The independent auditor appointed by the Aljunied-Hougang Town Council (AHTC) to examine its book, has released its report on 20 July. In its report, KPMG found "pervasive control failures" in the AHTC’s accounts and work processes over the past five years. These weaknesses cover key areas of governance, financial control, financial reporting, procurement and records management.

Looking beyond the political fracas surrounding this case, the findings by KPMG is a useful and timely wake-up call for both profit as well as non-profit organisations in the area of “back office” focus.

A total of 70 control failures was found during this audit and some of the key issues highlighted are as follows:

- Use of temporary clearing accounts that contained a total of more than one million transactions.

- Extensive use of manual journal entries (more than 48,500 records) to record payment to 3rd party (more than $60 million over 4 years)

- Duplicated recording of payment to supplier

- Use of dummy vendor codes for payments

Although these findings on a government-subsided, non-profit estate management entity are appalling, it is hardly rare to see or hear about these issues in the various industries in Singapore. It just differs in scale and the amount of media’s spotlight cast on it. It is kind of like the cockroaches hiding in our sewers, there are many and you do not see them, but you know they are there.

In our years of working with SMEs, we can perhaps help shed some lights on some common reasons on these perpetual and pervasive issues:

1. Insufficient focus on “Back Office”
The back office such as IT, operations, HR, accounting and compliance are usually seen as cost centres that do not directly generate revenue for the business. While most will agree that these are areas that provide vital support and administration, not many organisations would actually go the extra miles to spend quality time or resources on building up the capabilities of these back office functions. To ensure compliance with highly regulated areas such as Payroll and Employment practices, some companies would choose to outsource for professional help. Other back office areas are usually left to their own devices. 

2. Legacy “Key Staff” with legacy practices
This is usually the continuation of a vicious cycle from item 1. The onerous task of a resource thin back office falls back on a few individuals to manage the work load among themselves. Over time, the knowledge and experience acquired by these staff on getting the transactional routines sorted out make them “key” and even “indispensable” in some companies. It is not hard to imagine that oversight or governance in these areas are usually non-existent for as long as “nothing happens”. It is a fertile ground for both unintentional lapses and for any crooked minded staff to plant and grow any deliberate seeds of fraudulency on the backdrop of misplaced trust. By and large, “Trust” in most cases is a given to the back office as most would find that it is cumbersome and time-consuming to conduct check on back office.

3. Lack of common system to support oversight
There are quite a few facets in this area that we have seen and experience first-hand over years. Firstly, it is a prevalent mindset in many smaller organisation that the need for a common and effective back office system is a “good-to-have” item. To most lesser informed management, it conjures images of expensive Enterprise Resource Planning (ERP) system that are expensive to acquire, challenging to implement and hard to use.  Nothing can be further from the truth with more modern days’ business technology solutions that can be scaled and customised for the needs of different types and size of companies. Secondly, there are lack of management will to pursue such changes, usually as a vicious cycle continuation of item 2. The “legacy key staff” are the strongest in resisting such changes for obvious reasons. They fear it dilutes the level of “difficult and demanding” work they have been doing, may exposes historical lapses under their time, creates more things for them to learn and do etc. You get the drift.  Thirdly, ineffective stoved-piped legacy systems or practices, which most companies avoid confronting until the pain point is unbearable. But most times, back office seems to have high pain tolerance thresholds. Most times, staff will live with the unresolved system issues and find manual workaround solutions to move things along.

It does take much to imagine that over time, the above-mentioned issues developed into an equivalent of “Molotov Cocktail” waiting to be torched as there is simply no efficient and effective ways assimilate all these important pockets of key data and information within the organisation for the regular and necessary oversight by the management.

It is apparent (unfortunately, usually on hindsight) that it is going to be costly to perform such rectifications as seen in the AHTC's saga. 

"It appeared to us, though, that parts of management see the control failures as requiring short-term fixes and historical explanation," said the KPMG’s report.

Is it time you turn the spotlight on the back office?