Cash is Queen: Why Cash flow Matters

Cash is Queen: Why Cash flow Matters

In many of his works, the late great Peter Drucker posits that cash flow does matter more than profits. I tend to agree – to a certain extent. In this post, I want to show how cash flow can be more significant than profits, in some circumstances.

“It doesn’t matter how great your business model is, how profitable you are, or how many investors you have lined up,” wrote a contributor to The Platinum Wealth Newswire recently, “you won’t survive if you can’t manage your company’s cash.”

One can hardly argue with the above statement. In fact, a Google search of “What causes small businesses to fail” returns over a million results, the first ten of which are agreed on:

• Insufficient capital (money)
• Lack of experience.
• Poor location.
• Poor inventory management.
• Over-investment in fixed assets.
• Poor credit arrangements.
• Personal use of business funds.
• Unexpected growth.

In most instances, lack of capital is almost always at the top. This is what Investopedia has to say about the phenomenon:

“Of the vast number of small businesses that fail each year, nearly half of the entrepreneurs state a lack of funding or working capital is to blame. In most instances, a business owner is intimately aware of how much money is needed to keep operations running on a day-to-day basis, including funding payroll; paying fixed and varied overhead expenses such as rent and utilities; and ensuring outside vendors are paid on time. However, owners of failing companies are less in tune with how much revenue is generated by sales of products or services. This disconnect leads to funding shortfalls that quickly put a small business out of operation.”

Indeed, once you compound the lack of cash with its poor management the pitfall grows considerably. Some studies found that up to 80% of businesses fail due to poor cash flow management skills.

We do, however, have to bear in mind that both cash flow and profits are crucial aspects of a business. For a business to be successful in the long term, it needs to generate profits while also operating with positive cash flow. I emphasise “long-term” because time frames are of the essence here. Let us, in broad language, define the terms:

Cash Flow
Cash flow is the inflow and outflow of money from a business. It is necessary for daily operations, taxes, purchasing inventory, and paying employees and operating costs. Cash includes cash equivalents.

Profit
Profit is the surplus after all expenses are deducted from revenue. Profit is the overall picture of a business and the basis on which tax is calculated.

Cash flow is not the same as profitability. A profitable business can still be unable to pay its bills. Similarly, just because a business is meeting all of its financial obligations, doesn’t mean it’s profitable. Profit is an accounting term, which really only exists on paper. Measuring profit is a very specific way of looking at a business. It doesn’t tell you a whole lot about how the business is getting by day-to-day.

Which One is More Important

It follows, therefore, that when determining which one is more important, it depends on the business and the circumstances. For example, a business may see a profit every month, but its money is tied up in hard assets or accounts receivable (debtors), and there is no cash to pay employees. Once a debt is paid or the business sees an influx of revenue, it starts to see positive cash flow again. In this example, cash flow is more important because it keeps the business running while still maintaining a profit. Alternately, a business may see increased revenue and cash flow, but there is a substantial amount of debt (with the attendant debt servicing burden) so the business does not make a profit.

The absence of a profit eventually has a declining effect on the cash flow. In this instance, a profit is more important. Another thing to remember when determining whether to focus on cash flow or profit is cash flow can be bought. A business owner can put up his or her personal assets as capital into the business or get a small business loan from a bank to keep the business running until it starts seeing cash flow again. The same cannot be said about profit.

For us to answer the question of which one is more important we have to, at this point, bring in the concept of the business life cycle. Let us turn over to the diagram below.

The business life cycle usually includes its birth or incorporation stage, its initial growth stage, its expansion stage as it becomes more widely known and moves into new markets, its mature operation stage, and its eventual decline as consumer interest in its products wane and key employees depart. At this stage, it will either re-invent itself or die.

According to the JP Morgan Institute, roughly a third of new businesses exit (or die) within their first two years; and half exit within their first five years. We have already looked at the leading causes of small businesses death.

Established businesses often have a buffer of extra cash to get them through shortfalls. Growing businesses often don’t because they are always reinvesting. Years with the biggest growth—including the first few years—are also the most challenging when it comes to cash flow. This is one of the reasons it’s so hard to get a new business off the ground. This is the stage when cash is king and getting good at managing cash flow is one of the best things you can do for your business.

Since the majority of businesses do not exist beyond six years, it is, therefore, safe to surmise that the majority of businesses in any economy are small businesses. Most of these will be in the startup or incorporation, initial growth, and expansion stages. As we have seen, these are the stages when cash flow management is paramount. In a nutshell, your business may be healthy, have a great profit margin, and your staff may be motivated and great at their jobs. But if you don’t have cash at the right time to pay for your operations and your debts, you may be in trouble.

