Multinational companies risk fraud, waste and control loss at foreign operations of 30% or more. In the past some companies tended to “look the other way” as long as the foreign operation was delivering on its main goal of low cost operations or revenue goals. Compliance with Sarbanes Oxley and FCPA created some extra pressure on companies to improve oversight but the resulting audit and policy driven approach generally still only reduces total loss by 50%. As competitors also set up in lower cost areas or in the same market companies have strong business reasons to further reduce loss to improve margins.
Four critical areas to assess at the foreign operation are:
- Staff Professionalism
An assessment framework looking at each area on a continuum is useful to determine the likelihood of loss and which of the four critical area ‘levers” could improve performance.
Upon completing an assessment there are a variety of ways that one could create a score and assign risk of loss. Generalizing from proprietary scoring models more weight should ultimately be place on staff professionalism and process to fully reduce loss. However, a solid foundation of regular audit and clear policy is required for any credible and sustainable program.
Findings tend to show that with little to no control in place loss will be over 30% while a realistic optimized approach can get loss down to 5%. The approach you can take also depends on the maturity of the foreign operation. Some guidelines on potential loss based on various emphasis show:
- Audit only focus losses at 18.3%
- Equally Balanced Approach losses 12.9%
- Audit and Policy only Optimized 11.6%
- Staff and Process Optimized 8.5%
The conclusion is the biggest levers to reduce risk of loss are investing in professionalism at the foreign site and putting robust policies in place for: accounting, expense, purchasing and HR that are aligned with the corporate policy. However, in the start up of a new operations it is generally not possible to optimize site professionalism and process so early on there much be focus on audit and policy. The professional initially may come from Ex-Pat employees with development and transfer of information overtime. A mistake companies do often make though is not having continued site presence by a variety of functional areas and continuing to integrate the site leaders with corporate process and training.
Ultimately there is no realistic cost-effective way to eliminate all fraud, waste and abuse. Furthermore, there are many cases where the corporate headquarters itself was operating much more out of control. Still most multinational companies would see material benefit to regular review and investment in the professionalism, process, policy and audit guidelines at their foreign operations.