Why auditors DO NOT discover
Fraud
By

Ali Bin Mohammed AlMuwaijei
Board member, UAE IAA, United Arab Emirates
Why auditors DO NOT discover Fraud?

2
Anyone
heard of
CIA?

Anyone
heard of
CPI?
Corruption
Perception Index

3
Corruption Perception Index - 2012
1.
1.
1.
2.
3.
4.
5.
5.

Denmark
New Zealand
Finland
Sweden
Singapore
Switzerland
Austr...
Rank

Country

Score

1

Denmark

90

1

New Zealand

90

1

Finland

90

5

Singapore

87

27

Qatar

68

27

United Arab...
Report to the Nations
On occupational FRAUD and abuse

1,388 cases

Patterns of fraud are however consistent
Note: This da...
ACFE's 2012 Report to the Nation:
What is the Percentage of revenue lost to Fraud?

3%

5%

7%

10%

7
Summary of Report Findings

Losses

Organizations
Affected

Indicators

Typically 5% of
annual revenue

Mostly those
lacki...
The Fraud triangle
According to Donald Cressey, three elements
must be present for fraud to be executed:
a. Pressure/ moti...
The Fraud triangle
Pressure/ Motivation :

1. Greed
2. Gambling
3. Financial strain - personal
4. Financial strain - business

5. Maintaining...
Pressure/ Motivation (Cont.):

7.Pleasing others
8. drug/alcohol addiction

9. Financing new business interests
10. Termin...
Opportunity
1. Weak or non-existent internal control
2. Lack of segregation of duties
3. Highly decentralized organization...
Opportunity
5. Opportunity is the perception by someone believing

they can commit a fraud without getting caught

5. Mana...
Rationalization:
1. Intention to conduct a reasonable business
2. Intention to repay
3. Influenced/ implicated by others

...
Difference between Audit and Fraud
Audit
• System / Process
Improvements

• Individual/Gangue

• Improvements

• Prosecuti...
Auditors are policemen

How to deal with this issue?

Separate Audit and Fraud
17
What Names Would You Use for the Department?

• Incident Management Department (IMD)
• Fraud Prevention Department (FPD)
•...
Audit and FPD reporting to ONE?

Disadvantages

Advantages

• Alteration to audit plan
• Director is seen wearing
two hate...
Fraud Prevention Department

Role and Responsibilities Charter

Fraud Prevention policy

Code of conduct

20
Fraud Prevention Department
• Organization Structure requirement
– Legal/IT

• FPD Compensation
–
–
–
–

Salary
Risk Allow...
Interaction with Local/ Intl. Authorities

• State Security

• Courts

• Police

• Ministries/Embassies

• Prosecution

• ...
Fraud Prevention Department

Whistleblowing system

23
Setting a Whistle Blowing System
• Should you outsource or in source the system
• Protection system
• How far you can prot...
Initial Detection of Occupation Fraud

©2012 Association of Certified Fraud Examiners, Inc.

25
Sources of Tips

©2012 Association of Certified Fraud Examiners, Inc.

26
Lessons Learnt

27
Thank You
Ali.almuwaijei
+97150 7677757

28
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Mr. Ali AlMuwaijei, Board Member of the UAE IAA, delivered the opening remarks with presentation titled "Why auditors DO NOT discover Fraud" where he discussed the fraud triangle and the role of internal auditors in looking for the red flags and provided many statistical data about the fraud globally,

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Why Auditors Do Not Discover Fraud