The Zimbabwe Situation

In a 2016 interview with Standard Business, Confederation of Zimbabwe Industries (CZI) president, Mr Busisa Moyo said the manufacturing and commercial sectors were low on inventories because foreign suppliers were cutting back on raw material delivery to Zimbabwe and in some cases taking legal action as local companies failed to pay for supplies due to the prevailing cash crisis in the country.

In 2017, a KPMG poll found that cash challenges have had a significant impact on Zimbabwean businesses. That was when, according to the Reserve Bank of Zimbabwe, cash circulation in the formal sector had reduced to 1.4% of total deposits in the banking sector. During KPMG’s Audit Committee Forum held in July 2017, a quick poll of more than 100 business executives was conducted. Seventy-six percent of the participants said their businesses had experienced a significant negative impact as a result of cash shortages.

Zimbabwe relies on imports as the country’s manufacturing sector is not producing much due to lack of working capital, high production costs, low capacity utilisation levels as well as obsolete equipment. Between 2009 and 2016 Zimbabwe imported products worth over $20 billion.

What this all amount to is that if cash was king in general, in Zimbabwe it is an all-powerful emperor.

General Causes of Cash flow problems

I want to categorize the sources of cash flow problems into four categories as shown in the diagram below; namely, economic conditions within the country, lack of cash flow management know-how, errors and fraud within the cash flow channel.

Of these four categories, one is exogenous (caused by factors outside the organism, organisation or system) while the other three are endogenous (caused by factors inside the organism, organisation or system). While there is little that an entrepreneur can do to end cash shortages within the economy, there is a lot that one can do to mitigate their effects. The endogenous factors, on the other hand, are squarely within the purview of every businessperson – these are the essence of entrepreneurship.

Let us look at each of these categories in turn.

1. Economic Conditions

All the measures that a business person can take to address internal cash flow problems will go a long way in mitigating the effects of the liquidity challenges within the economy. This would include the use of non-traditional transacting systems such as barter exchange.

2. Lack of Knowledge
“My people are destroyed for lack of knowledge. Because you have rejected knowledge, I also reject you as my priests; because you have ignored the law of your God, I also will ignore your children.” Hosea 4:6

Need I say more? Save to add that a flagrant lack of knowledge in some instances is akin to actively rejecting it! There are many ways one can avail himself or herself of knowledge. Here are just but a few – online courses, business coaching clinics and business classes. Learning does not end when one leaves school.

Here are some of the major causes of cash flow problems arising out of poor cash flow management skills.

i. Declining Sales and/or Declining Gross Profit Margins

a) Declining Sales

  • Declining sales have a devastating effect on your cash flow as a relatively small decline can cause a massive reduction in your profitability (remember profit feeds cash and vice versa).
  • This typically occurs when economic conditions deteriorate, there is an increase in competition from global competitors, new competitors enter your market or your industry declines.
  • As sales decline, your overheads will probably remain unchanged so net profit decreases rapidly.
  • The table below vividly demonstrates the devastating effect of declining sales.

The table shows the disconcerting feature of a 20% decline in sales inviting a whopping 140% fall in net profit, i.e. a net loss of $2.

b) Declining Gross Profit Margins

  • Declining gross profit margins have a devastating effect on your cash flow as a relatively small decline can cause a massive reduction in your profitability.
  • Typically occurs when there is pressure on sales.

ii. Your Business Is Unprofitable

  • Simply put, you are spending more than you are charging to provide your customers with goods or services. For example, for every $1,000 you charge your customer you are spending $1,050! That is for every $1,000,000 you earn you are spending $1,050,000!
  • Inevitably your losses will accumulate to the point of having to borrow more money just to stay in business. But eventually you will come to the point where it is neither wise nor possible to borrow more money and you will have to sell your business, close it down, liquidate it, or someone else will liquidate it for you, for example, creditors.
  • A much better solution is to take immediate action to restructure your business to generate strong and sustainable profits; this will probably require a very experienced business turnaround specialist to guide you through this process.

