Companies need to place fraud risk governance high on the board agenda to mitigate the risk of fraud and other forms of financial crime, says professional services firm PwC.
“The recent economic uncertainty has placed the pressure on more employees, particularly executives in the ‘C suite’ – CEOS and CFOs – to commit white collar crime,” says Peter Goss, PwC Head of Forensic Investigations in Government and Public Services, South Africa. “Our experience as forensic auditors is that financial crime in South Africa is increasing at a high rate.
During difficult economic times, the incentive to commit fraud increases while the focus on detection and prevention tends to diminish.
“Procurement fraud is one of the most costly types of financial crimes that affects businesses across a broad spectrum of industries, particularly during times of an economic downturn.”
Goss says that it is important that the board be committed to the fraud risk management process. “Effective governance processes are the core of fraud risk management. The lack of effective corporate governance within an organisation has the potential to weaken a fraud risk management programme.”
Goss was speaking at the International Fraud Awareness Week conference held in Kimberly today, sponsored by the Association of Certified Examiners (ACFE) and National Treasury aimed at promoting awareness and education around fraud.
Worldwide it is estimated that organisations lose about 5% of annual revenues to fraudulent activities, according to a new study conducted by ACFE, with 42% of fraudsters being employees, 38% managers and 18% owner/executives. According to a study carried out by PwC’s Forensic Services Practice in 2011, 36% of internal economic crimes were carried out by senior management, compared to only 17% in 2009. “This is no surprise. These economic crimes require access to sensitive information and more sophisticated ‘know-how’ which senior management usually possess, says Goss.
“Employees, usually at senior and executive level, have a greater understanding of the business and also of the internal controls that are in place, which are designed to prevent fraud.
“Statistics show that these crimes have previously not been as prevalent in South Africa and the increase could suggest that organisations need to revisit their fraud risk management frameworks to ensure that they are able to deal with the emerging threats.”
One of the biggest shortcomings for organisations in not detecting fraud earlier is due to the lack of a fraud governance framework in place, he says. “Poor governance is impaired by corruption and fraud.”
Goss goes on to explain that a fraud risk governance framework considers more than simply fraud prevention or fraud risk management in isolation. “It incorporates and compliments the organisation’s corporate governance framework.” “A corporate governance framework with robust procedures, creating an environment in which employees can confidentially report their concerns, and in which perpetrators are dealt with effectively by top management, is considered to be a powerful deterrent tool.”
It is vital that the right message be conveyed by top management and that this message is reinforced by appropriate conduct. The board has the responsibility to ensure that an appropriate fraud risk assessment framework is in place to encourage ethical conduct.
Furthermore, a committee, such as the audit committee, should be charged with the responsibility of ensuring that fraud risk has been considered as part of the organisation’s risk assessment framework.
Directors also needed to be able to identify ‘red flags in their organisations in order to deter fraud and corruption. These include the misappropriation of assets, conflict of interests, and being in possession of assets which are not commensurate with one’s income.
Only once a workforce has been adequately equipped and prepared with the right resources and skills can a positive change within the organisation take place, concludes Goss.