Sun | Dec 11, 2016

Fraud on the rise: Better to be proactive than reactive

Published:Sunday | December 28, 2014 | 12:00 AM

Tricia-Ann Smith DaSilva, Guest Columnist

Statistics SHOW that no business is protected from fraud which often leads to substantial financial losses. In recent times, the media has been overflowing with news of significant corporate frauds.
For instance:

  • Multimillion-dollar frauds were reported at or by the Accountant General's Department, the Ministry of Youth and Culture, and Cool Oasis during last month.
  • The Internal Revenue Services reported that 108 investigations have been initiated related to financial institution frauds during 2014, with a rate of 64.8% incarcerations.
  • Occupational frauds have cost United States businesses over billions on an annual basis, according to the US Chamber of Commerce.

According to the Association of Certified Fraud Examiners 2012 Report to the Nations, Occupational Fraud and Abuse, it was noted that 36% of the organisations that suffered fraud losses lacked internal controls. The importance of assessing controls periodically cannot be overemphasised. Corporations that do not have adequate internal controls in place could be the next casualty of catastrophic losses.

Occupational fraud spans three categories - assets misappropriation, corruption and financial statements fraud - and has been on the rise. Asset misappropriations and financial statements fraud tend to be the most frequent and costly in regard to occupational fraud. The motives to commit financial statements fraud are as distinctive as the persons who commit these frauds. Financial statements fraud primarily includes a mixture of overstating and understating of revenue and expenditures. In addition, it may also comprise improper capitalisation procedures, reduced disclosure of related party transactions and the under-statement of financial obligations

As you review your entity's financial statements, detailed assessment of the reasons for upsurges or significant reductions in revenue and expenditures should be performed. For instance, items of considerations may include:

  • Analysing inconsistent growth patterns between accounts receivable and sales;
  • Examining increases in an entity's revenue over prior year despite substantial decreases in revenue for the industry;
  • Assessing improvements in the gross margin over prior years for reasonableness;
  • Investigating significant decreases in recurring expend-itures despite no changes in the company's strategic plans or budget; and
  • Performing financial ratio analysis over a number of years with focus on increased liquidity, improved margins and decreased gearing that are not appropriately supported.
  • Furthermore, management could perform reviews over a number of controls including, for example:
  • Assessing segregation of duties to ensure that at least cash collection, approval of disbursements, preparation of bank reconciliations amongst other key controls are not conducted by the same individual;
  • Reviewing the payroll system for fictitious employees to avoid funds being deposited in such accounts; and
  • Analysing expense accounts to identify any unusual transactions or trends.

An organisation should consider appointing a chartered or forensic accountant to: interview the employees with responsibilities for key processes, review the design and operational effectiveness of internal controls, and review the monthly financial statements for unusual patterns. An organisation that is proactive in assessing the internal controls would avoid the pitfalls of fraudulent conversion of their assets and financial statements. This should assist an organisation to reduce the probability of adding to the statistics discussed previously.

Tricia-Ann Smith DaSilva is a senior manager at PricewaterhouseCoopers and a board member of the American Board of Forensic Accounting. tricia-ann.n.smith@jm.pwc.com