Conflicting Role Assignments in Materials Function

In one of the earlier posts, conflicting role assignments in the context of finance function were captured.  Today we will cover assigning of conflicting roles to individual users in materials team. 

 

In each case, the cardinal principle of assigning independent roles to different persons as "maker, checker, approval " are getting compromised. This can lead to risks of committing of fraud in case any of the following persons collude amongst each other with malice intensions.

• buyer
• store person
• finance person
• quality inspector
• vendors  

Potential unethical or fraud prone and suboptimal activities

1. Creating purchase orders(PO) on vendors and making changes in purchase orders rates or terms and thereafter approving/releasing PO to vendor without seeking approval from senior hierarchy in purchase (vis a vis approved authority norms) and subsequent vetting by finance
2. Approving PO and making GRN (Good Receipt Note) without receipt of material and thereafter passing vendor bill
3. Making changes in PO rates and thereafter crediting vendor with revised higher rate (vis a vis approved authority norms) without seeking approval from senior hierarchy in purchase and subsequent vetting by finance
4. Making changes in PO quantity and thereafter raising GRN for higher quantities without seeking approval (vis a vis approved authority norms) from senior hierarchy in purchase
5. Counting the incoming material him- self mentioning the quantity as complete,(not withstanding shortage or damage) and clearing GRN for full quantity.
6. Making GRN and thereafter clearing GRN by same person, even in case of rejection of material received and crediting vendor
7. Making GRN and thereafter issuing material directly to manufacturing/cost centres without routing through quality control 
8. Making GRN and thereafter posting quantities of ok/good material to scrap yard for sale of ok material as scrap 
9. Issuing materials to job- worker/processor; thereafter raising GRN for semi-processed material (while mentioning it as fully processed) or even without physical receipt of material and crediting full payment to job-worker/processor.
10. Requisitioning material despatch (raw or semi or finished) outside company as free of cost/non- returnable and him -self signing the outgoing material gate pass.
11. Weighing the scrap quantity being sold (in the sale truck/vehicle) and him-self short mentioning the measured quantity in the weighment slip or scrap sale or despatch document  

Materials team professionals can visualise similar scenarios in their respective industries and take counter measures to prevent such occurrences.

Outsourcing Manufacturing

At times, companies may not have in house capacity to meet 100% of demand of certain aggregates or complete end products of specific model or in specific market segment or geographical location. 

Decision to outsource is governed by many considerations such as:-

1.  In-house capacity constraints

2.  Financial constraints to invest in capacity expansion 

3.  High Cost of shipping & transportation

4.  Product contributions being low in case produced in house

5.  Inability to consistently produce  inhouse high quality products

6.  Better know how & design options available  outside

7.  Economical advantage 

Once decision has been taken to outsource aggregates or complete end product either under company know how or outsourced manufacturer- vendor is to be  identified, technically evaluated, price negotiated and order placed for commencing supplies from out sourced manufacturing facility.

Potential unethical or fraud prone &  suboptimal activities 

1.  Performing Improper evaluation for make inhouse or out source decision vis a vis cost benefit analysis, merit of quality, economies of production, existing  capacity at company end, and recommend out sourcing by suppressing important /material information considering personal interests of inhouse team 

2.  Colluding and making compromise in evaluating target  vendor  vis a vis alternate options w.r.t. following key parameters

a.  manufacturing technology (vis a vis company design & drawings for end product-chosen models) 

b.  bill of materials  

c.  manufacturing capability

d.  quality assurance systems

e.  IT infrastructure 

f.   financial strength 

g.   competency assessment of work men & supervisory team 

3.  Colluding and negotiating  rates with outsourced vendor not at arms length ie neither  at competitive rates wrt other bids nor in cost comparison to similar inhouse  products costs. 

4.  Making non-comprehensive quality assurance agreement (so important for company's brand image) with outsourced manufacturer- vendor, besides commercial term 

5.  Colluding and granting periodic price increases / amendments to out sourced vendor towards his input costs / overheads / fixed costs without detailed costing analysis & supportings

6.  Colluding and making compromises during  quality audits by the company QC team  at various stages of manufacturing at out outsourced  vendor.

7.  Receiving and accepting end product  at  company or company’s warehouse and accepting deviations or at channel partner end directly without conducting inspection.

8.   Delaying timely communication of quality issues, design changes to outsourced manufacturer - vendor vis a vis similar changes at company’s end in case same product is manufactured at company end.

9.  Demanding favours at time of bill passing and payment releases towards end product supplied to company by the  out sourced vendor .

Assigning Conflicting Roles in Human Resource function

Assignment of roles to the HR team members is as much important as in any other function. The roles need to be assigned diligently to  each HR team person so that access rights assigned are relevant to one’s skill set/competence and segregation of duties is not compromised.  

