With companies under financial pressure, the opportunity to commit fraud has increased

Webinar reveals that unsegregated responsibilities can lead to fraud, especially during Covid-19.

On 26 June, CFO South Africa hosted a webinar that looked into how fraud thrives during times of chaos such as Covid-19, and that the management and auditors of a company need to work together to prevent fraud. 

CFO South Africa editor in chief Georgina Guedes, hosted the webinar, saying that “There’s a good chance that, while we are working from home and businesses are losing money due to Covid-19 and lockdown, businesses are also losing money for other reasons, like instances of fraud taking place in their organisations.”

She then introduced reformed fraudster Brad Sadler, who explained why he had been arrested for fraud while he was working as a head of risk, credit and corporate banking at one of the big banks. 

At the time, there wasn’t any segregation of responsibilities, so Brad would meet with the client, complete the application, approve it and sign the cheque – which proved dangerous.

“Risk is a very important consideration in banking. In our company, we had grouping, which meant we had to combine an individual’s application for a loan in their personal capacity, with an application in their company’s name, albeit it separate,” he said.

However, instead of grouping transactions together, Brad kept them separate. “One of the reasons was that this meant we could do business very quickly – we didn’t have to go to the board for approvals – and the other reason was that our turnovers and profits increased,” he explained. 

In the end, Brad lent R70 million to all the clients that he had not grouped together. He ended up being arrested because of the potential loss of R70 million by the bank. 

He was arrested in 1994 when he wanted to leave the bank and appointed his successor. “When he was going through all these deals he pointed out that we were at risk and took it to the board.” 

Brad’s trial only ended in 1998 and he was found guilty for most of the charges relating to fraud and corruption, and jailed. 

Dealing with fraudsters

Brave Inflexions founder and ethics guru Claudelle von Eck then said how you deal with a fraudster depends on which kind of fraudster you are dealing with; a psychopath or someone who has been caught unawares. 

“Psychopaths lack empathy and remorse, whereas on the other extreme the person does have empathy, is able to understand the ripple effect of their actions and eventually shows remorse. In the latter case, you can start talking about rehabilitation,” she explains.

In a broader context within society, Claudelle said we need to have deeper conversations around how much we are doing to rehabilitate somebody who has committed fraud, excluding the psychopaths. “If we convict and jail people, we are sending them back into society unemployable. They then think they have to commit fraud to get another job and it creates a continuous cycle.”

However, with a solid rehabilitation programme, people can rebuild their trust in fraudsters. 

Fraud during Covid

Addressing the current Covid-19 crisis, fraud examiner Mario Fazekas said that he has seen an increase in fraud being committed, quoting Warren Buffet: “Only when the tide goes out do you see who has been swimming naked”. 

He explained that, during Covid-19 is that the tide has gone out further than it has been for a long time and all the people who have been stealing and defrauding have now been exposed. 

“With companies under financial pressure, the opportunity to commit fraud has increased,” he said. “There is less segregation of responsibilities because people are being retrenched – even gatekeepers and auditors are being replaced.” 

Mario predicts an increase in corruption, financial statement fraud and the theft of assets driven by the fear of uncertainty during this chaotic time. 

Consequences

With fraudsters being exposed during this crisis, Brad stressed the consequences that come with committing fraud.

“Crime does pay,” he said. “I pay every single day of my life. The consequences of the decisions I made will be with me until the day I die – things like career and trust that will follow me.” 

Brad explained that prison is a very unpleasant experience. “It is crowded and criminalised. Rape, assault and stabbings take place daily. I was very fortunate that I was never raped, stabbed or assaulted, but that’s not what happens to most people when they go to prison. Our prisons are so overcrowded and the resources are just not available.” 

He said that he would never wish prison upon his worst enemy as it has the possibility of shattering people’s lives, and most of the time it does. 

Building blocks of prevention and detection

Mario explained that there are three important columns when it comes to preventing fraud: 

  • Are the right measures in place? – Are we trying to recruit honest people? Are we doing background checks? Do we have a code of conduct? Do we have a hotline?
  • Is everybody aware of these measures and their responsibilities? 
  • Are these measures actually achieving their goal? 

“If we take training and awareness, a lot of companies are doing the pushing – saying ‘you must come to training and protect the companies’ assets’ – but what about the pull?,” Mario said. “Companies need to survey their staff before and after training, and ask them what they see going around in terms of fraud or suspicious activity.” 

He added that, when he speaks to management about fraud, they usually say that fraud isn’t a risk in their company because they trust the people that work for them, because they’ve worked there for more than 20 years. However, he warns that a fraudster can be someone on their first day of the job, or someone on their fiftieth day.

“We’re also told that they have internal controls,” he said. “But who’s monitoring those controls on a regular basis?” 

A lot of the responses are that “we have auditors”, but Mario said that, at the end of the day, it’s not the auditor’s responsibility to prevent fraud – it’s management’s responsibility.

“When fraud is detected in the company, it’s easy for auditors to blame management and vise versa, but auditors and management need to work together to prevent fraud,” Mario concluded.