What Nidec’s Fraud Problem Reveals
Fraudulent accounting has come to light at Nidec, a major motor manufacturer. As reported by China News Digital and au Web Portal editorials, this is a company that has achieved rapid growth since its founding. That’s precisely why this news is relevant to SME owners as well.
You might think, “We’re not a listed company, so it doesn’t apply to us.” However, the structure of fraud is not limited by scale. In fact, SMEs with weaker governance systems are arguably more prone to similar issues.
This article uses Nidec’s fraud case as a springboard to explain governance design principles that SMEs can apply in their own companies. We’ll focus specifically on “how to spot the early signs of fraud.”
Fraud Doesn’t Happen Suddenly
Many business owners tend to think, “Our employees wouldn’t do that.” However, most fraud isn’t premeditated; it develops from a series of small “cheats” that accumulate over time.
In Nidec’s case, it’s been suggested that the fraud may have continued over a long period. This implies it wasn’t a large-scale scheme from the start, but rather a “minor adjustment” at some point that became habitual.
The key here is to view fraud not as a “people problem” but as a “system problem.” Even the most capable employees are not immune to fraud if pressure and opportunity align.
Understanding the Three Elements of Fraud
Fraud is said to require three elements: “Pressure (motive),” “Opportunity,” and “Rationalization.” Of these, the one a company can control is “Opportunity.”
In SMEs, authority tends to be concentrated in the hands of the owner or specific employees. As a result, checks and balances may fail, creating opportunities for fraud.
Building a System That Doesn’t Miss the Signs
It may be difficult to prevent fraud entirely. However, you can create a system to detect it early. The key is designing a mechanism to capture the “signs.”
Noticing Anomalies in Numbers
Most fraud manifests as anomalies in the numbers. For example, look for cases like these:
- Sales are steady, but profit margins suddenly improve
- A specific department shows abnormally strong performance
- Expense claim patterns change abruptly
- Inventory and book figures don’t match
In SMEs, the owner is often in a position to grasp all the numbers. It’s crucial to develop a habit of questioning monthly figures—not just “glancing” at them, but asking “Why did this number turn out this way?”
Paying Attention to Changes in Behavior Patterns
Beyond numbers, changes in employee behavior are also important signs. For instance, watch for these indicators:
- A sudden increase (or decrease) in overtime
- Frequent work on holidays
- Accounting or finance staff avoiding explanations
- Unusually close relationships with specific business partners
These changes don’t necessarily indicate fraud. But they should be seen as “signals” that something might be happening.
Actions SMEs Can Take Right Now
From here, we’ll introduce specific actions. You don’t need the sophisticated internal control systems of large corporations. Methods suited to the scale of an SME are sufficient.
1. Introduce Regular Rotation
When the same person handles the same tasks for a long time, opportunities for fraud increase. Rotate job responsibilities periodically, as much as possible.
For example, “segregation of duties”—having different people handle accounting and cash management—is fundamental. Furthermore, swapping personnel every six months or so can enable mutual checks.
We can already hear you saying, “We don’t have enough staff.” In that case, make it a habit for the owner to regularly review the books. You could also hire an external tax accountant for periodic checks.
2. Create a Culture of Asking “Why” Five Times
When you sense an anomaly in numbers or behavior, cultivate the habit of digging deeper into “why it happened.” The “Five Whys” method, famous from the Toyota Production System, is also effective for detecting signs of fraud.
For example, if sales suddenly increase: “Why did sales increase?” → “Because we tried a new sales technique.” → “Why was that technique effective?” → “Because we received a large order from a specific client.” → “Why did orders from that client increase?” Keep digging.
If anything seems unnatural during this process, you need to investigate further. The important thing is not to let it end with a vague “just because.”
3. Establish an Internal Reporting System
An internal reporting system is one of the most effective tools for early fraud detection. However, in SMEs, there’s often a strong atmosphere of “you can’t report on colleagues internally.”
One solution is to utilize external experts (such as a retained lawyer or an external consultation hotline). Setting up an anonymous reporting mechanism allows employees to provide information safely.
A “whistleblower-first” attitude is crucial. You need to clearly state that employees who report will not face disadvantages, and have a system in place to actually protect them.
4. Conduct Regular Audits
For SMEs, establishing a dedicated internal audit department is likely difficult. However, regular audits by external experts are possible.
For example, you could request a “simplified audit” from a tax accountant or certified public accountant once a year. While there is a cost, it increases the likelihood of detecting fraud early.
Also, having the owner conduct “surprise checks” is effective. By checking specific departments or transactions without prior notice, you can create a deterrent effect against fraud.
Conclusion: Governance Design is About “Systems,” Not “People”
Nidec’s fraud issue shows that it can happen to any company. The important thing is not to blame the individuals who committed the fraud, but to create a system that makes fraud difficult to occur.
I hope SME owners will keep the following three points in mind:
- Signs of fraud appear as “anomalies” in numbers or behavior patterns
- Don’t overlook anomalies with a culture of repeatedly asking “why”
- Strengthen check functions by utilizing external experts
“Governance is not a defense but a design skill” is the basic stance of this media. A system that prevents fraud becomes the foundation that protects your business and supports its growth.
Take a moment to review your company’s current situation. Do you sense any “discomfort”? That very discomfort is the first step toward improvement.
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