Unravelling the Deals: Where Sales Meets Deceit in the World of Commission Frauds!

In the realm of sales, upper management typically directs their attention to overarching financial goals rather than minor transactions. Their primary concern lies in maintaining a robust top line and finding contentment as long as sales contribute to achieving the targeted bottom line.

The sales leadership diligently monitors pricing dynamics, closely tracking sales performance relative to the average selling prices of goods. Their focus centres on establishing enduring customer contracts to foster long-term business relationships. Delving into the intricate details of sales transactions is not the usual purview of upper management; instead, they maintain regular communication with the leadership team to safeguard against any decline in sales below the budgeted expectations.

Now how can a sales team or the executives commit fraud to increase their commission?

Method 1 – Initially, the practice involved claiming the sales commission immediately upon the booking of a sales order. They specifically crafted the commission policy to disburse sales commissions at the point of sales order booking, deviating from the conventional approach tied to invoicing or shipping milestones.

The sales executive, taking advantage of this policy, would raise sales orders to claim the commission promptly. Post the closure of the accounting period, they would then cancel these sales orders. They primarily employed this manipulative strategy with clients who consistently placed significant orders with the company. Notably, the cancellation of sales orders didn’t account for returns, and such manoeuvres with smaller orders often escaped the scrutiny of the management, remaining inconspicuous in the overall sales landscape.

Method 2 – Sales executives employed a strategy of securing business from clients by offering discounts below the average selling price of products, justified as a means of acquiring new business. The management consistently endorsed the pursuit of new business through generous discounts, particularly on substantial orders. This practice persisted as sales executives would convey to the management that the customer’s commitment to ongoing orders hinged on the availability of such discounts. This occasionally pressured the management into accepting lower profit margins, driven by the imperative to sustain a robust top line.

Furthermore, sales executives held the authority to apply discounts up to specified levels, a discretion they often exercised to navigate negotiations and cultivate customer relationships. While doing this they would constantly give discounts to existing customers and ask the customers to pay back directly or indirectly.

Method 3 – Sales executives faced commission caps, limiting their commission payouts beyond a designated threshold. When executives experienced particularly successful months or quarters, they strategically postponed recognizing sales until subsequent reporting periods. This tactical delay allowed them to maximize their gains within each reporting period, capitalizing on the commission structure in place.

Related Fraud – Reimbursements – An alternative avenue for financial gain was through reimbursements, particularly exploited by travelling sales executives. Securing new business from locations beyond the base led to a practice where executives would officially book on duty for a few days under the guise of business development. Subsequently, they would generate dummy invoices, creating a false narrative of travel to that location. Explore more about reimbursement frauds here.

These fraudulent activities can occur independently or with the involvement of higher-ups. Despite ethical expectations that management-level executives would refrain from such malpractices, the pressure to meet targets may inadvertently lead them to engage in fraudulent behaviour.

Here are some steps as an internal auditor you can take:

1. Review and assess the clarity and consistency of commission policies. As discussed above if the commission is paid at the order level, it’s a policy gap.
2. Analyze sales and commission data for discrepancies and anomalies.
3. Monitor adherence to commission caps to identify potential fraud.
4. Conduct random sampling of sales transactions for accuracy verification.
5. Verify commission calculations against terms outlined in customer contracts.
6. Perform an analysis of sales commission and assess the trend of claims by the sales executives to identify if there’s a high commission claimed by a few executives.
7. Compare discount analysis among customers of the same size.
8. Scrutinize sales-related expense reports for unusual or unauthorized expenses.
9. Examine inventory levels and return data for irregular patterns. Are the materials coming from the customer before the return is confirmed in the system?
10. Review sales order and cancellation processes for irregularities. Check if the cancellations are happening right after the reporting period.