Fraud Tip Friday: Don’t be a Turkey! Internal Controls During the Holiday Season

As the holiday season approaches, organizations must remain vigilant about safeguarding internal controls to mitigate risks associated with financial discrepancies and fraud. The festive period, coupled with year-end deadlines, often brings increased workloads, reduced oversight, and heightened pressure to meet performance goals—all of which can weaken internal control systems and increase the risk of fraud.

The Importance of Internal Controls During the Holidays

The holiday season brings not only festive cheer but also unique challenges for organizations. Increased workloads, holiday vacations, and year-end reporting pressures can strain internal control systems, leaving businesses vulnerable to errors and fraud. By prioritizing internal controls during this time, organizations can safeguard the integrity of their financial and operational processes.

Internal controls are essential mechanisms, rules, and procedures that help ensure the integrity of financial and accounting information, promote accountability, and deter fraud. These controls are vital for compliance with regulations, ensuring budgets are adhered to, and maintaining operational efficiency.

Avoiding Circumvention and Override

Even the most robust internal controls can be undermined when employees or management bypass them. This risk increases during high-pressure periods when there’s a temptation to cut corners or prioritize results over compliance. For internal controls to be effective, it is essential to maintain a culture of adherence to protocols, especially during busy periods like the holidays.

One of the most significant risks to internal controls during high-pressure periods is circumvention or override. When employees or management bypass established procedures, whether to save time or meet ambitious performance metrics, the integrity of financial reporting is compromised. Management should lead by example, emphasizing the importance of following established protocols, even during peak periods, and fostering a culture of accountability.

Monitoring for Accounting Anomalies

With the end of the fiscal year on the horizon, organizations are under increased scrutiny to deliver accurate financial statements. This is precisely when financial anomalies are most likely to occur. By implementing proactive monitoring and review processes, businesses can detect and address potential issues before they escalate.

As the fiscal year concludes, organizations must diligently monitor for accounting anomalies. Regular reconciliations, variance analyses, and thorough reviews of financial statements can help detect irregularities early. Automated tools can enhance monitoring efforts by identifying unusual transactions indicative of potential errors or fraud.

The Pressure to Meet Earnings Targets: An Enemy of Internal Controls

Performance goals and compensation incentives are integral to motivating teams, but they can sometimes have unintended consequences. When achieving targets becomes the top priority, it can put undue pressure on employees to manipulate financial results or override established controls. Understanding this risk is key to balancing performance incentives with the need for integrity.

The pressure to meet earnings targets and other performance metrics tied to bonuses and compensation plans is a well-documented enemy of internal controls. Financial rewards such as bonuses, stock options, and other incentives are often linked to achieving revenue growth, profitability, or cost reduction goals. This can create a dangerous dynamic where employees or even executives manipulate financial data to meet expectations.

According to the Association of Certified Fraud Examiners (ACFE), financial statement fraud, while less common than other types of fraud, accounts for the highest median losses. Schemes such as improper revenue recognition, reserve manipulation, and fictitious sales are often driven by the desire to meet earnings expectations. Organizations must recognize the risks inherent in performance-based incentives and implement safeguards to mitigate them.

Case Studies: Lessons from Symbotic and Macy’s

Real-world examples provide powerful lessons in the consequences of weak internal controls. Two recent cases—Symbotic and Macy’s—highlight how even well-established organizations can falter when controls are insufficient or overridden.

• Symbotic Inc.: Symbotic, a $22 billion robotics company, recently experienced a sharp 36% decline in its stock value following the discovery of material accounting errors. These errors primarily involved inaccuracies in revenue recognition processes and contract accounting, which are critical to any company’s financial reporting. The company’s management attributed the mistakes to insufficient controls within their financial reporting processes, leading to a delay in filing their annual report with the SEC. The incident highlights a broader issue: companies in high-growth industries like robotics often prioritize scaling operations over reinforcing internal controls, creating vulnerabilities. Symbotic’s case underscores how weak financial oversight can not only erode investor confidence but also place a company in regulatory crosshairs. This serves as a critical reminder of the importance of implementing robust financial controls, especially during periods of rapid expansion.
• Macy’s: The iconic retailer faced a major setback after uncovering $132–$154 million in accounting discrepancies introduced deliberately over three years by an employee. These errors inflated Macy’s earnings and misrepresented its financial position, potentially influencing decision-making by investors and stakeholders. Macy’s postponed its quarterly earnings release to reassess its financial controls, raising questions about how such discrepancies went unnoticed for years. This case is a textbook example of how the failure to implement regular audits and cross-departmental oversight can lead to significant reputational and financial damage. Furthermore, it highlights how a single individual with unchecked access can circumvent controls, creating ripple effects throughout the organization. Macy’s experience demonstrates the importance of segregation of duties, routine audits, and establishing a whistleblower-friendly culture to prevent similar issues in the future.

These cases serve as stark reminders that lax internal controls or unchecked access can lead to catastrophic consequences. They emphasize the need for regular evaluations of financial controls and a proactive approach to fraud prevention, particularly during high-risk periods like the holiday season.

Closing

The holiday season and year-end reporting are times of celebration but also times of increased financial scrutiny and vulnerability. By remaining proactive, organizations can prioritize strong internal controls, mitigate risks, and foster a culture of integrity. These steps will not only protect businesses during this critical period but also position them for a successful new year.

Ethics and integrity in an organization are like a well-executed football game plan. Success demands strategic attention to every detail: managing the clock, coordinating players on the field, balancing offense and defense, and staying vigilant against mistakes. This holiday season, take the opportunity to reinforce your ethical playbook and align your team to finish strong. After all, luck is not a strategy, and every decision can impact the final outcome. Go Birds!

Wishing you a happy and healthy holiday season! Jonathan T. M.

#FraudPrevention #InternalControls #HolidaySeason #FinancialIntegrity #FraudAwareness #AccountingControls #EthicsAndCompliance #YearEndReporting #FraudRisk #ACFE #AuditAndCompliance

Disclaimer: The opinions expressed in this article are for learning purposes only and do not reflect the views of my employer. The mention of specific companies is solely for illustrative purposes.