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

 

 

 

Are your Processes Efficient? Find out Today.

Everyone wants to be more efficient, but where to start?

Efficient, scalable processes are the key to growing and maintaining your business but too many people don’t take the time to assess the ones they have in place.

When they outgrow their capabilities, businesses (like national economies) dive into a “hard landing”.

Luckily, Receipt Bank have put together a quick workbook to help you evaluate the key processes at your businesses and find out if they’re really working for you or ensure a “soft landing”.

Take the efficiency diagnositic to:

• Determine the efficiency of your daily processes
• Solve common issues that hold back businesses like yours
• Start building scalable, value-generating processes, ready for growth
• Productively identify and mitigate risks

Download the workbook here.

You are a Leader. You Suspect Fraud. Read This.

The story below illustrates what fraud examiners have always emphasised: When you suspect fraud, the first step is to secure evidence. How do you do that? You don’t have to go it alone. You can’t possibly know everything. Call the experts.

Manunure High School petrol-bombed

 HARARE, Newsday (March 30, pg 4) Manunure High School in Kwekwe had its financial records destroyed by fire following a suspected petrol bomb attack at the bursar’s office on Monday night. School Development Commitment Chairman Dickson Zhou confirmed the incident saying receipt books, computers and desks in the bursar’s office were reduced to ashes in the attack which took place around 8 pm.

crime scene

5wh Audit 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

DUE DILIGENCE INVESTIGATIONS

DDWhat is Due Diligence?

A “Due Diligence” investigation is a careful and methodical investigation of a company. It is done prior to doing business with the company.

The most common reason for due diligence investigations is corporate acquisitions and mergers – investigating the company being acquired or merged. These also tend to be the most thorough types of due diligence investigations. The buyer or merger partner wants to make sure they know who they are going into bed with.
Partnerings are another time when parties will investigate of each other in conjunction with the negotiations. Here is a list of the different types of partners and partnerings where due diligence investigations are appropriate:
 Strategic Alliances, Joint Ventures, Strategic Partnerships
 Business Partnerships and Alliances, Partnering Agreements, Business Coalitions
 Just In Time Suppliers and Relationships, Sole Source Suppliers, Outsourcing Arrangements, Suppliers and Customers
 Technology and Product Licensing, Joint Development Agreements, Technology Sharing and Cross Licensing Agreements
 Business Partners, Affiliates, Franchisees and Franchisers
 Value Added Remarketers and Resellers, Value Added Dealers, Distribution Relationships

A Little History on the term “Due Diligence”

The term “Due Diligence” first came into common use as a result of the US Securities Act of 1933.
The Act included a defence that could be used by Broker-Dealers when accused of inadequate disclosure to investors of material information with respect to the purchase of securities. As long as they conducted a “Due Diligence” investigation into the issuing company’s equity they were selling, and disclosed their findings to the investor… they would not be held liable for nondisclosure of information that failed to be uncovered in the process of that investigation.

The entire Broker-Dealer community quickly institutionalized as a standard practice, the conducting of due diligence investigations of any stock offerings in which they involved themselves. While the term “Due Diligence” was originally limited to public offerings of equity investments, over time it has come to be associated with any investigation of a company or business partner, including individuals.

Pre-Acquisition Due Diligence

How Much is a Company Worth?

Valuing a business is not an exact science. The valuation process often involves comparing several different approaches and selecting either the best method, or a combination of methods, based on the analyst’s knowledge and experience. Generally, there are several different methodologies that practitioners use to value businesses. These are:
1. Asset-based valuation;
2. Comparable transactions analysis;
3. Comparable public company method; and
4. Discounted cash flow.
In applying these methodologies to determine the value of a business, one or more of the following factors are generally reviewed and analyzed:
1. The nature of the business and its operating history;
2. The industry and economic outlook;
3. The book value and financial condition of the company;
4. The company’s earnings and dividend paying capacity;
5. The value of the company’s intangible assets;
6. Market prices of public companies engaged in similar lines of business; and
7. Transaction prices of other companies engaged in similar lines of business.
Item #5, “Intangible Assets”, can be a huge point of contention between buyers and sellers, especially in areas such as SALES.

