Crisis at the Mill: Weaving an Indian Turnaround
Frauds have become a common phenomenon in the world today. On a daily basis, cases of fraud keep cropping up and the number only keeps getting higher and higher. Big corporations have experienced such cases with their employees or even management, where large sums of cash that have gone missing cannot be accounted for. It may always seem like a petite crime but the long-term effects it has on an enterprise are so adverse and could even result in the closure of a business. Nonetheless, fraud a very serious crime in the United States and can lead to very gross implications for the individual caught in the act. This paper looks at the case presented in “Crisis at the Mill: Weaving an Indian turnaround” by Alvarez & Marsal employees: Sankar Krishnan and Nikhil Shah.
Analysis of the Fraud
Who are the main participants and why did the fraud occur?
In this case, the main participants are the top management at the WoolEx Mills Company. These include the Chief Executive Officer, Chief Financial Officer, the Head of Manufacturing, and the Head of Sourcing and Sales (Alvarez & Marsal, 2016). One of the reasons that can be used to offer an explanation to why the fraud occurred is greed. According to the Fraud Triangle Theory, for a fraud to occur, there need to be three factors in place: pressure, opportunity, and rationalization (The fraud triangle theory, 2015). Since there is no foretold case of a joint relation between the four participants, other than work, the only kind of pressure that justifies the situation is greed. Secondly, they had an opportunity to commit the crime without being noticed. The CEO has all the directives of the company within his power. Having the CFO makes the act much easier as he is in charge of all financial transactions. Rationalization might have occurred perhaps because they felt like they were underpaid for the services they provided for the firm.
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The company’s internal controls and the weaknesses
As it is realized, the company has done very little to mitigate the occurrence of fraud. For the top management to have colluded to work together in committing the fraud, it implies that something was so wrong. If they had noticed that the top management was unsatisfied, they would have worked out a way of overcoming the situation thus relieving their pressure. However, they seem to have had poor employer-employee relations. Also, they do not have proper mechanisms of preventing fraud from occurring. Any occurrences that may trigger unethical behaviour from employees should be minimized at all costs. Additionally, there also seems not to have been a strict policy on fraudulent behaviour.
Red flags that signalled fraud
The firing of an employee for raising the alarm on management irregularities was the first signal. It showed that the management was desperately hiding something that they did not want to be known to the public. Again, the investigations carried out by the corporate investigations firm also indicated that there was a probability of ongoing mischievous. Since the investigation involved former employees and clients, it was very substantial in realizing the loops that were being witnessed in WoolEx Mills.
How the Fraud was discovered and how the method used could be effective in future operations
Since accessing the company’s financial information could have been difficult from the outside, Sankar and Nikhil contemplated infiltrating the company’s management by organizing a coup (Alvarez & Marsal, 2016). They made sure not to bring too much attention to the issue so as to avoid the destruction of essential data that could prove the fraud. Once they had taken office and were now available to access any kind of data, they performed a deep analysis of every transaction which led them to find the exact areas that indicated money laundering.
In future events where such a case of alleged fraud is raised, it is very important to learn how to keep investigations at a low. If alarms are raised, evidence will be destroyed and there will be no proof that will be used to substantiate the claims. Moreover, suspending the suspected individuals and denying them any kind of access to the company’s records until the investigation is over is also a critical strategy. It prevents them from further colluding with others in destroying data that might incriminate them.
Evidence gathered to support the fraud accusation
To prove the occurrence of the fraud, the A&M team collected various data. The first was the series of emails that had been received from a number of clients who were complaining about the quality of products that the company had been producing. This was proof of bad dealership with vendors. Again, financial statements for all transactions done by the company were also obtained.
Company’s financial statements
The financial statements that were obtained from the company were the solid proof of fraud. First and foremost, there was an issue with cash flow in the organization, which presumably emanated from delayed customer invoices (Alvarez & Marsal, 2016). Again, it was also noted that the profitability margin had been reduced over the years due to increased costs of raw materials (Alvarez & Marsal, 2016). However, the main indicators of fraud were the missing records of discounts given and the poor budgeting process. The failure of issuance of credit notes also indicated a probable case of hidden transactions.
Possible presence of fraud in non-financial information
According to the report, it was found out that the company was using equipment that was out of date and old. This caused most of the equipment to break down and result in unprecedented issues like the jeopardizing of quality (Alvarez & Marsal, 2016). Again, there was also no tests run on the equipment used in the company. The business law requires that machinery be inspected on a regular basis to ensure that it does not become hazardous to those operating it. Nevertheless, the company had not instituted new technological advancements in the textile industry, most of which have proven to be effective in product quality enhancement (Alvarez & Marsal, 2016).
This kind of untimely issues that are experienced by the company depicts some kind of negligence from the management. For any modern organization leadership, the influence of technology is not negotiable. Most of the companies have spent huge sums of capital in embracing new advancements so as to improve their operations. With this kind of trend, it is evident that the management was ignorant of the matter. The failure to run maintenance on machinery also shows a probable cause of fraud.
Outcome of the fraud case and its lessons
In the long run, the top management of WoolEx Mills was found to be guilty of having committed fraud against the company. There were a lot of loops in the organization of financial data collected in which they were all involved. Additionally, cases of poor management were also noted. Following their suspension, they were fired from work, not on the best of circumstances, a factor that could jeopardize their entire career life. As for stakeholders, this case offers a good lesson in taking precautionary measures to limit fraud. For instances, it presents the issue of being concerned about pressures mounted on employees that could trigger their engagement in fraud. It also raises the issue of minimizing the opportunity of one to commit fraud in an organization and the need to have strict and well-known policies in regard to fraud.
References
Alvarez & Marsal. (2016). Crisis at the mill: weaving an Indian turnaround [Case Study]. Fontainebleau, FR: INSEAD.
The fraud triangle theory. (2015). Brumell Group . Retrieved on 28 April 2017 from http://brumellgroup.com/news/the-fraud-triangle-theory/.
