Fighting Occupational Fraud During a Merger & Acquisition Integration

According to the Association of Certified Fraud Examiners (ACFE) 2014 Report to the Nations on Occupational Fraud and Abuse, a typical company loses 5 percent of its annual revenues to employee fraud. Nationally, that translates into about $750 billion in total annual losses.

However, companies reinventing themselves through a merger or acquisition can be at risk for even greater losses. In times of flux, theft, shrinkage, scams and other employee-perpetrated fraud can be a greater temptation.

In general, people are uncomfortable with change. Change can cause uncertainty. Employees often are worried about whether there will be a place for them in the future, and if so, whether it will have the same compensation and perks to which they’ve grown accustomed.

In addition, the process of meshing two companies’ systems and cultures can be messy. The change and upheaval associated with a merger or acquisition can be the perfect opportunity for a dishonest employee to strike.

Common types of occupational fraud I’ve encountered with clients in the midst of the merger and acquisition (M&A) integration process have revolved around fictitious vendors or other accounts payable frauds. I’ve seen employees set up a new vendor in the vendor master file that then begins to bill the company, but this is not a legitimate vendor providing goods or services to the company. Rather, the fictitious vendor is merely a conduit to allow the unethical employee to steal money from his or her employer. This is often successful in companies that haven’t integrated appropriate internal controls and management monitoring systems for vendor and accounts payable management.

To limit your exposure to occupational fraud during the integration phase of an M&A transaction, here are three areas you should pay attention to:

  • Tone at the top – Management should ensure the company has a strong ethical tone at the top and consistently communicate that tone to all areas of the company. This can be particularly important in situations where the acquired or merged company may not have a strong ethical culture among its employees.
  • Timeliness of the successful integration of strong internal controls – Internal controls need to be standardized early in the M&A integration process. If policies and procedures are allowed to differ for extended periods, or segregation of duties is not implemented early on and enforced, the ensuing confusion and inconsistency can create a climate ripe for employee fraud.
  • Implementation of a fraud hotline – A merger or acquisition is the perfect time to implement or refresh an ethics and fraud hotline. ACFE research indicates occupational fraud is uncovered by a tip more than 40 percent of the time—more than twice the rate of any other method. Hotlines can turn your employees into your eyes and ears by educating them about ethical and fraud-related issues and giving them a way to anonymously report them. If you already have a hotline, this is the perfect opportunity to reenergize your efforts in this area with some fresh employee training and publicity about the hotline and how to use it.

Unfortunately, there’s no silver bullet when it comes to preventing occupational fraud. However, paying attention to these areas during the M&A integration process can make a huge difference.

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Shauna has more than 20 years of experience providing dispute analysis, forensic investigations and valuation services to the business and legal communities. Her dispute analysis experience includes litigation consulting, trial, deposition and arbitration testimony and prelitigation financial analysis.

Shauna Woody-Coussens – who has written posts on BKD Forensics.


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