Pacific Islands Financial Managers Association (PIFMA) Heads: Annual Meeting

by Ms Rosie Langi (ACFE,CICA,TA(Fiji) Director, Transparency International -Fiji

Disclaimer
Neither this presentation nor the materials you have been provided shall constitute legal advice or the opinions of the Transparency International Fiji or the professional entities that the presenter is associated with (ACFE, IIC, FIIA, FAFE) While the practices and methodologies which will be presented are considered industry best-practices, specific circumstances and fact patterns should drive your process and approach. Any similarities of names or circumstances are purely coincidental
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Overview
Interchangeable use of terms (Corruption vs. Fraud) TI focus
- Global Perception Barometer (The Barometer) - Corruption Perception Index (CPI)

Professional focus - Big Four (KPMG, PwC, E&Y, Deloitte)

- Association of Certified Fraud Examiners (ACFE) - (Prevention, Detection and Deterrence) Integrated Methods - The Corporate reporting Supply Cycle - Fraud Deterrence Cycle - GRC Toolbox The Future Where Do We Go From Here

Corruption vs. Fraud defined

Corruption - the abuse of trusted authority for private gain. (Transparency International) Fraud (occupational) - The use of ones resources for personal enrichment through the deliberate misuse or misapplication of the organisations resources or assets (Association of Certified Fraud Examiners)

THE FRAUD TREE

Corruption
Conflicts of Interest Bribery Illegal Gratuities Economic Extortion
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Asset Misappropriations

Fraudulent Statements

Cash Inventory & All Other Assets

Financial

Non-financial

Fraud in Historic Perspective

Fact of life for years Babylonian era (1800BC) Code of Laws US-since colonies settled, 1616 Virginia case, Captain Samuel Argall, Deputy Gov ...only six goats were left... Civil war False Claims Act 1863 Credit Mobilier scheme 1872 (double invoiced govt, distributed $50m to shareholders. Politicians involved. Fiji cases (FMF, NBF,HA,C&E, Immigration, Agriculture, Fisheries)

Transparency International
TI, is the global CSO leading the fight against corruption. Over 90 chapters worldwide, with its Secretariat in Berlin. TI raises awareness of the damaging effects of corruption and works with partners in government, business and civil society to develop and implement effective measures to tackle it. (advocacy) Membership is open (qualified)
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Regional Classification within the Asia Pacific

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Fiji Papua New Guinea Solomon Islands Vanuatu

Global Corruption Barometer 2010

The Barometer is the largest cross-country survey collects general publics views on and experiences of corruption. In 2010, over 91,500 people in 86 countries most comprehensive edition since 2003. general publics views about corruption levels in their country governments efforts to fight corruption. Complements Perception Index & Bribe payers Index on the general publics perceptions of key institutions public willingness to engage with the fight against corruption.

TI Projects
Regional Advocacy and Legal Advice Centres (ALAC) Forest Governance and Integrity Preventing Corruption in public contracting Transparency in political financing National integrity systems Corruption prevention in disaster relief National

Corruption in politics Corruption in the public sector International Anti Corruption conventions Anti-Corruption education Corruption in public contracting

Changes in Corruption Levels in the past 3 yrs, by Region.

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Perceived Levels of Corruption in Key Institutions

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Corruption Affecting Key Institutions/ Sectors. Comparison Overtime, Overall Results

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Assessment in Government Actions Against Corruption

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Peoples Trust to Fight Corruption

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Peoples Trust to Fight Corruption By Region

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Transparency International Corruption Perceptions Index (CPI)

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Professional Bodies - ACFE

The worlds largest and Certifying anti - fraud body was formed in 1988 The Association of Certified Fraud Examiners (ACFE) based in Austin, Texas, USA. over 55,000 members world wide and offers the Certified Fraud Examiners Membership is open to those of good standing. Certification is in Law, Finance, Criminology and Ethics and Investigation (CFE)

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Famous Quotes: Enron

The company is probably in the strongest and best shape that it has ever been inThere are no accounting issues, no trading issues, no reserve issues, no previously unknown problem or issues. (Kenneth Lay, Enron CEO statement to Wall Street) I am incredibly nervous we will implode in a wave of accounting scandals, and our [successes are] nothing more than an accounting hoax. (- Sherron Watkins, Former Enron, VP Corp Development and Whistleblower)
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International Fraud Cases

Enron (US) 2000 - $US600 million loss; - $85m settlement, 20 000 employees. Adelphia(US) 2002 - $US2.3billion $0.01 per acct per month 1million clients = $10 000pm = $120 000pa UK Insurance claims for 38 teeth UK pop 55 million, social security number 70 + million
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Fiji Fraud Cases

National Bank Of Fiji (Fiji) 1990s $F300million approx. Housing Authority of Fiji (1990) Customs & Excise Department (1990s) Fiji Immigration Department Shell companies Phantom employees (Education) Agriculture scam Tender bidding Peter Foster

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THE FRAUD TREE

Corruption
Conflicts of Interest

Asset Misappropriations

Fraudulent Statements

Cash

Financial

Bribery

Inventory & All Other Assets

Nonfinancial

Illegal Gratuities
Economic Extortion
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Initial Detection of Frauds

Internal Audit Tip From Employee By Accident 18.8% Internal Controls External Audit Tip from Customer Tip from Vendor Anonymous Tip Notified by Police
0%

23.8% 18.6% 23.6% 26.3% 21.3% 18.4% 15.4% 10.9% 11.5% 7.8% 8.6% 6.2% 5.1% 5.1% 6.2% 0.9% 1.7%
5% 10% 15% 20% 25% 30%