Main causes of lack of profitability include:

  • A flawed business model.
  • An underperforming business; your sales & marketing and/or operations are not working like clockwork.
  • Lack of understanding of financial statements.
  • Lack of accurate and timely financial statements.
  • Lack of familiarity with KPI’s (Key Performance Indicators) and strict monitoring of them
  • Low gross profit margins due to high direct costs and/or not charging enough for your products/services and/or extreme competitive industry pressures.
  • Poor performance and lack of productivity of staff.
  • Poor processes, many errors/defects.
  • Poor stock purchasing and management.
  • Excessive overheads.
  • Excessive interest and/or vehicle and equipment (fixed assets) finance commitments.
  • Poor credit approval of customers and poor debtor collection management practices resulting in high bad debts experience.
  • Undisciplined spending.

iii. You Have a Natural Negative Cash Flow Business Model: Examples include:

  • You sell on credit terms, 30, 60, or even 90-day terms, but you have to pay your payroll, rent, overheads, etc. weeks, if not months before you are paid by your customers. And your payment terms with your suppliers are shorter than the payment terms you have given your customers.
  • You carry imported stock which you have paid for weeks or months before it lands in your warehouse.
  • You are paid by way of progress claims for which you also provide credit so you receive payment long after you have paid your direct factory expenses or subcontractors and materials expenses. Furthermore, retention payments are withheld by your head contractors or by your customers.

There are ways to address every one of these circumstances which involve redesigning your business model and also using appropriate means of financing, many of which are still available, even if you are already in financial distress.

iv. Excessive Debt and Capital Expenditure and/or Excessive Personal Drawings/Benefits

  • High repayments due to excessive debt and/or repayment of loans over too short a period. This especially applies to vehicle and equipment loans and lease repayments which are typically structured over relatively short terms with low or nil balloon or residual values.
  • Capital expenditure funded out of cash flow instead of being financed over the useful life of the asset, which puts pressure on cash flow.
  • Funding purchase of personal property, assets or the repayments on these properties far beyond the capacity of your business to sustain these payments as well as meeting the ongoing payment of all business expenses within normal trading terms, including taxes and superannuation (pension fund).
  • Excessive living and lifestyle expenses.

v. Poor Stock or Poor Credit and Debtor Management

  • Poor stock management, such as carrying stock that doesn’t sell through, carrying excessive levels of stock, not clearing discontinued or obsolete stock, poor demand planning, undisciplined purchasing habits, or a poor stock management system to name a few.
  • Poor credit management, that is no or poor credit approval processes before providing customers with credit which will sooner or later result in bad debt write-offs and in the worst cases will result in failure of the business.
  • Poor debtor management which includes lack of disciplined collection of debts due by customers, allowing continued credit when customers have not paid their bills within company credit terms, and lack of regular reconciling of debtors accounts.

3. Fraud and Error within the Cash flow Channel

“To err is human”. The ancillary of this quote from Alexander Pope goes “to forgive, divine.” Unfortunately, fraudsters and cash flow errors are not in the business of forgiving! Whereas error is an unintentional blunder, fraud, on the other hand, is a well thought out plan to steal and deceive. We use the term “fraud” as a generic term which includes all surprise, trick, thievery, cunning and unfair ways by which another is cheated. The question then is, if all people tend to make mistakes (when they are under stress, pressure, unwell, inattentive, etc.), while some tend to be dishonest, what do we do about it? The answer is, of cause, internal controls. In any organisation, the cost of internal control and compliance with financial, accounting as well as regulatory requirements is a necessary cost of operation. An appropriate system of internal control should neither be costly nor onerous.

The main internal control principles include:

  • Establish responsibilities. Every staff member should know what they are supposed to do; tasks do not have to slip between two people.
  • Maintain adequate records. This includes a complete set of accounting records as well as those required by law and regulations.
  • A comprehensive company policies and procedures manual covering all departments within your organization will become your “bible” for the company. A relevant facet of the manual is the Code of Ethics, incorporating a ‘Fraud Ethics Policy which will incorporate:

o The process and methodology for performing ‘Fraud Vulnerability Reviews’;
o The development and roll-out of a ‘Fraud Response Plan’, including the implementation of a ‘Whistle Blower’ fraud reporting facility;
o The roll-out of a Fraud Awareness program for all staff;
o The process of performing regular fraud detection reviews, thereby limiting your exposure to fraud losses.

