Best Practices & Capability Convergence

What do you think about a popular organized retail chain which changed its ERP system thrice during last seven years? Some individuals with the retail organization had opposed to the frequent change by the top management. Is this really bad a strategy considering our living in this era of exponential time where shift happens at the speed of Internet?

After technology acquisition, technology adoption along with required organizational innovations is the next logical step on the technology capability ladder. Capability convergence is the end goal while technology acquisition is the initial first step. However, technology dynamism can be visualized as the youth and vigor displayed by a firm in moving up and down the steps as shown above in the picture.

To the adopting organization, benefits resulting from adopting a new technology may include increased productivity, efficiency, improved processes, cost savings, improvement in market share or entry to new market et cetera. To an individual in the adopting organization, benefits derived from such change may be improved job performance and the associated rewards or benefits.

However, when new technology threatens earnings through corrupt practices, then its utilization is perceived as negative. It is also perceived as negative when the change requires sustained dose of consciousness, motivation and hard work to change routines and to come out of one's comfort zones. Also, when confidence is less in mastering the new technology, negative attitude of user group is derived. Thus it's important to know the root causes of resistance to change.

There is difference between decision of the firm to adopt a new technology and decision of its employees to adopt it. The firms' decision to adopt an innovation or a new technology may be motivated by 'rationalism', 'bandwagon pressure' or 'forced choice'. Rationalism assumes that firms choose and adopt new technologies freely based on fit with its strategy; under bandwagon pressure firms adopt innovations to imitate its direct competitors. The choice to adopt a particular technology may also be due to various forces like internal and external customers, government, vendors or consultants.

Technology Adoption is thus the receiving organisation's collective decision to accept the new technology and implement it sincerely by making necessary changes within the organisation and across the organizations. Management decision to adopt a new innovation or technology has to be supplemented by employees' positive attitude towards the new innovation.

It is very critical for organization to adjust itself to a new technology; the new technology must have a certain fit with the firm's organisational structure, processes, values and beliefs. Innovation imposed on organization without internal receptivity is bound to fail. Internal resistance results from incompatibility between the nature of innovation and the existing configuration of interests and resources.

Thus two issues of critical importance in technology adoption are opposition to the new technology from employees and difficulties in understanding and adopting the best practices.

The darkest blue is the zone of the tacit best practices.

Open The Fraud Triangle

Fraud surveys suggest roughly 80 percent of all frauds during last 80 years were discovered by accident. In early days the primary objective of Internal Audit was to discover fraud but the objective changed gradually while above sort of misinterpreted statistics made way for a widespread complacency in this regard.

Fraud universe is all frauds that exist during a given point in time. This fraud universe is basically composed of three categories of fraud. Category 1 includes fraud which has been or is being prosecuted and its details are available in public domain. Category 2 includes all fraud which has been discovered but not prosecuted. And Category 3 includes fraud which has not been discovered. Now, the question is what proportion of fraud is in each category?

The fraud trend researchers, who examined the fraud universe and came up with the 80 /20 statistics, had not categorized the frauds as above. But obviously, if there are three categories to fraud, and no one can argue with that, then we have a situation similar to dead fish in a lake. The dead fish float to the top while live healthy fish continue swimming deep down inside the water surface.

Let's talk about fraud discovered but not prosecuted. The question here is why does anyone ever discover fraud but not prosecute? One reason mentioned quite often is to avoid the embarrassment, the trouble and the legal costs, etc. But it is something much more meaningful which deters prosecution. In many instances victims find themselves in situations where they are certain that fraud has occurred, but the evidence is not sufficient to assure conviction in a court of law. The clever fraud perpetrators leave little evidence of their crimes.

Fraud detection usually begins with the discovery of innocuous bits of evidence which only gives hints or red flag to suggest fraud has occurred. It is the reactive auditor's job to search for the necessary additional evidence which will enable prosecution. Contrary to general impressions fraud is rarely found substantially documented and evidenced by the auditors.

Fraud only becomes fraud when a court of law determines that a defendant is guilty of fraud. Up until then he or she is presumed innocent. Accordingly, all cases in this category are to be kept confidential. Thus, the fraud trend researchers, who have determined the 80/20 percentages, might not have an opportunity to examine the frauds in Category 2.

Category 3 is obvious. Anyone perpetrating a fraud is not likely to tell you about it. Researchers cannot examine those cases to categorize them in any way. And they could never be included in the 80/20 percentages. One of the secrets to getting fraud from Category 3 to Category 2, and from Category 2 to Category 1, are trained people who know how to find and accumulate evidence. Most auditors don't know how to accumulate evidence. But key to increase the trend towards the upper categories is training in fraud detection and discovery and in accumulating the evidence one needs to convince a judge or jury.

What percentage of fraud do you think is in Category 2? Is it 10 percent, 20 percent, 50 percent or 75 percent? How much percentage for the fraud in Category 1? 50 percent of the universe? Now, many would agree to believe that it is around 10-20 %. In other words, around 80-90 percent of the perpetrators are smart enough not to leave evidence around. They plan their crime, they don't leave evidence around, and they don't get foolishly detected.

How does Internal Audit detect fraud then? Internal Auditors need proactive fraud auditing. Detecting fraud is much like fishing. When fishing, a fisherman must first decide what type of fish he or she wishes to catch. Each different type of fish requires different search methods, bait or recognition criteria. What works for one type of fish, or fraud, is not likely to work for another type. What works for saltwater fish will not work for freshwater fish. What works to catch trout will not work when fishing for bass.

Just as in fishing, there are different types of fraud, each of which requires a different detection method. Just to mention a few, there is duplicate payment fraud, multiple payment fraud, defective delivery fraud, defective pricing fraud, contract rigging fraud, shell fraud, defective shipment fraud and unbalanced bidding fraud.