KPIs on Trial

KPIs on Trial

When KPIs lead to fraudulent behaviour

When KPIs lead to fraudulent behaviour In 2017, British Telecom (BT) discovered to be the victim of a GBP 530 million (USD 680 million) accounting fraud and embezzlement, orchestrated by the CEO, COO and CFO of the Italian subsidiary. As a result, the company’s shares plunged by more than 20% (the biggest ever one-day fall and the lowest level since 2013) and an amount of GBP 8 billion or more than a fifth was wiped off BT’s market value.

Greed plus top-down pressure to meet financial KPIs motivated BT Italy top managers to commit fraud. Meeting or exceeding such KPIs would have made these key players entitled to significantbonuses and increased their chances for further promotion. Allegedly, the scam consisted of creating fake sales invoices to increase revenues and generating fake purchase orders to conceal the fraud. This fraudulent scheme required collusion among many people in sales, procurement and finance and it had been perpetrated since 2013.

This scandal is not specific to either Italy or the telecom industry. For example, the US banking industry has been significantly shaken up by the scandal in Wells Fargo. The pressure to meet KPIs developed a corporate culture where employees fraudulently opened more than 2 million bank accounts that customers did not ask for so as they could meet their sales targets and satisfy the bank’s aggressive strategy of cross-selling products and services. This bad practice lasted from May 2011 to July 2015.

What about other organisations?

We could cite an endless list of other corporate scandals. But this poses the question: what about your organisation?

Your employer, like any other organisation, can fall victim of fraudulent behaviour or gross misconduct linked to KPIs that encourage employees to focus on quantity (e.g. the number of disputes processed, repairs carried out, controls remediated, accounting journals created, etc.) rather than the goal itself (e.g. customer satisfaction, profit, etc.).

This environment creates an opportunity for employees to play up with the system of internal controls and commit fraud.

Over the years, I have investigated colleagues who faked documents (e.g. purchase orders and invoices) that were rubber stamped by their managers who were under pressure to deliver on quantity. I have also seen employees successfully pushing through fraudulent or excess discounts to customers leveraging on the fact that the business priority was to complete as many customers’ disputes in as little time as possible rather than defending the company’s interests and addressing the root cause of the issue.

What can we do to prevent or stop this side effect of KPIs?

Firstly, KPIs need to be defined as challenging, while realistic and achievable. Excessive top-down pressure can encourage employees to prioritize the achievement of a KPI over delivering a sustainable performance, e.g. manipulating performance data, bypassing or overriding internal controls and/or cutting corners to achieve targets.

Also, listen to your employees if they raise concern about excess pressure around their KPIs or from their immediate managers. For example, in the Wells Fargo case, a few employees reported their concerns about their superiors intimidating them to do whatever it takes to achieve impossible targets, however, management did not take them seriously until it was too late.

Finally, consider reviewing the KPI setting process with fraud in mind, to challenge whether there could be too much focus on quantity vs. quality that could inadvertently lead to fraudulent behavior or gross misconduct.