  • Segregation of duties. This is indispensable in a system of internal control. The rationale for segregation of duties is that the work of one employee should, without a duplication of effort, provide a reliable basis for evaluating the work of another employee. There are two common applications of this principle:
    a. The responsibility for related activities should be assigned to different individuals.
    b. The responsibility for record keeping for an asset should be separate from the physical custody of an asset.
  • Screening and employee rotation. Procedures for the hiring of new employees should not be left to chance. Proper background checks should be done. Wherever possible and appropriate, employees should change jobs within the organisation as a matter of policy. Many fraud schemes are detected this way.
  • Use technological controls. By eliminating the use of paper-based processes and limiting human interface in transactions, computers can aid internal control. However, there should be general and application controls around the technology itself. One of the first steps that we would take to design or improve internal control in small business is to ensure that each team member has access only to the applications and data needed to carry out their job responsibilities. Starting with the computer and network, ensure that each person has a unique username and password that is used to log on each day.
  • Perform regular independent reviews. This is a primary management responsibility: Watching over the shoulders of subordinates is not necessarily eavesdropping.
  • Insure assets by bonding key employees. Consider agreements (such as a fidelity bond) under which a bonding or insurance company guarantees payment of a specified sum as damages, in the event one or more of the employees covered in the bond cause financial loss to the insured employer. Se my previous post on fidelity bond here.

Summary

Profit is of course what most people are in business for. It’s an easy measure of ‘success’, and without profits, it would be impossible to secure finance, attract investors, or grow operations. However, in order to achieve this profit in the first place, businesses must first align the timing of their cash used, with the timing of their cash received. That is, they need to shore up a steady cash flow.

However, the profit trap can be an easy one for anyone to fall into. Below are three reasons it can pay to spend less time focusing on your bottom line and more on observing and shoring up steady cash flow.

1. Focusing on cash flow can highlight operational issues

Movements in cash flow can sometimes indicate operational, as opposed to sales-related, issues. As an example, what may appear to be a quiet month revenue-wise might actually be a large number of clients neglecting to pay on time. Those same clients may all decide to pay at once in the following month, making it appear that revenue is back on track when in actual fact it’s just that your cash flow is out of balance. In this case, these cash flow movements highlight a need to implement systems that ensure more steady payments from clients.

2. Growth becomes more manageable

Growth should be the Holy Grail for most business owners. Expanding your offering’s reach through investment in new locations, R&D, or new staff can all help to boost future profits. And if you are able to understand what your net cash position is, you will be better positioned to make more informed decisions to grow your business. Decisions on factors such as staffing, office space, leases, and even business structure all become far clearer with a clear understanding of your business’s cash flow.

3. Debt becomes cheaper and easier to manage

Your business may be healthy, have a great profit margin, and your staff may be motivated and great at their jobs. But if you don’t have cash at the right time to pay your debts, you may be in trouble.
Debt obviously becomes more expensive if you’re unable to pay on time, with late fees and overdrafts adding up. This can also cause unnecessary stress for the business owner. But with steady cash flow, a business manager can plan for debt repayments, and make better decisions regarding how much debt to take on.

Finally, remember to safeguard your hard earned cash: The cost of internal control and compliance with financial, accounting as well as regulatory requirements is a necessary cost of doing business.


Caleb address

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Reference
https://business.google.com/dashboard/l/14873898238558312677
https://platinumwealth.co.za/insights/business/cash-is-king-why-cash-flow-matters-more-than-profits/
https://www.jpmorganchase.com/corporate/institute/small-business-longevity.htm
http://www.businessturnaround.net.au/the-5-main-causes-of-cash-flow-problems
https://www.accountantsdaily.com.au/columns/9285-why-cash-flow-can-be-more-important-than-profit
https://5whaudit.wordpress.com/2011/10/17/what-is-fidelity-guarantee-insurance/

© Caleb Mutsumba

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The Practical Aspects of the Fight against Corruption

The fight against corruption is indeed a cardinal one for any society. Corruption at any level and by any other name is undeniably corrosive. It is the trademark of any retrogressive society. Every sane person knows it. That is why every leader, even those who seem to benefit from it, condemn it by day, even as they condone it by night. In 2015 then President Mugabe pronounced “zero tolerance to the scourge of corruption” even as Zimbabwe continued its descent on the global corruption scale. Today, similar declarations abound.

How do we tell the difference? How do we tell the real fight from the adulterated; reality from fake? Though the tune and the dance seem different from those of yesteryear, can the man in the street know for certain that now is the era of belling the cat? What’s the benchmark? After all, the picture for ages has been something like this:

Namely, the arrest of some political figure followed by a less dramatic acquittal, typically after a long time of an on-and-off-and-on-again appearance at this and that Court. This has had the regrettable result of the public having to question the bona fides of the allegations.

