Companies everywhere are subject to corruption and fraud. And those operating in Asia are no exception.
According to Kroll's 2009/2010 Global Fraud Report produced by the Economist Intelligence Unit, 84% of companies in Asia-Pacific have experienced at least one fraud in the past three years. The average loss was $6.2 million, down from $9.1 million a year earlier on account of the recession, and finance was one of the riskiest activities.
"A CFO is like the anchor of a business," said Tadashi Kageyama, senior managing director and Hong Kong-based Asia head of investigations at Kroll. "You need to be aware of whether the ship is going in the right direction or not, regardless of whether the company is losing money or making money."
One could call Kageyama an expert on the risks faced by CFOs in Asia. Since joining Kroll in 1999, he has worked on hundreds of cases involving various corporate frauds ranging from disputes, intellectual property, litigation and money laundering. Responsible for Asia-Pacific, he has clients in every major market from Japan to China and the United Arab Emirates. Prior to joining Kroll, Kageyama worked for Mitsubishi Heavy Industries in Japan and the US in roles that had him working on, at least in part, vendor disputes and fraud -- experience he brought to Kroll.
"My original objective when I joined Kroll was to help the case managers with business intelligence assignments, conducting due diligence for investment banks, private equity firms, hedge funds and US and European multinational companies," he explained. "But because my boss was a former FBI special agent whose expertise lay in counter-terrorism and white collar crime, a lot of cases I was also working on were cross-border fraud cases."
Now, more than a decade later, Kageyama advises clients on how to respond to and mitigate fraud. He said he works with both CFOs and other "C-suite" executives on different types of cases of various amounts and levels of intrigue.
Kageyama described one investigation where Kroll was hired to advise a multinational company operating in Asia on how to control operating costs. The company's CFO was particularly interested in how he could determine whether costs were really necessary or not.
"That a particular country had significantly higher entertainment costs compared to other companies in similar jurisdictions," said Kageyama. "We asked the CFO how he saw this and he said 'Don't you know that this country's society focuses heavily on entertainment? You need to have these indirect costs to boost sales.' But he never felt the high costs could be caused by fraud or corruption that we ended up proving in the end."
He continued: "Often it's the case where the local manager says these are 'must have' costs of doing business in a market and high level executives believe the local manager and don't think it could be an indication of fraud."
Preventing this kind of situation is tough. Most multinational companies already have robust enterprise resource planning systems in place that automatically identify financial abnormalities, but that's not enough.
"There is a limit to technology tools," said Kageyama. "There will always be someone who finds a way to bypass these tools."
Preventing corruption requires physical action. "CFOs and managers need to go outside their offices," he said. "They can't just rely on their spreadsheets and management reports." The majority of companies Kroll investigates are respected public companies that have proper policies and procedures and sophisticated controls and tools, according to Kageyama. He said senior management can mitigate fraud by conducting frequent site visits, having regular conversations with staff, knowing local headcounts and locations and even double checking to make sure there is a segregation of duties within local operations.
"When you're CFO of a global company, you could be sitting 14-hours away from a local office. It's true that fraud occurs more frequently as the distance gets further and further from the control centre."
In another example, Kageyama described a case in China where a general manager, local CFO and local production manager at an American manufacturer secretly created a separate company and began diverting clients away from their employer. When sales at the real company flat lined and the global CFO flew out to fix the business, the fraud was uncovered.
"The CFO did the right thing," he said. "He didn't let the general manager off the hook but it took six-months before he flew out to China. He could have done more." He then referred back to his earlier point about knowing your local operations and explained that a common symptom of fraud is when a relatively straightforward question is asked and subsidiaries are hesitant to answer.
It's hard to prepare for every risk facing finance executives. While it would be nice to rely on the wonders of technology, increasingly global businesses and sophisticated systems allow for fraud in ways that were not possible 10, even five years ago.
"The conventional wisdom is that fraud goes up in a recession," wrote Tim Whipple, president of Kroll Consulting Services, in the Global Fraud Report. "What goes up is the discovery of fraud."
After more than a decade of experience, Kageyama's advice for CFOs and finance executives boils down to knowing your business. He did not say this would be easy but it's often far less painful than going through the repercussions of a major fraud.