Cat laughterHow much is the company REALLY worth?

The valuation methodologies and factors outlined above are based primarily on historical performance information and assumptions concerning subjective value-adders. Remember, Sales is the LIFE BLOOD of every company. Many factors involving Sales can add (or detract) tremendously to the value of a business:
• What is the True Value of the SALES PIPELINE?
• What is the True Value of the existing Customer Base?
• How good is the organization’s existing Sales Force?
• How good is the Sales Management?
• Are the Salespeople truly capable of carrying out the strategies?
• Can you TRUST the Projections?
The Executive Summary and Management Overview offers a buyer comprehensive data and provide the information necessary to more accurately access the value of a company’s Forecast, Team, Pipeline and associated Sales Assets.

Post-Acquisition Due Diligence

Once you’ve consummated a transaction, you face a whole new set of challenges. The due diligence you will have done, however careful, however thorough, looked only at observable factors.

Your decisions, from this point on, have to be made with an in-depth understanding of the operating dynamics of the company. These are the organizational and interpersonal issues you can’t examine from the outside.
This activity is known as post-acquisition due diligence. Post-acquisition due diligence is as important as the pre-acquisition due diligence. If you don’t get it right, you can get the deal done, but fail to achieve the true objective… generating new post-acquisition corporate value.

This applies not only to acquisitions, but to mergers and large scale joint ventures as well.

Using Common Sense

Too much due diligence can kill the transaction, particularly on small deals. It’s not practical to investigate every possible avenue of consideration. For most transactions, to do so would be too costly and too time consuming.
Pruning the possible lines of investigation and inquiry should be done in a conscious and informed manner – not at random. That is the art of Due Diligence investigation.

We, as practitioners, do have in place checklists and menus of items from which we can choose what we want to investigate and what we will overlook. In most instances, one will investigate only a portion of the possible items the checklists highlight – some briefly and others in depth.

In general, if you are getting a great deal, good pricing, and favorable terms… you will want to move quickly and lightly. On the other hand, if you are doing a highly leveraged deal and are paying top dollar, you’ll have little or no room for error. You require a very complete due diligence, or don’t do the deal at all. When there is no room for error you tolerate no room for error.

For instance, in the process of an investigation, you may find a large number of relevant agreements that you will want to read. In the imperfect world we live in, that may be impractical – you may have to pick and choose which ones you read, which you skim, and which you pass over. How much you invest in this activity depends on how much room for error you have. It may not make sense to invest $75,000 of Due Diligence effort into a $150,000 deal, but for a $15,000,000 deal the calculus is far different.

Develop a Due Diligence Strategy

Before starting your Due Diligence investigation, develop a due diligence strategy. Consider the following factors:
• What’s important to you? What isn’t?
• Which problems will be costly? Which ones will be minor?
• What drives profits – products, technology, sales staff, contracts?
• Where are you most likely to find problems? Where are you unlikely to find problems?
• What is the type of transaction are you expecting? How large or small is the transaction? How complex? What will the investigation cost in time and in money?
• What is the risk to you if the unexpected causes the transaction to go bad?
• How much time do you have? What do you have to lose by delay? What do they have to lose? How badly do you need the deal? How badly do they?
• After the transaction is closed will you have something the other party needs or wants? Can you use this to secure warranties on the due diligence items? Can you put money into an escrow to secure warranties?

Lawyers, Accountants and Due Diligence

You can rely on lawyers and accountants to read agreements and turn numbers into stories.

Of course, you also need someone who understands the particular business and industry – an industry expert. That person will know what to look for, where to probe, and what questions to ask.

Still, no matter how thorough your checklists are, they can’t be sufficiently complete to deal with the unique issues of companies in unique industries. For example if you are doing something in an industry with special peculiarities such as telecommunications or oil, general-purpose checklists will need to be supplemented. This is where your industry expert, his industry savvy and personal contacts will be invaluable.

You will never be able to conduct a complete due diligence investigation. In most transactions you will have to exercise business judgment to assess risk versus reward – with imperfect information. This is where a practical understanding of the industry will be of great help. Knowing how to cut to the chase… knowing beforehand where the skeletons are likely to be buried, and which questions will surface areas of weakness. There is just no substitute for industry specific experience.

