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The Fourth Asian Roundtable on Corporate Governance

Shareholder Rights and the Equitable Treatment of Shareholders

Deepankar SanwalkaKPMG

“Tools and Rules to Combat Fraud”

Mumbai, India11-12 November 2002

The views expressed in this paper are those of the author and do not necessarily represent the opinions of the OECD or its Member countries, the ADB or the World Bank

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Contents

Fraud

Combating Fraud

Internal controls

Fraud diagnostic review

Fraud control planning

Keys to preventing fraud

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What is Fraud?

“A practically conclusive test as to the fraudulent character of a deception for criminal purposes is this:

Did the author of the deceit derive any advantage from it which he could not have had if the truth had been known?”

- Stephen’s “History of the Criminal Law of England”

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is a deliberate deceit which is planned and executed to deprive an individual of property, money or any other valuable security. Fraud must be committed with intent and includes actions of misrepresentations and/or acts of omission

Fraud

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Combating Fraud

Controls structure to minimise fraud risk

Fraud risk management

Identification of red flags

Disaster recovery plans

Managing the risk of fraud is essentially no different to managing any other type of business risk

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Internal Control

An effective control system within the organisation is the first deterrent to the occurrence of Fraud within the organisation

Key principles:

Segregation of duties

Transparency in operations

Appropriate authosrisation procedures

Effective management supervision procedures

Safeguarding of Assets

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Fraud risk management

Principles of fraud risk management

Risk Assessment

Fraud control planning

Awareness training

Open channels of communication

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Diagnostic Review

Identify the specific and inherent fraud risks

Determine the overall risk rating for each inherent risk

Assess the effectiveness of internal controls

Develop measures to counter the risk

Risk is an integral part of business. But how do you effectively manage the risk of loss due to fraud?

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Fraud control planning

Definition of Definition of Fraud / Statement Fraud / Statement

of attitudeof attitude

FRAUDFRAUDCONTROLCONTROL

PLANPLAN

Reporting Reporting protocolsprotocols

Fraud prevention/Fraud prevention/Internal controlInternal control

trainingtraining

Fraud ControlFraud ControlResponsibilitiesResponsibilities

Fraud risk Fraud risk assessmentassessment

Internal auditInternal auditstrategystrategy

DocumentedDocumentedpolicypolicy

and proceduresand proceduresPro-active fraud Pro-active fraud detection by linedetection by line

managementmanagement

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Red Flags

ClassificationClassification

Financial Documents

Lifestyle & Personality

Organisational Structure

Accountability and Controls

Ineffective/no communication channels

Inadequate authorisation procedures

Weak internal controls

Tendency towards crisis management

Missing documents/ alterations

Excessive number of void documents

No numerical controls

Questionable handwriting/ authorisation

Unusual billing address/ arrangements

Lack of separation of duties

Lack of physical security and/ or key control

Weak links in chain of controls and accountability

Missing independent checks on performance

Dissatisfied worker

No vacations or sick time off

Close customer/ vendor relationships

Excessive overtime

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You’ve Been Defrauded!

Ten Steps to Consider1. Shut the door2. Safeguard the evidence3. Notify your insurer4. Do not confront a suspect without consulting an advisor

who has fraud investigation experience5. Decide on your objectives6. If you are considering prosecution, contact the police7. Consider suspending the suspect employee8. Determine whether external or internal resources will be

used to investigate the fraud9. Determine who should be interviewed10.Consider prevention measures to prevent future

occurrences

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