This can be accomplished by assigning appropriate macro level rights to different individuals in hierarchy for accessing a) work flow or process, b) master data tables, c) configuration tables and d)documents and data tables relevant to HR function. Further rights needs to be judiciously assigned at granularity level for the above vis a vis following aspects to prevent unethical or fraud prone activities

a) create or make   b) edit or modify   c) delete   d) view   e) approve or authorise     

Few examples of Fraud prone role assignment in HR function

1. HR supervisor shortlisting & interviewing candidates for various positions and thereafter issuing appointment letters by same Person. 
2. HR supervisor directly authorising time & attendance sheets, providing payroll inputs to pay roll agency /team and thereafter authorising payroll credit to employees accounts
3. HR supervisor designing payroll scales and thereafter   finalising   emoluments, perks & other terms with shortlisted candidate without consulting hierarchy 
4. HR supervisor creating employee masters for and there after making changes towards performance rating, emoluments etc 
5. HR supervisor designing employee’s skill/ competency matrix, and there after directly assigning current competency score without obtaining inputs of relevant functional boss of the appraisee.
6. HR supervisor directly receiving employee resignation letter and thereafter accepting same without involving functional team supervisor.
7. HR supervisor directly conducting exit interview without involving functional team  and thereafter  deciding relieving date 
8. HR supervisor designing / issuing welfare schemes /designing HR related forms /claim forms and thereafter authorising self’s claim vouchers for expenses &reimbursements.
9. HR supervisor deciding   authority norms / manuals and there after finalising workflows
10. HR person doing emolument’s benchmarking & designing annual pay scales and there after deciding directly periodic increment rates /pay hikes or promotions   for employees.
11. Functional supervisor conducting performance appraisals directly and there after deciding awards amounts or & transfers, or terminations without obtaining inputs from HR or functional head.
12. Functional supervisor directly authorising full & final settlement amount and there after  issuing relieving letter to resigned,  terminated, retirees.
13. Functional Supervisor issuing show cause notice to blue collar workman and there after  directly deciding disciplinary action   issuing  termination letter.  

Therefore rights must follow maker-checker concept( two or three different persons/users making, checking and approving activities ) to prevent  occurrence of any unethical practice .

Segregation of duties in finance function

The most common activities that are performed in finance and accounts on almost daily basis are making, reviewing and approving of transaction w.r.t following

1. Expenses towards  purchases of all types of materials, capital goods, projects, software, consultancy services  and services rendered by service providers  and fixed expenses and overheads
2. Revenue from sale of end products, their spares & after sale services  in case of manufacturing industry  and service income  from rendering  of services in case of service industry 
3. Raising of funds, non-current liabilities and current liabilities
4. Non-current assets and current assets   

For carrying out various finance function related activities (vis a vis revenue, expense, funds raising, non-current & current liabilities as also non-current assets and current assets), the process of assigning user rights, particularly in ERP environments, is a pretty complex and usually involves five steps as below

1. Identifying Fields to which access to be  given - Examples: company code, company name, plant code, plant name, cost centre, chart of accounts, fiscal year, account document type, GL account number, amount in document, document serial number like invoice no, purchase order number etc
2. Identifying configuration tables to which access to be given - Examples:-
1. GL accounts group - share capital, sales revenue, material expenses,    employee costs etc 
2. Tax Keys - output tax, input tax etc
3. Valuation Area - plants, ware houses etc
4. Posting account types - asset customer,vendor,material etc
3. Identifying Masters to which access to be given. Examples: General Ledger  account master, Customer master, Vendor master, employee master etc
4. Identifying Workflows or navigation transaction codes to which access to be given - Examples: Issuing shares, Borrowings, making investments, capitalising, booking expenses etc 
5. Assigning roles to users based on combination of above - In this 5th  step, each finance individual user is assigned access to combination of configuration tables, masters, workflows & documents considering granularity at field  level i.e.a) create b) edit or modify c) view d) delete e) approve 

Segregation of duties

The roles assigned to any finance individual user need to be such that these are appropriate to user's position/level, skill, competence. The roles are to be assigned so that segregation of duties is accomplished to ensure that there are no conflicts of duties or incompatibility in roles .

 Fraud prone role assignments in Finance & Accounts function  

 It is possible that there may be some collusion of company employee with following

• Other employees
• Vendors
• Channel partners/customer 
• Business associates

In case of such collusion, cardinal principle of "segregation of duties" may get compromised, leading to following types of scenarios by assigning conflicting rights to same one individual

1. Creating  purchase voucher  related to  incoming supplies, authorising it and thereafter   releasing payments to vendor
2. Creating sales voucher  related to product invoicing, authorising it, and thereafter   crediting channel partner/customer account 
3. Creating sales return voucher related to  product, authorising it, and thereafter   crediting channel partner /customer account
4. Creating warranty voucher  related to defective part, authorising it, and thereafter   crediting channel partner/customer account 
5. Creating journal voucher towards expenses, authorising it, and thereafter    crediting employee towards expenses
6. Creating journal voucher towards share money receipt, authorising it and thereafter    crediting shareholder towards amount
7. Unblocking account of vendor/service provider/contractor  who is black listed and thereafter making payment to vendor/service provider/contractor
8. Making credit note favouring a vendor without any supporting reason and thereafter   making payment to vendor/service provider/contractor
9. Removing payment block of specific vendor without any proper authorisation and thereafter   making payment to vendor/service provider/contractor
10. Making fixed asset acquisition payment voucher favouring vendor and thereafter   making payment to vendor/service provider/contractor
11. Amending the finance copy of purchase order (in finance ERP/software system) with retrospective rate increase, without any authorisation and thereafter making enhanced payment to vendor/service provider/contractor
12. Creating / editing payment terms in the vendor masters and thereafter releasing payment to vendor much earlier than due date. 

