Beware the watchdog – sophisticated regulators could see companies having to run for cover

Commercial crime in South Africa is on the increase by 8.1%; global statistics reveal that as much as 7% of a company's annual turnover is being lost to fraud, theft and corruption. With collapsed companies such as Enron providing historical examples of when “too little is done too late”, Governments and Regulators alike are under greater pressure to better fight against commercial crime. Finding new and more sophisticated ways of monitoring business behaviour is a growing reality that many companies within South Africa would be wise not to ignore.

The need for better monitoring and detection is clearly needed - since 1999 fines paid by companies for contravening the South African Competition Act amounted to about R1.783 billion. Locally and within recent years South Africa has seen companies within a variety of industries being brought to book for anti-competitive behaviour: from tyre manufacturers, plastics manufacturers to flour and white maize millers.

On a global scale, better monitoring systems are a growing imperative; for instance, increasing food prices across the Baltic region (Estonian milk prices which have increased by 66% from last year) have forced regulators to step up investigations. According to Craig Turnbull, Director, Deloitte Analytics, “Regulators are beginning to realise that a system that allows for a better understanding of information is vital to improved detection and monitoring. Companies therefore need to know what is going on in their own backyard as it may save them reputational damage, bottom line revenue and market share in the long run.”

Locally, the move towards the better use and understanding of available information has seen the South African Revenue Services (SARS) modernising and updating their human and technological capabilities in order to detect offenders more readily. “We have little doubt that other arms of government, including various Regulators, will follow suit. With better detection and enforcement systems, ultimately, businesses will soon have nowhere to hide,” adds Turnbull, “If you don’t monitor your company’s activities know that the Government certainly will – if they are not already,” says Turnbull.

“With Government and Regulators already looking at how to better utilise information at their disposal, it is not inconceivable that the time will come when Regulators take vast amounts of publicly available information, such as product prices for instance, and then, with the right analytical tools which already exist, view unnatural price movements over a period of time. This will surely give them an indication of which products’ prices are questionable over the long term. How many companies are ready for this level of sophisticated monitoring?” comments Turnbull.

With there being a growing movement towards scrutinising product pricing, internal monitoring has never been more important. A challenge that many companies face is that of the decentralised business model. Companies that have adapted their structures for global business are now finding that the corporate activities of their sub-business structures have weaker ties with the company’s head-office. “Unawareness of any wrong doing is no longer a line that companies can take and with Government and Regulators arming itself with a greater analytical capability. A company’s best form of defence is prevention – i.e. to stay ahead of the curve,” concludes Turnbull, “Having adopted the decentralised decision-making approach, an organisation’s many facets become vulnerable to fraud and corruption on a variety of levels but using analytical tools that allow a better understanding of information within your own structures is the best way of detecting bad business practices or mismanagement of funds.”

With the financial crisis being a catalyst for Governments and companies worldwide to evaluate their decision making and the information systems upon which such decisions were made, the world is left with a stark reminder that knowledge is the most powerful defence against costly errors or bad choices. The big picture is therefore only helpful if it takes account of the details.