fraud auditing in turkey thursday 26 april 2007 wayne anthony head of crisis management services ...
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Fraud Auditing in TurkeyThursday 26 April 2007
Wayne AnthonyHead of Crisis Management Services
thinking growth *connected with client issues
*connectedthinking
serving client priorities: transactions,performance improvement, crisis
management
Advisory*
Overview
•What is fraud?•Why do people commit fraud?•Common frauds in Turkey•Case studies•What should you look for?•What to do if you suspect fraud?•Questions
Page 3
What is fraud?
Definition:
“Fraud is a generic term used to denote wrongful or criminal activities to or in an organisation, intended to result in the gain of money or
benefits for the perpetrator's. “ PwC GECS2005
UK – Fraud Act 2006 defines fraud under a number of sections including fraud by:
• false representation• failing to disclose information, and• abuse of position.
Page 4
Why do people commit fraud?
Before someone can commit fraud, it is generally accepted that three conditions must exist:
• The individual must have an incentive (or cause) to commit fraud;
• The individual must identify an opportunity to commit fraud; and
• The individual must be able to rationalise the act (coupled with a low chance of detection).
Fraud
Opportunity Ability to rationalise
Incentive
The “Fraud Triangle”
Page 5
Why do people commit fraud?
Incentive
Self-rationalisation
Opportunity
39%
20%
41%
Source: PwC GECS 2005
Insufficient controls
External collaboration
Management over-ride
Internal collaboration
Anonymity with the company
Foreign business customs
26.8%
23.5%
16.3%
14.4%
8.5%
10.5%
Page 6
Why do people commit fraud?
Incentive
Self-rationalisation
Opportunity
39%
20%
41%
Source: PwC GECS 2005
Expensive lifestyle to maintain
Dissatisfaction with the company
Career disappointment
Layoff/redundancy
52.7%
18.9%
18.9%
9.5%
Page 7
Why do people commit fraud?
Incentive
Self-rationalisation
Opportunity
39%
20%
41%
Source: PwC GECS 2005
Lacking awareness of wrongdoing
Low temptation threshold
Self-denial of consequences
40.6%
39.1%
20.3%
Page 8
Common frauds in Turkey?
Page 9
Common frauds in Turkey
• Off-book transactions especially payroll payments;• Inappropriate use of expense and marketing accounts;• Unethical supplier and customer relationships;• Use of inflated/false invoices to reduce tax liability and also
generate off-book cash funds;• Breaches of local and international regulations relating to
bribing of government officials;• Financial statement manipulation;• Cash frauds covered by false/inflated invoices; and• Misappropriation of company assets for personal use.
Page 10
Case Study 1 – Employee misappropriation
Page 11
Case Study 1 – Employee misappropriation
• Multinational machine tools manufacturer – retail operations in Turkey;• Anonymous letter sent to HO regarding the actions of the MD;• Allegations included fraud, theft of company assets and unethical
relationships with suppliers;• The MD controlled through family members the major sub contractor of
the company which he had authorised numerous unofficial payments;• MD had falsified his expenses for the last 7-8 years and had used
company funds to buy personal assets to equip his second home; and• We concluded that company assets have been seriously
misappropriated by the MD. As a result, MD was removed from the company.
Page 12
Case Study 2 - Employee misappropriation
Page 13
Case Study 2 - Employee misappropriation
• Textile manufacturer based in Turkey;• A senior accountant, employed for 15 years by the company,
obtained unauthorised online control of one of the company accounts by submitting documents with fake signatures to the bank;
• We identified 67 unauthorised transfers from the company accounts during the last 2 years covered up by false entries in the company's accounting records;
• Transfers to the accountant's personal accounts totalled approximately $2 million; and
• The accountant has been arrested and prosecuted.
Page 14
Case Study 3 – Regulatory (FCPA) violation
Page 15
Case Study 3 – Regulatory (FCPA) violation
• Multinational pharmaceuticals manufacturer - distribution operations in Turkey;
• Anonymous call to the Company’s global hotline regarding bribery allegations against some staff of the Turkish subsidiary;
• Senior sales managers and field staff were accused of providing improper gifts to doctors in exchange of purchases;
• Based on our investigation we identified that the doctors were provided expensive gifts (Mobile phones, air conditioners etc.) and improper entertainment; and
• We concluded that several domestic and international regulations have been violated by the sales staff. Several employees involved in these violations were removed from the company.
Page 16
Case Study 4 – Off-book payments
Page 17
Case Study 4 – Off-book payments
• Multinational advertising and media company operation in Turkey;
• Management used false/fictitious invoices from a ‘friendly supplier’ to generate a pool of off-book cash of approximately USD4-5m over three years period;
• The cash was used to make off book payroll payments for staff, management bonuses, payment to officials and purchase of luxury goods;
• Identified during review by auditors of supplier relationship and round sum cash payments; and
• Management removed and company restructured.
Page 18
What to look for – Introduction
• Under today's condition and regulations such as SAS 99 - Consideration of Fraud in a Financial Statement Audit when performing an auditing you have to carry out your work with an increased level of professional skepticism
• You need to be looking for anomalies – variation from predictable patterns of behaviour or simply something that seems out of place. This is commonly referred to as:
RED FLAGS: Clues to fraudulent activities
Page 19
What to look for – Red Flags 1
• Employees official salary too low for market rates or a number of employees on minimum wages which may indicate the practice of off-book payments;
• Employees who have an excessive life style for their level of earnings e.g. Expensive car, jewellery etc;
• Excessive use of journal transactions;• Use of suspense accounts within the financial statements; • Large number of reconciling items on control accounts such
as bank reconciliations;• Senior management related to major customers or suppliers
where favourable terms are used or kick back frauds;
Page 20
What to look for – Red Flags 2
• Inflated invoices are commonly used to generate off book cash which is sent back to the company for illegal uses such as bribes, off book payroll payments etc. consider:
- suppliers who have large frequent round sum transactions;- suppliers who will only deal with senior management or one person in
the finance department or purchase department has very little information on the nature of the suppliers business;
- suppliers with debit balances at the year end; and- suppliers who have high volume of transactions during the year but
zero balance at year end.• Unusual suppliers for the nature of the client’s business which may
indicate assets or services purchased for personal use such as electrical goods, computer equipment, mobile phones, building and decoration services etc.;
Page 21
What to look for – Red Flags 3
• Suppliers that are located overseas in off-shore jurisdictions such as British Virgin Islands;
• Suppliers that have multiple address and or entries on the clients purchase system;
• Bank accounts with large round sum payments or payments made to overseas bank accounts especially off-shore countries such as Cayman Islands, Switzerland etc.;
• Large amount of cash transactions within the business – is it normal or necessary for the type of business.
Page 22
What to look for – Red Flags 4
Recommendation
Conduct interviews and discussions to understand your client’s business in detail to help you to identify anomalies which may
be an indication of fraud and not just agreeing details to documents as they may be fake.
Page 23
What to do if you suspect fraud or unusual transactions
• Clearly document your concerns;• Do NOT discuss with the client in
the first instance;• Report to the engagement
manager and partner as soon as possible; and
• Partners to seek legal advice and expert assistance on your role and responsibilities as auditor.
Page 24
Questions
Dispute Analysis & InvestigationsBusiness Recovery Services
Hüsnü Can Dinçsoy Wayne AnthonyAdvisory Services Partner Crisis Management Services Leader+90 212 326 6054 +90 212 326 [email protected] [email protected]
Contact Details
Crisis Management Services*
*connectedthinking