Why auditors DO NOT discover Fraud

ByAli Bin Mohammed AlMuwaijei

Board member, UAE IAA, United Arab Emirates

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Why auditors DO NOT discover Fraud?

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Anyone heard of

CIA?

Anyone heard of

CPI?

Corruption Perception Index

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Corruption Perception Index - 2012

1. Denmark 90

1. New Zealand 90

1. Finland 90

2. Sweden 88

3. Singapore 87

4. Switzerland 86

5. Australia 85

5. Norway 85

169. Iraq 18

170. Turkmenistan 17

170. Uzbekistan 17

172. Myanmar 15

173. Sudan 13

174. Afghanistan 8

174. North Korea 8

174. Somalia 8

Transparency International

Scale from 0 (highly corrupt) to 100 (very clean).

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Corruption Perception Index – 2012

Rank Country Score

1 Denmark 90

1 New Zealand 90

1 Finland 90

5 Singapore 87

27 Qatar 68

27 United Arab Emirates 68

54 Malaysia 49

79 Sri Lanka 40

88 Thailand 37

94 India 36

118 Indonesia 32

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Patterns of fraud are however consistent

1,388 cases

Report to the NationsOn occupational FRAUD and abuse

Note: This data is based on an ACFE study of 1,388 cases of occupational fraud in 94 countries- 2012.

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ACFE's 2012 Report to the Nation:

What is the Percentage of revenue lost to Fraud?

3% 5%

7% 10%

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Summary of Report Findings

Losses

Typically 5% of annual revenue

World-wide USD 3.5 trillion

Organizations Affected

Mostly those lacking anti-fraud

controls

Controls exist, but not

implemented

Indicators

Tell-tale exists for fraud

perpetrators

Living beyond financial means

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According to Donald Cressey, three elements must be present for fraud to be executed:

a. Pressure/ motivation usually individual characteristics and situational factors

b. opportunities eg available targets ie lack of controls

c. rationalization/justification/ neutralization

This is known as the fraud triangle

The Fraud triangle

The Fraud triangle

Pressure/ Motivation :

1. Greed

2. Gambling

3. Financial strain - personal

4. Financial strain - business

5. Maintaining own/ family business

6. Influenced/ implicated by others

Pressure/ Motivation (Cont.):

7.Pleasing others

8. drug/alcohol addiction

9. Financing new business interests

10. Terminal illness

11. Dissatisfaction with employer

Opportunity

1. Weak or non-existent internal control

2. Lack of segregation of duties

3. Highly decentralized organization

4. Lack of knowledge/awareness

5. Opportunity is the perception by someone believing

they can commit a fraud without getting caught

6. Management control and influences “opportunity”

more than any other factor in the Fraud Triangle

Opportunity

Rationalization:

1. Intention to conduct a reasonable business

2. Intention to repay

3. Influenced/ implicated by others

4. Underpaid by employer

5. Helping clients

6. Tone at the top: poor corporate governance

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Difference between Audit and Fraud

• System / Process Improvements

• Improvements

• Individual/Gangue

• Prosecution

Audit Fraud

Months Years

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Separate Audit and Fraud

How to deal with this issue?

Auditors are policemen

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What Names Would You Use for the Department?

• Incident Management Department (IMD)

• Fraud Prevention Department (FPD)

• Internal Affairs & Anti Fraud. (IAAF)

• Internal Affairs & Anti Fraud Dept. (IAAFD)

• Anti Fraud & Internal Affairs Dept. (AFIAD)

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Audit and FPD reporting to ONE?

Advantages• Audit detect fraud and

pass to FPD

• Use of Audit for initial

investigation

• Supplement resource

when needed (IT,

Technical and auditors)

Disadvantages• Alteration to audit plan

• Director is seen wearing

two hates

• Some overlapping of

investigations

• Communication problems

between GIA & FPD

• Business unit mix

messages

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Fraud Prevention Department

Role and Responsibilities Charter

Fraud Prevention policy

Code of conduct

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Fraud Prevention Department

• FPD Compensation– Salary– Risk Allowance– Bonus – Insurance

• Organization Structure requirement– Legal/IT

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Interaction with Local/ Intl. Authorities

• State Security

• Police

• Prosecution

• Courts

• Ministries/Embassies

• Interpol

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Whistleblowing system

Fraud Prevention Department

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Setting a Whistle Blowing System

• Should you outsource or in source the system

• Protection system

• How far you can protect the identity of individuals

• Reward system for informers

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Initial Detection of Occupation Fraud

©2012 Association of Certified Fraud Examiners, Inc.

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Sources of Tips

©2012 Association of Certified Fraud Examiners, Inc.

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Lessons Learnt

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Thank YouAli.almuwaijei

+97150 7677757