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