement audits or external audits are compulsory for subsidiaries that are classified as either large proprietary companies or small proprietary companies that don’t lodge consolidated financial statements with ASIC (the Australian Investment & Securities Commission). Even where a financial statement audit is not compulsory, it will assist an organisation to identify the financial irregularities and control deficiencies which can be strong indicators of potential fraud.
5. Utilise internal audits
Internal audits complement financial statement audits. Rather than providing an independent verification of the financial statements, internal audits focus on examining the system of internal controls in detail.
Many parent entities of worldwide groups request internal audits for their global subsidiaries. This is because they facilitate the development of robust internal control mechanisms to mitigate the risk of potential fraud, and also investigate or limit the impact of suspected fraud that may have already occurred.
Good governance & internal controls are key to preventing fraud
Good corporate governance and internal control systems, as well as audits to ensure controls are functioning effectively, are especially important for international businesses. See our video on how fraud is committed for areas where your business may be vulnerable. There are specific fraud control and prevention techniques that we can advise on for preventing fraud in global subsidiaries.
Accru Felsers specialises in assisting foreign-owned companies with audit & assurance services for their Australian subsidiaries. We have a wealth of experience in this area accumulated over 75 years of auditing. Please contact us if you would like our assistance.