A service company, established for many years, decided to provide a special bonus to two of it regional management team, whereby the bonus was based on the current years’ net profitability of the regional branch.

The most senior of the managers determined and signed off the allocation of overhead charges (for transport, storage etc.) against each job completed for its clients, which therefore determined the eventual net profitability on which their individual bonuses for the current year were calculated. For Some years, the net profitability for the region always remained exceptionally high, so the two directors gained substantial bonuses throughout this period.

However, some seemingly minor queries arose as to charging of overheads against some job files for work completed in earlier years and after extensive investigation by accounts and HR, it appeared likely that current costs were possibly being incorrectly charged against previous years’ jobs as opposed to the current job for which they truthfully applied. Therefore, as the old files had effectively been written off and gone into storage, their profitability was ignored even though the action of allocating current overhead charges wrongly against them meant that the old jobs were retrospectively becoming losses.

human error or fraud?

As a result of these overhead charges being incorrectly allocated against previous years as opposed to being correctly allocated against the current jobs, this falsely inflated the apparent net profit being achieved for the current jobs. If following investigation this was found to be correct, then this would in all probability be viewed as fraud and potential gross misconduct as the falsely inflated net profits would result in a higher bonus being due to the two managers.

Although the initial basic evidence appeared sound, a PSM HR Manager attended alongside a Director and suspended both managers on paid leave whilst further investigations were completed. In particular, the initial analysis provided evidence that the senior of the two managers had personally been allocating the charges against what was a number of old, out of date job files and their signature was on the charging out note to confirm their actions. However, in the initial investigation of a smaller number of cases, there was an additional, albeit less evidence to show that the other manager had also signed and charged some supplier charges to out of date job files. Therefore, given that the two worked so closely together and generally were known to go everywhere and do everything in liaison with each other, plus the fact that they would equally have benefitted from any falsely enhanced bonus, it was concluded that there could be reasonable grounds to support potential collusion between the two.

The challenges in such a case were:

1. Complexity of analysis required

   The invoicing of charges for additional services to be held against current job files, was highly variable and could be amounts varying from £2.50 to £100 or more. As a result, it was fairly complex for the company to prove the case either way, i.e. to obtain the evidence to prove or disprove whether the invoicing was being deliberately and falsely allocated to incorrect job files, and, if proven, to substantiate the guilt of one or both of the two managers. Additionally, the allocation of these charges was being done against job files going back over several years, so this meant effectively reopening job files going back for the same period of time, i.e. several years.

2. Proof of which person/manager, allocated the charges

   Whilst it was generally accepted that one of the two managers would normally be responsible for the decision as to which job files to allocate charges, it was important to verify firstly, whether the invidual cases of incorrect allocation could simply have been human error in terms of a single digit file number being incorrect, or was it more likely to have been a deliberate action by one or both of the managers. Secondly, if the evidence suggested that the allocation was more likely to be deliberate, it was important to assess whether the conduct was being conducted again, by one or both of the managers.

3. If proven, the amount of additional bonus fraudulently gained

   Given that the initial evidence showed that the charges were being incorrectly charged against files going back several years, were the case to be proven beyond reasonable doubt, then an effort was required to estimate, if possible, the estimated level of fraud. The key point being that if it was concluded to be negligence and of a minor nature, then a “proportionate” outcome could well have been a warning of some type. However, if it was concluded to be serious negligence and even more so a deliberate attempt to defraud/gain money through additional bonus payments, then it would have been a complete breakdown in trust and confidence between the Company and the manager(s). This latter, being the case, the dismissal would be with immediate effect as of the date when the dismissal decision was made and without any further payments due beyond the date (they remained entitled to any payments that were due to that date including outstanding holiday pay).

PSM procedure applied

The Company Accountant was very effective in the completion of the analysis going back over several years and, whilst extensive and complex, the evidence was very strong that firstly, the file numbering for current as opposed to old job files were wholly dissimilar and hence, it was extremely unlikely - if not impossible - that the allocation could have been simple human error due to a single digit being incorrect. Additionally, while the majority of cases where this had occurred had b een completed by one specific manager, wiht a lesser number being completed by the second manager, given the closeness of their working relationship, plus the fact that both would have directly benefitted from enhanced bonus payments resulting from the falsely inflated profitability of current job files, then collusion between the two was viewed to be a strong possibility.

“Buyer Beware”

A note of caution, as if needed!  It is important that those members of the senior management team that are tasked to monitor the trigger points, continue to do so at all times, so as to secure the organisations position in case of a “blip” in the economic cycle, which may necessitate a brief holding of planning and progress, until such time as the economy restarts its upward progress.  What should be self evident is that assuming the foundations of either market effective/efficient products or services are provided by the organisation, then, the ability to react promptly to every phase of the cycle will:-  

• firstly secure the continued growth and profitability of the company, 

• secondly will enable the organisation to take advantage of both market and also any opportunities that occur due to poor, inadequately prepared or indeed failed competitors and 

• finally, will minimise the likelihood of the organisation becoming one of the many who become just faint memories in the market place and keep insolvency practitioners busy.    

Happy hunting!