Management Manipulation Tendencies to Achieve Key Performance Indicators

Key Performance Indicators (KPIs) are critical indicators of progress toward deliberate progress that serve as a focus for strategic and operational improvement, create an analytical basis for decision making and assist focus attention on what matters most. Key Performance Indicators for a company is very important since it acts as a measurement of the company’s successes and failures. It also gives an overview of the company’s performance at any time. Not every KPI measures the overall performance of a business. However, some corporations have many KPIs for every department of the business.

An audit performs procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures will then depend on the auditor’s judgement, including the assessment of risks of material misstatement of the consolidated financial statements which is either due to fraud or error. Fraud is an intentional action which is done by one or more individuals in the management, or a third party to obtain an illegal advantage. The distinguishing factor between fraud or error is whether the underlying action is intentional or not. An individual might be motivated to commit fraud because he feels that he is given unrealistic performance targets.

The main responsibilities for a management is to prevent and detect fraud and error lies with those in charge with governance as well as management of an entity. In addition, management responsibilities include implementing and ensuring the continued operation of accounting systems and internal controls which are designed to prevent fraud and error.

Management has various ways to analyze and prevent these fraudulent events, such as COSO framework, fraud triangle, and communication. The COSO model defines internal control as a process affected by the board of directors, management, and other personnels to provide reasonable assurance to achieve objectives, such as operational effectiveness & efficiency, financial reporting reliability, and applicable laws and and regulations compliance. In an effective internal control system, the components needed to support the achievements of the management’s goals and objectives are control environment, risk assessment, control activities, information and communication, as well as monitoring.

In addition, the fraud triangle is also the common model of analysis to explain why an employee decides to commit fraud in the workplace. There are three elements of the fraud triangle:

1. Pressure, one can be pressured to commit fraud because of personal financial problems. However, one doesn’t believe that he can solve his problems legally or he can talk to his acquaintances who might help him.

2. Opportunity, one who plans to commit fraud discovers a flaw in internal controls - lack of oversight - and believes that no one will notice if he takes the money.

3. Rationalization, the frauder must decide that the benefits he would derive from his deception are more essential than the risk of getting caught as well as having the ability to defend his or her actions.

Key Performance Indicators (KPIs) measure the goals of the business against actual and quantifiable data over a period of time. However, sometimes one or more employees would do anything to achieve the management KPI by manipulating the management objectives, in an illegal way. Then, a company which reaches their KPI might give their employees bonuses or vacation. An audit will perform procedures which are based on the auditor’s judgement. This would include the risk of material misstatement, such as fraud or error. The management is responsible for the employee’s illegal actions. Therefore, they implement continued operations of accounting systems and internal control. To prevent fraud, management could analyze and prevent fraudulent events by using the COSO framework, the fraud triangle, and communication.