When looking at the Financial Risk, it is important to remember that Fraud is not the only risk in this category.  Errors of all kinds can have serious financial consequences.  In this article I will tell the story of an unfortunate sequence of events leading to a highly embarrassing outcome.  The one good thing about it was that the financial cost was minimal.  The damage to the organisation’s reputation was the real loss.  I will point out some of the failings and how they could have been avoided, as I see things.  Perhaps you will think of some others.  You may also notice that those same shortcomings could have left the organisation vulnerable to a fraud.

It happened in the early 1970’s when many organisations were just beginning to use computers for their principal financial functions.   In this instance the function in question was creditor payments.  The whole system had been reviewed including the manual operations which linked to the computer.  Like most IT functions at that time, a batch input system was introduced.   A payment slip was stuck onto each invoice to be paid.  A number identifying the creditor had to be entered on the slip as well as the invoice number, an expenditure code and the amount.  It then had to be signed by an authorised person to certify that it was to be paid.

Completed invoices were bundled together into a batch on the front of which a batch-header form was attached giving a batch number and the total of the amounts to be paid, which was produced by using an adding machine.  The batch was then passed to the IT department where all the information on the creditor payment slips and the batch header was input.  The totals had to agree and the other details had to be valid.  The computer then generated a listing of all this data and produced the cheques and remittance advices.  An independent group of people, know collectively a Despatch, checked that the cheques agreed with the list before putting them into envelopes,  and…despatching them.  Where more than one payment was being made to a creditor, the computer combined them onto one cheque but showed the separate amounts on the remittance advice.

A period of parallel running had apparently proven that the system worked properly.   The problem which defied the system concerned a credit note.  The arrangement was that a credit note should be treated in the same way as an invoice but a negative amount shown on the creditor slip.  Usually a credit would be attached to an invoice from the relevant creditor, but that was not considered essential as the computer would automatically deduct the amount from anything being paid to that creditor in the same run, which usually included several batches.  The thing nobody had thought of was how to deal with the situation where a credit note wnt through the system in a week when there was no invoice against which it could be offset.  Inevitably, like most unforeseen circumstances, it occurred in due course.

The computer, unable to produce a cheque for a negative amount, deducted the figure from the highest number it could process.  The system was designed to prevent any payment of a million pounds or more from going through.  In the event of a genuine million pound payment being necessary it would have been handled manually.  Thus a cheque was produced for a million pounds less a penny less the amount of the credit note.  The credit note was for less than a pound.  The creditor took a photocopy of the cheque and sent it to the local paper.  He framed the original.  Had he tried to bank it, it is possible that it would have been queried at that stage.  It is also possible that he could have been charged with fraud, as he must have known he was not owed anything like a million pounds.  The resulting furore and internal enquiry left a lot of blood on a lot of carpets.  You might have a view on whose it should have been.  The programmers and systems analysts were asked why they had not thought of the eventuality which did in fact occur.  So was the system owner, the creditor payments manager.  It should have been possible to arrange for unaccompanied credit notes to be rejected.   The cheque list could have been checked against the actual invoices.  Someone should have noticed that the total far exceeded the batch total.  Someone might have used their “common” sense and queried a payment of nearly a million pounds, especially as the creditor did not supply goods of anywhere near that value.

Perhaps you need to review your financial systems, online and offline, to ensure they are (still) fit for purpose.