Your company may have strong fraud prevention controls in place, but they do little good if a senior manager overrides those controls. In the worst cases, managers may alter records, manipulate financial results, intentionally misstate the timing of transactions, or use any of dozens of other tactics to hide financial problems.

Something is not right

Management override of financial controls can be difficult to detect. However, it is a warning signal when a manager:

• Disputes auditor findings on accounting or reporting matters
• Fails to identify business risks in a timely manner
• Fails to correct known problems
• Is unwilling to discuss issues that could require financial adjustments
• Is lax in enforcing antifraud controls
• Produces overly optimistic reports of current or future performance

Such behavior does not prove that fraud is occurring. However, it suggests that you need to improve or open new paths of communication and remain vigilant. And if you do suspect fraud, you must be willing to investigate — regardless of whom it might implicate.

A healthy culture

To prevent management overrides, build a culture that encourages honesty and supports employees who speak up when they suspect something is wrong. Think about whether your senior managers experience pressure that unwittingly encourages fraud. For example, if your industry has seen increased business failures, these employees may think they need to keep profits at specified levels. They might also feel stressed if their compensation depends on achieving stretch goals for cash flow or operating results.

Employees a level or two below senior managers are most likely to observe management overrides. Give them access to a confidential hotline and they are more likely to report fraud before it seriously harms your business. And if you extend your hotline to vendors and customers, you will increase your chances for learning of improprieties early.

Vigilance required

The risk of management override of internal controls to distort financial performance is real for any organization. Market shifts, aggressive performance targets, industry uncertainties, personal financial stress, and other factors may lead to a senior manager’s fraudulent activity. We provide audit and assurance services that can help you identify flaws in your current fraud-prevention program and design controls that are more difficult to override. Contact us today to see how we can partner with you.