In practical terms, what is the fight against corruption? What does it entail? Talking about the establishment of special Corruption Courts, Justice, Legal and Parliamentary Affairs Minister Ziyambi Ziyambi said the courts would have no sacred cows. “We are going down to the roots of corruption,” he said. “No stone will be left unturned; even the so-called big fish who sometimes get away with corruption will be pursued. Further, these courts will ensure all corruption cases are dealt with expeditiously. There will be a united effort (my emphasis) among the NPA, JSC, Attorney-General’s Office, Zimbabwe Anti-Corruption Commission and police; and crack teams will be assembled where necessary.” (The Herald. 5 February 2018)

Needless to say, the fight against corruption is both proactive (preventative) and reactive. While the former is quiet and more effective, the latter is noisy, complex and costly. In the same Herald article, Zimbabwe Law Society president Mr Misheck Hogwe said that “It should be understood that corruption is one of the most complex crimes and needs a systematic approach” Indeed it should.

I did ask what the benchmark was. Let us have my take on that. To me it is the implementation of the last in the minister’s above sentences: a bona fide united front in this fashion:

While public debates of allegations, arrests, prosecutions and outcomes make all sorts of headlines and get official attention as well as funding, investigations only whimper in the background. Yet it goes without saying that successful outcomes are a result of resourceful investigations and astute prosecutorial work. On the same token, the allegation from which all this chain of events arises has to be well-founded. Let us look at each of these events in turn.

Allegation

What is the test criterion of a well-founded allegation? The long and short answer to this is that it should be free of malice. Whether the allegation is raised out of mere suspicion of wrongdoing, it should be well-founded, sound, logical and substantiated. This places the onus of evaluating a suspicion on the person raising the allegation. Many unsubstantiated allegations of corruption have found their way into the justice system, to the detriment of the integrity of the system.

Investigation

An investigation is an exercise to establish the truth. An investigation cannot create a case out of no case. Perpetrators of fraud and corruption will go to great length to conceal their crimes. It is the responsibility of the investigation to establish, not only the what, where, when, how and the who, but also ascertain the evidence thereof. Corruption is indeed a complex crime and it calls for an equally multifaceted investigative approach. This calls for directing attention to what is good and useful for uncovering the evidence and ignoring the rest.

The term “public-private partnership” has become quite popular in our political discourse. In this country, however, the practice has yet to find traction in the field of criminal investigations. In many countries the practice is a matter of cause. Modern fraud investigations will encompass a wide range of disciplines, including computer forensics, data/digital/ financial analytics, social mapping and so on. Experts in these investigative disciplines may not be found in the public sector. Many, if not most, are in private organisations and universities. Public-private partnership is therefore critical for successful outcomes.

Prosecution

In public discourse, prosecution is most often taken to be the low hanging fruit. It is where the most heat and noise come from. When the outcome is an acquittal it is the prosecution which often gets the rap. But, from what we have looked at above, the slap may not always be justified. When the case is politically sensitive talk of “persecution by prosecution” ensues. Just like an investigator, a prosecutor cannot create a case out of no case. Besides going to great length to conceal their crimes, perpetrators of fraud and corruption often create war chests to hire the best legal teams to defend them should they be caught. Public-private partnership in prosecution is therefore equally important for successful outcomes. Many “expert witnesses” may not be in the public sector.

Trial

An independent judiciary is of cause the icing on the cake. All players in the preceding stages are going to play their roles in good faith when they know that there is going to be a free and fair trial at the end of it all.

Conclusion

Finally, we have to keep in mind that the fight against fraud and corruption is an all embracing campaign, not merely uncoordinated battles. It should encompass both proactive and reactive measures. While the reactive actions of allegation, investigation, prosecution and trial generate heat and sound, the real test of a corrupt free society is in the proactive arena. How does society view corruption? Is a corrupt person ostracized reminiscent of a child molester? If not, why and what should be done? There may not be any easy answers. But one thing is certain: Corruption should be made to be abhorred through socialization and education.


Caleb Mutsumba
Forensic Audit Consultant
Mobile +263 712 620287 / WhatsApp:+263 772 466540
Skype: caleb.mutsumba
LinkedIn:- http://zw.linkedin.com/in/calebmutsumba
Blog: – https://5whaudit.wordpress.com/
Twitter:- @Caleb_Mutsumba

Managing the Risk of Fraud in Mobile Money

Managing the Risk of Fraud in Mobile Money

Let me illustrate the theme of my expose by an incident that happened to me at a Harare restaurant recently. After my meal I thanked the waitress and asked for the bill, showing her my phone to indicate my mode of payment. Instead of bringing a printed bill she asked me to pay not by way of the merchant code that was prominently displayed. “There’s a problem with that code” she said politely. “You can use this number”. It was only after the transaction that I realised what had happened: I had paid the waitress or her accomplice for the meal. Having earlier informed the waitress of my being in a hurry, she knew I had neither time nor mood to raise a fuss with management.

