Fraud Survey 2008, Forensic versus Audit and a differing perspective and approach

The Institute of IIA in Qatar in cooperation with Qatar University’s Scientific Accounting Association hosted very successful seminar at the Ibn Khaldoun Hall at the university on Sunday 1 March 2009. Mr Shazad Alam from the Forensic Accounting Services of KPMG addressed three topics, “KPMG’s fraud survey conducted in 2008 in GCC countries, a different perspective between Forensic and Audit, as well as a reflection on the latest scandals..

The survey was covering a broad sector of business and Governmental sectors, rendering it reliable and informative. Key outcomes were:

1. It identified 2179 incidences of fraud with a value of US$114M.
2. Age barrier was no restriction to commit fraud.
3. The typical profile of a fraudster amongst other characteristics, are a male, between 2 to 10 years service in the company, operating his scheme between 1 to 5 years, and average age between 36 to 55 years.
4. The most popular fraud by instance was cheque forgery (47%)
5. By value the most popular way of enriching oneself was by manipulating the financial statements (26%)
6. Whistleblowers contribute to the detection of fraud in one third of the cases.
7. Concerning though is that red flags were present in 49% of the identified cases, but they went unnoticed.
8. Early warning signs, such as non compliance to contract specifications, are easily ignored.
9. The motive for fraud was based on Greed (35%), lavish lifestyle (18%) and financial commitment (18%).
10. In 61 % of the cases there were no formal channels to report the fraud.

For Auditors, focusing on the improvennt of internal controls, it will be conforting to know that the main reasons why fraud occure, are, either poor internal controls, overriding existing controls, collusion between employees, lack of accountability as well as poor management practices.

We could therefore not underestimate the risk and impact of fraud. The more e-commerce is being used, the greater will be the expected number of instances and the sophistication level of fraud. A declining economy provides a fertile breeding ground for fraudulent schemes, according to Shazad.

The last, very interesting section, was the analysis of three recent fraud scandals. In Madoff’s ponzi scheme he took reputed companies for a ride in a non-existent wave of wealth creation. BNP Paribas and The Royal bank of Scotland were two of his victims.

Allen Stanford sold US$8 billion “certificates of deposits who were not worth the paper they were written on. He amassed a wealth greater than the GDP of the island Antigua who provided him a safe haven and honoured him with a knighthood.

His unscrupulous deals were brought to light when an due diligence by analyst Alex Dalmady questioned his models ability to produce the returns claimed and to fund the dividends.

The US$ 78 M cash ballooned to a whopping ficticious balance of US$ 1 Billion. Years of growth and expansion helped the creativity of Ramalinga Raju of Satyam. It fooled some people for some time but shocked all of us for ever.

What was learnt from these three musketeers as Alam referred to them includes questions such as:

1. What is the outcome of the Due dilligence.
2. How strong is the corporate governance in organizations?
3. Who are the Auditors?
4. How transparent is the company? Etc.

The enquiring mind of the auditor and the thinking ability of the Forensic analyst is therefore paramount in identifying frauds and observing red flags when they are waving.