Jonathan le Roux: Is Fraud in your rearview mirror?


5 myths among CFOs about fraud– and their reality checks

I once read an article that said ask the following question: "Is your financial information used as a brakelight or a headlight for your organisation?"

Depending on your answer to this, will also determine how you view fraud within your organisations and its impact on your financial position, liquidity, governance and brand reputation.

Some of my perspectives regarding CFO myths about fraud:

1. Fraud happens, but not here at my organisation, and if so, it is probably small petty theft stuff

2. Let's just make a provision for fraud at the beginning of the year, so we don't have to worry about it

3. Fraud does not affect our financials and if it is not material, neither will the auditors raise it as an issue

4. Let's deal with fraud when it happens as it requires a lot of time, effort and money to combat fraud within an organisation

5. Once we sign and complete the external auditors ISA240 document covering Internal Control Fraud Considerations, we are in the clear

The reality check of the above myths is as follows:

  1. Fraud is occurring at all organisations.
    - According the Association of Certified Fraud Examiners (ACFE) Report To The Nation Occupational Fraud and Abuse Survey 2014, they say 5% of an organisations revenue/turnover is being lost due to fraud per annum.
    - We might not know about it due to our control environment, attitude towards entitlement and lack of tolerance for reporting / punishing such activities
  2. Setting aside money for the fraud loss you think you are going to incur is very naive.
    - It takes on average 18 months for fraud to be detected within organisations (based on their anti-fraud control environment conditions)
    - The loss attributable to fraud is your profit margin percentage, so to fully provide for the fraud costs, you would need to sell x quantity of your products to be placed in the same position to recoup/recover that profit margin percentage
  3. Fraud does affect your financials, but you need to know what to look for. There are five (5) types of Financial Statement Fraud categories, namely: Fictitious revenues; Timing differences; Improper asset valuations; Concealed liabilities and expenses and Improper disclosures
    - All fraud incidents should be reported and disclosed in your Financial Statements notes based on the ISA240 auditor standards (amongst other requirements)
    - The New Companies Act place certain conditions on Directors of companies in exercising due care and skill
  4. Fraud can be prevented and detected if sufficient knowledge of fraud and its prevalence is known within the organisation. There is significant resources available on this topic, but a good start is reviewing the Fraud Examiners Manual for the ACFE which deals with the three (3) most common types of fraud being Corruption, Asset Misappropriation and Financial Statement Fraud
    - There is much information on the ways in which can be committed in organisations, those red flags that will help you detect the fraud and also possible solutions to prevent them
    - The use of various financial statement analysis tools like ratio analysis, vertical and horizontal analysis can help people looking at financial statements to pick up anomalies or inconsistent results (this is what happened to Enron when analysts looked at their financials and it didn't make sense when compared to their competitors)
  5. Bu virtue of signing any document, not just the ISA240, you as CFO or Director will be held to account should there be misleading, inaccurate or dishonest information contained in this document
    - It is best to disclose all information known to you regarding fraud, risk and other associated irregularities towards the auditor (even if you think they are junior and you have answered this document 100 times before)

Start placing fraud in your headlights and keep it as a standard agenda item on your CFO or financial meetings. If fraud is out of sight for you in these meetings, so too will it be for your organisation.

Stay fit4fraud.

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