  1. 1. Why auditors DO NOT discover Fraud By Ali Bin Mohammed AlMuwaijei Board member, UAE IAA, United Arab Emirates
  2. 2. Why auditors DO NOT discover Fraud? 2
  3. 3. Anyone heard of CIA? Anyone heard of CPI? Corruption Perception Index 3
  4. 4. Corruption Perception Index - 2012 1. 1. 1. 2. 3. 4. 5. 5. Denmark New Zealand Finland Sweden Singapore Switzerland Australia Norway 90 90 90 88 87 86 85 85 169. Iraq 170. Turkmenistan 170. Uzbekistan 172. Myanmar 173. Sudan 174. Afghanistan 174. North Korea 174. Somalia Scale from 0 (highly corrupt) to 100 (very clean). Transparency International 4 18 17 17 15 13 8 8 8
  5. 5. Rank Country Score 1 Denmark 90 1 New Zealand 90 1 Finland 90 5 Singapore 87 27 Qatar 68 27 United Arab Emirates 68 54 Malaysia 49 79 Sri Lanka 40 88 Thailand 37 94 India 36 118 Indonesia 32 5
  6. 6. Report to the Nations On occupational FRAUD and abuse 1,388 cases Patterns of fraud are however consistent Note: This data is based on an ACFE study of 1,388 cases of occupational fraud in 94 countries- 2012. 6 6
  7. 7. ACFE's 2012 Report to the Nation: What is the Percentage of revenue lost to Fraud? 3% 5% 7% 10% 7
  8. 8. Summary of Report Findings Losses Organizations Affected Indicators Typically 5% of annual revenue Mostly those lacking anti-fraud controls Tell-tale exists for fraud perpetrators World-wide USD 3.5 trillion Controls exist, but not implemented Living beyond financial means 8 8
  9. 9. The Fraud triangle According to Donald Cressey, three elements must be present for fraud to be executed: a. Pressure/ motivation usually individual characteristics and situational factors b. opportunities eg available targets ie lack of controls c. rationalization/justification/ neutralization This is known as the fraud triangle
  10. 10. The Fraud triangle
  11. 11. Pressure/ Motivation : 1. Greed 2. Gambling 3. Financial strain - personal 4. Financial strain - business 5. Maintaining own/ family business 6. Influenced/ implicated by others
  12. 12. Pressure/ Motivation (Cont.): 7.Pleasing others 8. drug/alcohol addiction 9. Financing new business interests 10. Terminal illness 11. Dissatisfaction with employer
  13. 13. Opportunity 1. Weak or non-existent internal control 2. Lack of segregation of duties 3. Highly decentralized organization 4. Lack of knowledge/awareness
  14. 14. Opportunity 5. Opportunity is the perception by someone believing they can commit a fraud without getting caught 5. Management control and influences “opportunity” more than any other factor in the Fraud Triangle
  15. 15. Rationalization: 1. Intention to conduct a reasonable business 2. Intention to repay 3. Influenced/ implicated by others 4. Underpaid by employer 5. Helping clients 6. Tone at the top: poor corporate governance
  16. 16. Difference between Audit and Fraud Audit • System / Process Improvements • Individual/Gangue • Improvements • Prosecution Months 16
  17. 17. Auditors are policemen How to deal with this issue? Separate Audit and Fraud 17
  18. 18. What Names Would You Use for the Department? • Incident Management Department (IMD) • Fraud Prevention Department (FPD) • Internal Affairs & Anti Fraud. (IAAF) • Internal Affairs & Anti Fraud Dept. (IAAFD) • Anti Fraud & Internal Affairs Dept. (AFIAD) 18
  19. 19. Audit and FPD reporting to ONE? Disadvantages Advantages • Alteration to audit plan • Director is seen wearing two hates • Audit detect fraud and pass to FPD • Use of Audit for initial investigation • Some overlapping of investigations • Communication problems • Supplement resource when needed (IT, Technical and auditors) between GIA & FPD • Business unit mix messages 19
  20. 20. Fraud Prevention Department Role and Responsibilities Charter Fraud Prevention policy Code of conduct 20
  21. 21. Fraud Prevention Department • Organization Structure requirement – Legal/IT • FPD Compensation – – – – Salary Risk Allowance Bonus Insurance 21
  22. 22. Interaction with Local/ Intl. Authorities • State Security • Courts • Police • Ministries/Embassies • Prosecution • Interpol 22
  23. 23. Fraud Prevention Department Whistleblowing system 23
  24. 24. Setting a Whistle Blowing System • Should you outsource or in source the system • Protection system • How far you can protect the identity of individuals • Reward system for informers 24
  25. 25. Initial Detection of Occupation Fraud ©2012 Association of Certified Fraud Examiners, Inc. 25
  26. 26. Sources of Tips ©2012 Association of Certified Fraud Examiners, Inc. 26
  27. 27. Lessons Learnt 27
  28. 28. Thank You Ali.almuwaijei +97150 7677757 28
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