Other Reasons for Due Diligence Investigations

Earlier I mentioned acquisitions, mergers and partnerings as major reasons for due diligence. These aren’t the only uses for Due Diligence investigations. Here are more:

1. Selling your company.

  • You want to know the financial status of the buyer. Also what is the buyer’s history of acquisitions? The buyer’s past behavior is the best indicator of how the buyer will conduct itself with you and your company.
  • Will you be accepting debt from the buyer? Will you be taking shares in the seller? If so you’re really an investor. You’re investing in the buyer. You need to know what you’re investing in.
  • You may conduct a due diligence check-up on yourself. It’ll prompt you to areas of inquiry. Prepare well and you’ll increase your control of the buyer’s due diligence investigation.
  • Well, before putting your homestead up for sale you should spruce it up and give it a new coat of paint. An introspective review will help identify the areas of your company you need to primp.

2. Taking charge of a turnaround company.

  • One of the first things to do when taking charge of a company to turn it around is collect information. The checklist is perfect for that.

3. Investing in a private company.

  • Before investing in a private company you need to ask a lot of good probing questions. The checklist will help prompt you for those questions.

Interviews with Insiders

Brace up for one on one sessions with a variety of insiders.

The insiders are the ones who really know what is what. They often know more about the company than does the CEO, especially about those little details that can come back and bite you where it hurts the most. Pay special attention to those insiders with the longest history with the company. Don’t overlook the assistants of these insiders either.

Here is where to look for these people:

 Members of Senior Corporate Management and Department Heads.

o The Chief Financial Officer, the Controller, the Treasurer.
o The Top Human Resources Officer
o R&D and Engineering Management.
o Sales & Marketing Management

 Members of Corporate Planning and Development Department
 Operational Departments
 Internal Legal Department
 Internal Audit Department
 Outside auditors
 Outside legal counsel
 Current consultants (business, technical, other)

Typically you will not be permitted access to most of these people until after the transaction is announced, or even until after it is closed. The smaller the company, the more likely this is to be a problem.

But you will usually get early access to the CFO. Here is a trick you can use – one that we use.

When meeting with the CEO get permission to take the CFO along for an informal lunch. Then as you are leaving, with the three of you together, ask the CEO to direct the CFO to give full and complete answers to your questions. That gives the CFO cover to be open and forthright with you.

Then your job is to convince the CFO, that
(a) the deal will close and he will soon be reporting to you,
(b) you will hold in confidence anything he tells you (assure him you will find a way to discover it yourself without blame going to him), and
(c) that he doesn’t want you to discover unpleasant surprises after the transaction closes.

Ask him how to conduct your due diligence. You can learn a lot from him. It’s the CFO’s chance to ingratiate himself or herself to the new owner.

Depending on the circumstances, you may be able to use this trick with other key insiders. You most likely will only be able to use it once though!

________________________________________

EagleWe at 5wh Audit have the expertise to assist with Due Diligence Investigations.

________________________________________
© Caleb Mutsumba

Introduction to Fraud and Forensic Audit in Zimbabwe

Introduction to Fraud and Forensic Audit

1 Background

Fraud has always been a major business constraint in Zimbabwe. With the introduction of the multi-currency regime, the problem of fraud has gone beyond what was just a business challenge. Foreigners can now look into Zimbabwe for the much coveted US Dollar.

At 5wh we offer a series of services across the fraud control spectrum – from fraud prevention and detection, through to investigation, evidence collection and litigation support.

2 Definition

The Oxford Dictionary defines “Forensic” simply as, “Of or used in law courts.” Eagle

Forensic auditing is a blend of traditional accounting, auditing, and financial detective work. The emphasis is on the quality of work, as it has to satisfy the exacting demands of the law courts.

3 Investigate first – then act

This is the logical thing to do and in Zimbabwe this is what the law (Labour Relations Act [Chapter 28:01]) requires. If you suspect that your organisation is the target of financial crime you will need fast professional support to help you take action.

©Caleb Mutsumba