Risk management is a key component to the commercial success of any business. Effective risk management underlies sustainable commercial activity, including m-commerce, because it protects two key commercial assets: revenue and reputation. Mobile operators are familiar with managing risks on their side of the business and those that have launched mobile money are aware that mobile money carries different kinds of risk –particularly the risk of fraud.

Managing risk in mobile money is a challenging task, especially when it comes to the risk of fraud, which not only results in financial loss to the business but also damages the reputation of the service to the customer. As such, mitigating the risk of fraud is a primary objective in a robust risk management strategy.

Internal Control

Any person in business understands that as soon as they move from working alone to employing someone else there has to be in place some form of ensuring that what the other person does or gets as part of their work does indeed benefit the business. In other words, every business greater than that of sole operator has to have some form of internal control. This is the means by which you marshal your enterprise resources to achieve your objectives.

Just as in any worthwhile undertaking, an appropriate system of internal control should neither be costly nor onerous. Whatever shape or form your system, at the end of the day, it should help you to exploit your opportunities as well as manage the risks of doing the things you do. It is desirable to ask oneself a few questions from time to time: Is my system able to detect errors and fraud in sufficient time for me to take appropriate action? Can I quantify and qualify the effectiveness of my controls? Do I have just enough controls – not too many and not too few? What can go wrong? What can I do to mitigate what can go wrong and what should I do to promote what can go right? In other words, regularly reviewing your operations.

Fraud Risk
One of the major risks facing any business in Zimbabwe today is that of fraud. I am using the term here to denote a wide array of thieving and various deceitful acts by both employees (internal fraud) and outsiders, including suppliers and customers (external fraud). Accountants classify losses from theft rather euphemistically as part of “inventory shrinkage.” But everyone knows what that usually refers to: lost revenue due to theft.

My cited restaurant experience is an example of an internal fraud. In that case it is likely that the waitress and chef were in it together. It follows therefore that fraud is a risk that should feature prominently in one’s regular reviewing of operations. A fraud vulnerability review (also known as fraud risk assessment) follows the pretence of “prevention is better than cure”. The process of risk analysis proceeds from threat assessment to threat evaluation to the selection of countermeasures designed to contain or prevent that risk. Many, if not most, risks are generic; they are present in any environment. In my example, the waitress could have pocketed the cash had I paid in cash. In general effective internal controls operate across operational areas. For instance, effective receipting will depend on an effective billing system.

Questions to consider when identifying and assessing operational risks in mobile money

• What are the most complex parts of the process?
• Where are the most vulnerable bridges or links between interconnected systems?
• Are there any large value, high-risk transactions that happen regularly?
• Are there any authentication mechanisms that are easily faked?
• How could someone abuse the system?
• How could someone disrupt operations?
• What frauds are prevalent in the country apart from mobile money? How common are they?
• What is the general level of criminal activity and the strength of law enforcement in the country?
• What is the likelihood of the risk?
• What is the potential impact on the business (financial and reputational)?

Using controls to mitigate risk in mobile money

Controls in mobile money are either preventive, which reduce the likelihood of fraudulent activity, or detective, which monitor and report trends or activities that have already happened. Below I have outlined the key controls as they affect most mobile money deployments. While this is not a comprehensive list, each of these controls addresses at least one specific risk associated with mobile money. For example, controlling access rights helps to reduce the risk of information manipulation, while monitoring and analysing suspicious transactions increases the visibility of fraudulent activity.

Examples of controls in mobile money and in general

• Control access rights to protect transaction data integrity, e.g. invoicing in a computer system
• Segregation of duties and independent checks to reduce error or fraud on high risk procedures. In general, the functions of (i) initiating a transaction, (ii) approving a transaction, (iii) executing a transaction, (iv) recording a transaction, (v) taking custody of the assets, and (vi) reporting on the transactions, should be divided between at least two people.
• Threshold limits to reduce risk associated with the computer system.
• Customer awareness campaigns to increase customer education and protection, e.g. a notice below the biller code to pay only via that code and none else
• Employee training on acceptable practices and conditions as well as roles and responsibilities
• Communication and information sharing with employees. Many businesses are going through hard times and payroll debts are not uncommon. Where employees are not paid in full silence, ducking and diving does not help the situation.
• Monitor and analyse suspicious activity
• Monitor activity on system access – does system access tally with historical business activity
• Create robust customer recourse and escalation procedures – customers can be a good internal control resource
• SMS alerts to customers, where possible
• Management checks and review

A thriving business environment is fodder to a thriving community and vice versa. I will be sharing specific incidents in future. Please help the SME in Zimbabwe – and other businesses for that matter – by sharing your experiences with me (caleb.mutsumba@gmail.com) and/or leaving your comments below.

