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finance: Vigilance Essential in Catching Fraud - Ernst & Young


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David Coleman Associate Director for Fraud Investigation and Dispute Services at Ernst and Young comments that as companies come under financial pressure, either to meet shareholder expectations or merely to survive, management and employees are increasingly succumbing to the pressure to break the law.

“The market is clearly seeing an increase in the number of liquidations and an increase in the scope and scale of fraud committed,” he says. “Although this is to be expected when economies go into recession, there still isn’t enough being done by other companies to protect themselves from the fallout of these practices.”

“The problem that companies face when trying to protect themselves against fraud is that these illegal activities are not always aimed at immediately enriching a individual, but rather at protecting the business with the hope that once the market turns around they will be able to undo any damage they have done,” he says.

“In the fraud triangle, which refers to the three elements that exist for a fraud to take place, there is incentive, opportunity and rationalization. When it comes to executives they may rationalise that their motives for misstating their true financial position is more altruistically motivated as they do not want the company and its employees to suffer,” he explains.

“While financial statement fraud can be used by management to ensure that bonuses are paid, it could equally be part of a strategy to ensure that banks and other finance houses do not withdraw lines of credit because of poor performance,” Coleman says.

“Although financial statement fraud can happen anywhere in the world, the specter of corruption looms especially large in SA. With government still spending large amounts of money on infrastructure projects and business faltering, the temptation to exert undue influence on those responsible for the adjudication and awarding of government contracts,” he comments.

“In this situation the rationalisation is often that winning the contract will ensure the survival of the business and therefore the jobs of the people it employs and government employees on the other side are looking to secure their future with the money on offer,” he cautions.

According to Coleman there are a number of steps that companies can take to ensure that they do not fall into the fraud and corruption trap.

He explains that part of this strategy involves carefully reviewing processes and policies within the company to ensure that any weak points can be identified and addressed,” he comments.

“Every company should be asking itself if it has an effective anti-fraud strategy in place and then ask three critical questions around the programme. These questions are: Is it sufficient to deal with problems when they arise, is it effective and properly communicated and do the employees feel that they are part of the programme?

Staff members need to feel comfortable that a system is there to protect them should they report anything they see that is out of the ordinary. The difficulty that a programme like this faces is when upper management are complicit in the fraud and the survival of the company is at stake. Coleman says that it is at this point that the strengths of the system will be tested.

With the South African economy in recession it is vital that companies strengthen their defenses against fraudulent activities and optimise their processes and policies to ensure that no-one, whether at the top or the bottom of the organisations, is able commit a financial crime.

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