Safeguarding Global Subsidiaries Against Fraud

Fraud poses a significant threat to organisations worldwide, necessitating robust measures to safeguard against potential risks. This risk is even more pronounced for multinational corporations due to the geographical dispersion of their subsidiaries, making it challenging to oversee internal controls at a local level. However, by implementing five key measures, international businesses can effectively mitigate the risk of fraud in their subsidiaries, branches, and regional offices.

1. Robust Internal Controls:

A strong system of internal controls is fundamental in mitigating fraud risk in any entity, especially when dealing with remote or newly established subsidiary operations. These controls mirror those of the parent entity but may face implementation deficiencies at the local level. Issues such as inadequate segregation of duties, ambiguous staff responsibilities, and unrestricted access rights to sensitive systems and data can create vulnerabilities to fraud.

2. Centralised Treasury Function:

The treasury function plays a pivotal role in managing financial risks and optimising capital structure. While its connection to fraud prevention may not be immediately apparent, a centralised treasury function indirectly aids in preventing fraud in subsidiaries. It enables effective control of group cash flow and financial structuring across all individual subsidiaries, reducing the risk of misappropriation of entity funds through unauthorised transactions.

3. Effective Management Oversight:

At the heart of fraud prevention in subsidiaries is the involvement of senior managers and those charged with governance. Senior management plays a critical role in mitigating the risk of fraud by periodically reviewing high-level management reports, budgets, forecasts, and financial reports. They also implement procedures for the consolidation process to identify potential financial irregularities at the subsidiary level before they occur. Establishing a culture of honesty, transparency, and integrity further contributes to a robust anti-fraud environment.

4. Internal Audits:

Internal audits complement financial statement audits by examining the system of internal controls in detail. They are particularly valuable in developing robust internal control mechanisms to mitigate the risk of potential fraud. Many global parent entities request internal audits for their subsidiaries worldwide to investigate or limit the impact of suspected fraud that may have already occurred.

5. External Audits:

External audits, while not foolproof, are instrumental in identifying potential fraud and offering recommendations for additional efforts in prevention. Financial statement audits are compulsory for certain subsidiaries, serving as a crucial means to pinpoint financial irregularities and control deficiencies that may signify potential fraud. They are particularly beneficial for large proprietary companies or small proprietary companies not filing consolidated financial statements.

Implementing these measures will significantly strengthen an organisation’s ability to detect and deter fraudulent activities in its global subsidiaries.

With over 75 years of accumulated experience in this field, Accru Felsers specialises in providing audit and assurance services for foreign-owned companies with Australian subsidiaries. Organisations seeking assistance in fraud prevention strategies can reach out to our team for guidance and support.

About the Author
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Jordan Muddle
Jordan Muddle is an auditor in the Sydney team. Since joining Accru as a graduate four years ago, Jordan has been supporting diverse clientele including subsidiaries of foreign owned companies, hotels and not-for-profit organisations.