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Risk Management

Economic crime is SA: Fact or Fiction?

It’s a fact. No matter which global or regional surveys a person may refer to, the latest 2014/15 surveys on economic crime all show that crime of this nature is on the increase.

Economic crime, particularly fraud and corruption are causing organisations in both the public and private sector substantial financial losses, and increasing pressure on business to grow their revenues together with market volatility could be just some of the reasons why these crime statistics are increasing.

EY’s Europe, Middle East, India and Africa (‘EMEIA’) 2015 Fraud Survey, entitled Fraud and corruption – the easy option for growth? found that greater pressure on businesses to grow revenues, together with market volatility was creating increased risk in expansion opportunities. Challenges including geopolitical instability, commodity and currency price volatility, as well as economic sanctions were pushing companies and their executives toward high-risk behaviour. A 33% of the EY Fraud Survey respondents reported that management was under increased pressure to expand into higher risk markets. In these markets, 61% of respondents regarded corruption in companies as widespread, and 37% of respondents reported that companies often overstate their financial performance. In the 2014 Report to the Nations on Occupational Fraud and Abuse, conducted by the Association of Certified Fraud Examiners (ACFE), it found that whilst there was a higher percentage of fraud being committed by staff on the employee level, fraud committed by employees accounted for a much lower median loss than fraud committed by its executives.

In the same ACFE report, it is interesting to note that accounting departments (as compared to seven other departments) were rated as the number one area where occupational fraud was most likely to occur. More interestingly though; was that whilst executives tended not to commit fraud as much as their junior counterparts, when executives did commit fraud, it was usually six times the value of those committed by their juniors. These findings were also corroborated in another fraud study, namely the 2014 Kroll Report, which was undertaken by the Economist Intelligence Unit with 901 senior executives polled globally. They reported that the following individuals were a leading figure in at least one fraud:  32% were senior or middle managers,  42% were junior employees, and  23% were agents or intermediaries. In the 2014 Global Economic Crime Survey concluded by PricewaterhouseCoopers, out of the top five most reported crimes was Asset Misappropriation (69%), followed by Procurement Fraud (29%) and Bribery and Corruption (27%). This report furthermore stated for the first time since 2005, South Africa had shown an increase in the prevalence of economic crime. Whilst the global overall incidence of fraud increased from 2009 to 2011, South Africa recorded a fraud incident rate of 60% in 2011 and 69% in 2013. Over the same period of time, the global average of fraud incidence was 33% and 37% respectively. What is of grave concern for South Africa is that the country is reportedly experiencing a higher incidence of economic crime in every category, except in the categories of Intellectual Property Infringement and Mortgage Fraud. Sadly this dire situation is not fictional and boards of directors should be critically concerned as statistics show as much as 5% of a company’s turnover can be linked to fraud and corruption (ACFE). More concerning is that forensic investigators estimate that 62% of all fraud and corruption is committed internally by the organisation’s employees (ACFE). This may be largely due to the fact that many organisations lack proper and effective internal controls to detect and prevent fraud, and organisations should be more proactive by implementing effective systems of internal controls that are designed to assist in the prevention of economic crime within an organisation. Not only should the system of internal controls be clearly articulated into the organisation’s Corporate Governance Framework® and risk matrices, but clear lines of accountability must be attributed to the board of directors when such controls fail, or worse, when these controls are missing. An organisation should be able to quickly detect when its internal controls are inadequate, and furthermore it should also know when there is any form of breaches of the controls, or a lack of management review and so forth. Indeed, this thinking is also in alignment with the recommendations contained in the King Report on Governance for South Africa of 2009 (King III), stating that “the board should report on the effectiveness of the company’s system of internal controls”. Clearly, when there is a poor tone being set at the top of the organisation and these controls are done haphazardly, then the organisation becomes particularly vulnerable to fraud. Whilst organisations can become far more proactive in their fraud prevention and controls, they may benefit by implementing various types of pre-employment testing which can play an important role in the organisation’s hiring policies and processes.

Some of these pre-employment tests may include; director and employee background checks, drug tests, personality tests, cognitive tests and in special cases, polygraph tests. Let’s not forget the important role fulfilled by audit in the fight against corruption and the quest for a ‘clean audit’. Both internal and external auditors are extremely useful resources to detect and prevent these criminal activities. Perhaps organisations should arrange more ‘life-style’ and ‘surprise’ audits in order to detect prohibited acts and this will make it more difficult for individuals to cover their tracks in anticipation of a planned audit. It is interesting to note in EY’s 2015 fraud survey (Fraud and corruption – the easy option for growth?) that as many as 20% of employees believe anti-corruption policies will hold them back from growing their business. That being said, it does make one wonder what really goes on within organisations and if the board actually wants to know how the bottom line figures were achieved by their employees? Indeed, directors should be reminded that contrary to popular belief, the board is ultimately accountable for detecting and preventing corporate fraud and this function does not rest with the external auditors, whose function is limited to expressing an opinion on the annual financial statements. The Global Leader of EY’s Fraud Investigation and Dispute Services (FIDS) Practice namely David Stulb makes a solid argument stating that to “grow in a high-risk market you need the right controls and processes. You need your teams to be trained to make the right choice when asked to pay a bribe or ‘cook the books’, and you need the right tools to monitor activity so these risks can be addressed in a timely manner.”

Terrance M. Booysen and peer reviewed by Sharon van Rooyen (Partner: EY)







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