Caleb Mutsumba RPA, CFE
Forensic Auditor
Mobile/WhatsApp: +263 772 466540/ +263 712 620287
Skype: caleb.mutsumba
LinkedIn:- http://zw.linkedin.com/in/calebmutsumba

Fraud in Non-Profit Organisations

“I wrote an article on this a few years ago and interviewed a few experts on fraud in non-profits and why it tends to go undetected for so long. One theory was that non-profits are too trusting and assume that people who work for them respect the spirit of charity that the organization is built on. Unfortunately this isn’t always the case and a lack of internal controls combined with the limited staffing typical of non-profits makes it easier for employees in accounts to steal. Accounts payable fraud seems to be among the most prevalent, possibly due to situations where due to staffing limitations, one employee is responsible for too many financial tasks without checks and balances. If you’re interested in reading the article, you can find it here: Fraud in Non-Profits

Dawn Lomer

Nssa boss externalizes $340 million

HARARE, Newsday (May 11, pg 3) National Social Security Authority (NSSA) acting general manager Hashmon Matemera appeared at the Harare Magistrates’ Court yesterday charged with externalizing about $340 million during his tenure as BancABC managing director. Matemera (52) was not asked to plead when he appeared before provincial magistrate Vakai Douglas Chikwekwe, who granted him $10 000 bail and remanded the matter to June 15. Allegations against Matemera are that he facilitated the externalization of $332 980 000 belonging to diamond miner Jinan to Botswana, Zambia, Sierra Leone, Mozambique, Dubai and China when he was still head of BancABC three years ago.

Blackmail Fraud 2.0

In my post of March 25 I lamented the distressing development of what I termed Blackmail Fraud. This phenomenon of “non-terminability” or “immunity from termination” is best illustrated by the topical case sited below.

WASHINGTON—

Zimbabwe’s leading platinum-mining firm, Zimplats Holdings, allegedly used an offshore company to pay salaries for senior managers in violation of exchange control laws, according to documents leaked from a Panamanian law firm. Read article..

Assuming that what is reported to have happened here did indeed occur (well, there’s no smoke without fire), then such a practice could ‘ve only been done by and/or at the behest of the C-Level management. Now, assume further that it was the Accountant in charge of the “Executive Salaries” function who would handle the transactions. Would he be touchable or indeed terminable of he, well, helped himself to some payroll funds. Wouldn’t the board have preferred a rather hushed solution to this scam had it come to their attention before these nosy journalists!

 Gudo picuringOur summary advice is:

(a) Tone at the top.
(b) Making certain Internal Controls are operating as they should at all times. This calls for an independent monitoring function.

(c) Periodic Fraud Vulnerability Review (also known as Fraud Risk Assessment) which follow the pretence of “prevention is better than cure”. Here experts assist with the process of risk analysis that proceeds from threat assessment to threat evaluation to the selection of countermeasures designed to contain or prevent that risk.

(d) Effective, conclusive investigations where a fraud is suspected or detected.

About 5wh Audit

5wh is a relationship-oriented professional services company that provides the following solutions to business challenges:
Ø Internal Audits
Ø Forensic Audits
Ø Compliance Audits
Ø Due Diligence Investigations
Ø Business Systems Design, Development and Reviews

We work with business owners and leaders who are set on blowing away those constraints blocking their way to success. We also assist our clients isolate hidden economic assets in their business and determine specific projects to optimize and leverage those assets for greater profit and growth.

We know that the only way to turn your potential for success into actual success is to blow away the constraints that block your path.
________________________________________
© Caleb Mutsumba

 

 

 

Blackmail Fraud: What is it?

Immunity from Termination

The one distressing development that we at 5wh are witnessing across many of our client organisations in Zimbabwe is what we have come to call “blackmail fraud”. In this situation, the fraudster – either amateur or professional and mostly in administrative or managerial position – commits acts of transactional or systematic non compliance as part of or adjacent to the fraud scheme.

When the fraud is detected, the fraudster calls attention to the non compliance issue. In many instances, because of the legal doctrine of vicarious liability, the non compliance issues tend to peril the employer more than the employee. In the end, employers are stopped from acting against the offender in a way they would have or what the Code of Conduct stipulates.