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2001

2004

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Governance and Corruption

Good governance is not a luxury but a basic requirement for development. Corruption undermines development and is generally an outcome and a symptom of poor governance. It has reached global proportions and needs to be attacked directly and explicitly. (Commonwealth Declaration) It is now widely acknowledged that the control of corruption has to be an integral component of good governance.(TI) Proactive and reactive measures necessary (ACFE)
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The Use of Integrated Methods To Fight Fraud

Corporate Reporting Supply Cycle The Fraud Deterrence Cycle The GRC Toolbox

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1. The Corporate Reporting Supply Cycle

Corporate Executives

Board of Directors

Independe nt Auditors

Information Distributors

Third Party Analyst s

Investors and Other Stakeholder s

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2. The Fraud Deterrence Cycle

Corporate Governance

Investigation and Remedial of Programmes

Fraud Deterrence Cycle

Transaction Level Controls

Retrospective Examination of Processes and Transactions

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Conceptual Overview of the Fraud Deterrence Cycle

An interactive process with 4 main elements; Establishment of corporate governance Implementation of transaction level control processes (Internal control processes) Retrospective examination of governance and control processes through audit examinations Investigation and remediation of suspected or alleged problems

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The Fraud Deterrence Cycle

Corporate Governance Independent board, chairperson, management, stakeholders Audit committee to have at least a finance expert, all others financial literate, Regular meetings Explicit ethical commitment (walking the talk) Prompt and appropriate investigation Budgeting / forecasting controls Internal audit reporting to audit Committee Clear, formal policies and procedures, regular reviews, Well defined financial approval authorities and limits Timely and complete Information flow to the board.

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Transaction Level Controls

The Control Environment Risk Assessment Control Activities Information and Communication Monitoring

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Important Control Processes

Additions/changes/deletion s to master file of customers, Vendors, employees Disbursement approval processes Write off approval processes Revenue recognition procedures Inventory controls Segregation of duties
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Information system access and security control Proper employment screening procedures, background checks Timely reconciliations Cash management controls Security of assets Top level reviews of actual performance versus

3. The GRC Model

Governance, Risk Management and Compliance (GRC) to eliminate corporate silos integrate organizational management, protection against fraud and theft and regulatory adherence.
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Problem? GRC programs often underestimate fraud risk.

How The GRC Works?

Integration of governance, risk management and compliance (GRC) and anti-fraud programs, creating synergies and efficiencies that will better detect and deter fraud. Managers, CEOs to recognize the ubiquity and seriousness of the fraud threat. Everyone works together, sharing best practices and using common tools to rely on each others work. No unilateral ownership, but must be cooperative and well coordinated. Need to identify appropriate strategic and tactical guidelines and best practices to get there.

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2010 KPMG Survey

1,200 members on boards worldwide oversight of fraud risk was a great concern for only 6 percent only 72 say Yes, fraud is a great concern to me. (1,128 believe either that fraud is not a big threat or that ICs are very good) Interests more on Gulf
oil spill, Wiki Leaks disclosures of classified information, Political unrest in the Middle East and North Africa, Earthquake and tsunami in Japan. Tone at the top (5th) and Ensuring audit

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Opportunity

The Fraud Triangle

Pressure
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Rationalization

Beyond The Fraud Triangle

Since 1950s to understand fraudsters motivations Inadequate for Prevention, Detection and Deterrence of fraud because Pressure and Rationalisation cannot be observed. Case: 1978 Wal-Mart hired Thomas Coughlin, director of loss prevention, 2005 VC, Alligator boots ($ 1359), dog pen ($2 500) Questionable transactions $100 000 $500 000 2004 compensation over $6m. Inconsistency with Add Capability = The Fraud Diamond MICE Model (Money, Ideology, Coercion, Ego/Entitlement)

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Looking Forward - Where Do We Go From Here?

Evolution of discipline The changing corporate including boundary between environment in which the financial auditing and decision to investigate and forensic accounting the process and the results investigations of investigation encounter real world benefits Education and training for a new generation of forensic Changes in corporate accounting investigators reporting especially re and fraud examiners. non financial operating data (NFOD) . The changing regulatory and legislative environments

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Looking Forward - Where Do We Go From Here?

A Historical Account of the Auditors Role
Auditing ancient history 4000BC. Growth of the auditing profession in the 19th Century

...auditor who is able to detect fraud is other things being equal a better man than the auditor who cannot.(Auditing: A practical manual for auditors by L R Dicksee) Current Environment Sarbanes Oxley Act 2002 - International Financial Reporting System (IFRS) AICPA s99 Consideration of Fraud in a Financial Statement Audit. Auditors are Not Alone.
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Looking Forward - Where Do We Go From Here?

Reactive Investigation & auditing (traditional) Proactive Prevention & Detection & Deterrence Deterrence , Auditing and Investigation

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- Increased size of reported scandals (Enron, WorldCom, Tyco, Food for Iraq) - Issues e.g. executive pay, benefits & perks, wilful deception, mumbo jumbo, creative accounting, , cooking of the books Systematic, Rigorous approach that uses both reactive & proactive methods. Partnerships TI, NGOsand professional bodies

Vinaka Vakalevu
Valuable Sources - http://www.transparency-international.org - http://www.acfe.com
- Golden Thomas et al, A Guide to Forensic Accounting, 2006, John Wiley & Sons Inc.

- Wells, JT Corporate Fraud Handbook, 2004 John Wiley & Sons Inc.
- Hare, Robert D, Without Conscious, The Disturbing World of Psychopaths Among Us, 1999 the Gilford Press, USA. - The GRG Toolbox by Robert Tie, The Fraud Magazine, September /October Issue 2011, ACFE.

Ms Rosie Langi rosie_consult@yahoo.com.au

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