We live in testing and uncertain times, with global and local economies struggling to come to grips with slow growth, high unemployment and rising living costs. This phenomenon is often associated with companies embarking on cost cutting and cost containment, with employees bearing the brunt of low salary increases and decreased disposable income.
The implication of this is that fraud and corruption generally become more prevalent as employees seek opportunities to supplement their income.
This is according to Keeran Madhav, Director of Forensics at Mazars South Africa, who says that fraud and corruption is the silent killer of a business, just as cholesterol is to humans. “Public companies and entities tend to only take notice of fraud and corruption when it surfaces. Unfortunately, most companies still adopt a reactive approach to dealing with risks associated with fraud and corruption. It is time companies address fraud, corruption and other economic crimes proactively.”
He points to Section 29.1 and 29.2 of the Treasury Regulations which requires every public company to submit a corporate plan annually that must include a fraud prevention plan.
The first step in an organisation’s quest to address the risk of fraud and corruption is to review the ‘tone at the top’, says Madhav. “Management’s behaviour shapes the organisation. For example, if management steals time or misuses assets of the company then employees are most likely to follow suit. Management needs to constantly reaffirm the ethical standards and code of conduct, but at the same time they also need to practice what they preach. This is typically referred to as normative behaviour where employees are discouraged by dishonest acts because they feel it is the right thing to do. A culture of normative behaviour is conducive in an environment where the tone at the top regarding fraud and corruption is clear and the message strong.”
He says the second driver of ethical behaviour in an organisation is its anti-fraud and corruption policies. “As a minimum, an entity is required to have appropriate and effective policies and procedures in place to mitigate the risk of fraud and corruption. The effective communication of these policies and procedures is important in ensuring employees, managers and executives are all clear on the entity’s stance towards fraud and corruption. This ultimately moulds the organisation. The strength of an entity’s anti-fraud and corruption programme is not determined by whether anti-fraud and corruption policies exist but, by how well an entity is able to enforce them.”
Anti-fraud and corruption awareness training coupled with fraud and corruption policies, procedures and the code of conduct or ethics refreshers are by far the best form of prevention, says Madhav. “Currently, entities do not proactively or adequately educate employees on anti-fraud and corruption policies; as a result many existing employees are unaware of them and risk falling prey to possible misconduct.”
The third factor is monitoring anti-fraud and corruption programmes, he says. Questions that need to be asked include; how often do entities perform anti-fraud and corruption risk assessments? Are these risk assessments used constructively to improve controls or business processes? Are there open channels of communication to identify risks in the business?
He says a whistle-blower mechanism is important in detecting fraud and corruption but is not the only mechanism that will save the entity from illicit and illegal acts. “Proactive monitoring of the anti-fraud and corruption programme is equally important. For example, compliance audits on gifts, conflicts of interest and employee recruitment and procurement are equally important in preventing fraud and corruption. Data mining and analysis will assist management identify potential areas of risk and concern.”
Entities must proactively address the risk of fraud and corruption before it negatively impacts the bottom line, concludes Madhav.