Though this is not a new phenomenon, we have seen that, with penalties getting so excessive (take tax penalties, for instance), it seems that even the smaller non-compliance issues give rise to this phenomenon of “non-terminability” or “immunity from termination”.

Where to Now?

Internal Control

An organization is a living entity which changes over time. As a result, the organization’s mission, goals and objectives must be regularly evaluated and periodically revised. Thus, internal control is an ongoing process known as the Internal Control Cycle. After an organization analyzes its goals and objectives to determine its risks, management must analyze these risks and evaluate the policies and procedures in the identified high-risk areas. Part of the management process includes monitoring the progress made toward meeting goals and objectives. Monitoring also helps to ensure the effectiveness of the organization’s internal controls and the effectiveness of the policies and procedures. Periodically, policies and procedures should be revised to mitigate risk and eliminate redundancy. They must also be communicated internally and externally, as necessary.

Everyone in an organization has responsibility for internal control.

Tone at the Top

Management’s attitude, actions, and values set the tone of an organization, influencing the control consciousness of its people. Internal controls are likely to function well if management believes that those controls are important and communicates that view to employees at all levels. If management views internal controls as unrelated to achieving its objectives, or even worse, as an obstacle, this attitude will also be communicated. Employees are aware of the practices followed by upper management including those that circumvent internal controls. Despite policies to the contrary, employees who note that their managers frequently override controls, will also view internal controls as “red tape” to be “cut through” to get the job done. Management can show a positive attitude toward internal control by such actions as complying with their own policies and procedures, discussing internal controls at management and staff meetings, and rewarding employees for following good internal control practices. Although it is important to establish and implement policies and procedures, it is equally important to follow them. In the “immunity from termination” scenario, the Code of Conduct is not only perceived to just another worthless document; it is in effect a hollow manuscript.

Management Ethics, Philosophy & Operating Style

An organization’s culture evolves from the values of its members and the culture, in turn, exerts a strong influence on the actions, decisions, and behaviors of all employees.

An ethical culture requires engaged employees and managers who understand why doing the right thing is important for the organization’s long-term viability; and they have the determination to see that in fact the right thing does get done.

What are some of the key attributes needed for an organization to be fully integrity-based?
• Employees feeling a sense of responsibility and accountability for their actions and for the actions of others.
• Employees freely raising issues and concerns without fear of retaliation.
• Managers modeling the behaviors they demand of others.
• Managers communicating the importance of integrity when making difficult decisions.
• Leadership understanding the pressure points that drive unethical behavior.
• Leadership developing processes to identify and remedy these areas where pressure points occur.
These attributes touch other aspects of the organization that go beyond the fundamental abilities of making a profit and maintaining high levels of quality and productivity: how well the organization adapts to change, or encourages employees to be engaged in decision making, how well the organization creates a collective sense of purpose around shared values. It is this broader set of skills and qualities that create the foundation needed to support an ethical culture. These higher-level behaviors are no longer “nice to haves.” These are the behaviors now demanded for survival in this economic environment of creative destruction.

Management’s philosophy and operating style affect the way the organization is managed. They determine, for example, whether the organization functions informally with verbal instructions or formally with written policies and procedures. They also define whether the organization is conservative or aggressive in its response to risks. In other words, they define the organization’s “risk appetite” or the level of risk that is acceptable to the organization. To be successful, the organization’s internal controls must be aligned with management’s philosophy.

Our summary advice is:

(a) Tone at the top.
(b) Making certain Internal Controls are operating as they should at all times. This calls for an independent monitoring function.

(c) Periodic Fraud Vulnerability Review (also known as Fraud Risk Assessment) which follow the pretence of “prevention is better than cure”. Here experts assist with the process of risk analysis that proceeds from threat assessment to threat evaluation to the selection of countermeasures designed to contain or prevent that risk.

(d) Effective, conclusive investigations where a fraud is suspected or detected.

About 5wh Audit

5wh is a relationship-oriented professional services company that provides the following solutions to business challenges:
Ø Internal Audits
Ø Forensic Audits
Ø Compliance Audits
Ø Due Diligence Investigations
Ø Business Systems Design, Development and Reviews

We work with business owners and leaders who are set on blowing away those constraints blocking their way to success. We also assist our clients isolate hidden economic assets in their business and determine specific projects to optimize and leverage those assets for greater profit and growth.
We know that the only way to turn your potential for success into actual success is to blow away the constraints that block your path.
________________________________________
© Caleb Mutsumba