Selection criteria for Vendors

There are different types of vendors that organisations deal with such as suppliers of materials and equipments, service providers, consultants and contractors etc. 

It is essential that before shortlisting a vendor (for calling for negotiations), proper evaluation of vendor is done systematically on important parameters ,particularly for inducting vendors for high value recurring buying of materials or services or for construction projects. 

Giving below important aspects that must be followed either through personal visits to vendors plant/office or through dialogues to assess vendor's capability:-

1. Technical  infrastructure  ie use of suitable equipments, tools, jigs & fixtures & appropriate licensed software for production, installation & servicing of material to be purchased.
2. Process controls at vendor‘s end for ensuring quality during production, installing & servicing or for rendering services under scope 
3. System for compliance with reference standards/quality plans
4. Monitoring & control of process parameters & end product requirements or for services requirements
5. System for approval of  manufacturing or service rendering processes & equipment
6. Criteria for workman ship & documentation  
7. Equipment maintenance system to ensure process capability
8. Leadership profile
9.  International /National Quality certification of the company and it's products and services 
10. Global footprint in terms of manufacturing operations or offices or customers or vendor associates.
11. Ability and reputation in meeting legal compliances
12. Skill & knowledge of vendor ‘s teams
13. Experience in supplying similar materials or services  to corporate clients/exports etc 
14. Industry standing/reputation /brand name etc

Unethical / Fraud prone practices

1.    Missing  out assesment on many parameters by Assigning junior team members or inappropriately skilled persons thereby potential induction of non capable vendor/consultant or contractor .
2.    In collusion with potential vendor, suppressing actual observations in vendor assessment report by assesing team member and giving biased opinion to shortlist   preferred vendor are unethical practices 
3.   Senior management instructing vendor shorlisting  team to include vendor / consultant/relative who are their friends or relatives  and asking them to skip their formal  techno-commercial  evaluation.

Shortlisting a vendor is as critical and important as calling an  employee for interview without assesing his/her  qualifications and capabilities. Shortlisting and calling a vendor for negotiations ,without proper evaluation is all the more important if the vendor/consultant or contractor is going to be associated for  medium or long term supply of inputs /products or rendering of services.

Sales and Distribution - Pricing

In this post, I would like to share thoughts on potential unethical and fraudulent practices in Pricing aspects w.r.t Sales & Distribution as one of the key important process out of 30+ key  key processes identified for this function. Pricing is one of the most important decision sales team has to take for end product or its spares or for rendering after sale services. We'll first understand how pricing is determined and then talk about potential unethical and fraudulent activities that can happen there

I. For the customised products/spares for corporate customers or export, pricing is governed by factors such as actual costing, contribution & degree of customisation and intense negotiations between company and such clients.

II. Pricing, in the case of end products/spares sold through channel partners like authorised distributors, dealers, retailers & service providers prices  lists  are arrived after summing up following parameters:-

1. Updated input-landed material costs of bought out material, required to be further processed by manufacturing team
2. Manufacturing variable costs like direct power, tools, consumables and labour
3. Marketing variable costs like packing, outward freight & insurance  
4. Channel partner wise margins
5. Expected costs of material supply of essential spares & consumables for running or operation of the end product during the free  warranted period
6. Expected Costs of labour for rendering free services during the  free warranted period 
7. Minimum desired company margins to avoid negative contribution arrived as per following formula
8. Taxes (state wise)

III. Further following aspects are also considered relevant:-

1. Competitor’s pricing
2. At what stage of product life cycle, currently the product is
3. Market segment
4. Statutory restrictions
5. Market situation in terms of political & social aspects

Potential unethical & fraudulent activities

Following are some of the unethical & fraudulent activities that can happen and we should be aware of:-

1. Not factoring all above aspects while arriving at price/MRP
2. Factoring incorrect taxes
3. Deliberately not updating input cost elements in the pricing software  , while inputs costs changes are shared by finance or materials or manufacturing teams periodically  
4.  Configuring incorrect algorithms w.r.t pricing conditions in the customised software or ERP module  vis a vis above listed   aspects  
5. Deliberately not configuring limited period , approved incentive scheme or pricing procedure in price computation software
6. Conniving with competitors and pursuing cartel approach for pricing of the products/spares   and servicing
7. Deliberately missing out review of the prices of fast moving items
8. Suppressing highlighting of negative contribution items  from price review team
9. Colluding & making unauthorised circular changes in price lists or & effective date by accessing software (to oblige some channel partners /customers) due to non -monitoring of  audit trail
10. Not sharing  transparently with customer , updated price lists/MRP by the  channel partner
11. Valuable comments are invited from sales & distribution team on the above