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APT Financial Consultants
   Sako Mayrick, 2008       1
Fraud is a deliberate misrepresentation which
causes another person t suffer d
            th         to ff damages,
usually, monetary losses
Error is an unintentional misstatement in th
E     i        i t ti   l i t t       t i the
financial statements




             APT Financial Consultants
                Sako Mayrick, 2008              2
Irregularities are intentional misstatement or
omissions i fi
    i i    in financial statements, i l di
                     i l t t     t including
fraudulent financial reporting (management
reporting) or misappropriation of assets
(defalcation)




             APT Financial Consultants
                Sako Mayrick, 2008               3
Mistake in gather or processing data
from financial statements
Incorrect accounting estimate arising
from oversight or misrepresentation
            g           p
of fact




          APT Financial Consultants
             Sako Mayrick, 2008       4
Mistake in the application of accounting
  principles relating to recognition,
  classification,
  classification presentation or disclosure
  measurement, recognition classification,
  presentation or disclosure
Errors are therefore the normal risk factors
  of a well d i
   f      ll designed ICS which i working
                    d       hi h is    ki
  perfectly.



              APT Financial Consultants
                 Sako Mayrick, 2008        5
Intentional act by one or more individuals
among management , those charged with
governance, employee or third parties
involving the use of deception to obtain an
unjust or illegal advantage
Auditor is concerned with material
misstatement




               APT Financial Consultants
                  Sako Mayrick, 2008          6
Management fraud is a fraud which
  involves one or more members of
  management or those charged with
  governance
  Fraud involving employee of an
  organisation is referred as employees fraud
A third party may be involved in whole SCAM
   h d              b      l d      h l
  ( a clever but dishonest way to get money.




               APT Financial Consultants
                  Sako Mayrick, 2008            7
Larcency – is a wrongful taking and carrying
away of personal property of another
Embezzlement is a fraudulent appropriation of
                                pp p
the property by a person entrusted with its
custody, thus breaching the trust or fiduciary
responsibly




              APT Financial Consultants
                 Sako Mayrick, 2008              8
If the stealing occurs simultaneous with taking
possession it is larcency
If stealing occurs subsequent to p
          g              q       possession the
crime is embezzlement




               APT Financial Consultants
                  Sako Mayrick, 2008              9
Fraud may involve
       p                     /
  Manipulation, falsification/alteration of
  records or documents
  Misappropriation of assets
  Suppression or omission of the effect of
  transaction from records or documents
  Recording transaction without substance
  R     di t        ti     ith t b t
  Misapplication of accounting principles




              APT Financial Consultants
                 Sako Mayrick, 2008           10
Disguise – masking identity , activities so as to
make it have appearance of legitimacy
Divergence – departure from the norms, it
must be masked
Diversion – distracting relaxing
Conversion - unauthorized at that deprive the
owner his property permanently or for an
indefinite time




              APT Financial Consultants
                 Sako Mayrick, 2008            11
Cash conversions
Accounts payable diversions
Stock diversions
Debtors conversions
Manipulations
   Lapping
   Kiting
        g
   Teeming and lading
   Undervaluation of stocks
   undercastingg
   Payments of fictitious debtors
   Ghost payroll registers
   Collusion with suppliers on discount or over invoicing

                    APT Financial Consultants
                       Sako Mayrick, 2008                   12
The primary responsibility for
prevention/and detection of fraud and
error rests with management and those
who are charged with governance
However,
However the auditor should consider
the risk of material misstatement in F/S
resulting from fraud or error
                         error.


             APT Financial Consultants
                Sako Mayrick, 2008         13
Opportunity- due to weak
               And
               A d override of controls
                        id   f    t l




  Pressure
                           Fraud              Need/
 Unrealistic
 Corporate                                    Rationalization
 Target can                                   •Every one
                                                   y
   Force                                      Does it
Employees to                                  •Simply borrow
Commit fraud                                  -money


                  APT Financial Consultants
                     Sako Mayrick, 2008                   14
Fraudulent financial reporting
Misappropriation of assets




           APT Financial Consultants
              Sako Mayrick, 2008       15
Omission of amounts to deceive F/S users
 Deception – manipulation, falsification or alteration
 of accounting records or supporting documents
 Misrepresentation – intentional omission from, the
       p
 financial statement of events transactions or other
 significant information
 Intentional misappropriation of accounting
                  pp p                       g
 principles
         l
 Misappropriation of assets
   Embezzling receipt
               g    p
   Payment of goods and services not received



                 APT Financial Consultants
                    Sako Mayrick, 2008                   16
Primary responsibility for prevention and
detection of frauds and errors rests with
d t ti     ff d       d           t   ith
those charged with governance of an entity
 Create a culture of honest and high ethics
 Establish appropriate controls to prevent and
 detect frauds and errors within an entity
                                         y




              APT Financial Consultants
                 Sako Mayrick, 2008              17
Those charged with governance
 Ensure oversight of management
 E             i ht f              t
 Integrity of organisation
 Integrity of entity’s accounting and financial
     g y           y            g
 reporting systems
 Appropriate controls
   Risk monitoring
   Financial control
   Compliance with law




               APT Financial Consultants
                  Sako Mayrick, 2008              18
Those charged with governance
    Establish a control environment and maintain
    E t bli h       t l     i         t d     i t i
    policies and procedures to achieve objectives
    Ensure as far as possible , the orderly and efficient
    conduct of entity’s business
       Implementing and ensuring the continued
       operations of accounting and ICS which are
              i    f          i     d       hi h
       designed to prevent and detect frauds and errors
Audit risk can never be eliminated but can be reduced




                   APT Financial Consultants
                      Sako Mayrick, 2008                19
Purpose of audit is to ensure F/S taken as a
whole are free from material misstatement
whether caused by error or fraud
Auditor should act with skill and care that
would be exercised by a reasonably competent
auditor in circumstances




              APT Financial Consultants
                 Sako Mayrick, 2008            20
Audit should design his work to have
  reasonable expectation of detecting material
  misstatement which might i
    i t t       t hi h i ht impair th t th
                                   i the truth
  and fairness of financial statements
  Misstatement should either be corrected or
  properly disclosed
  He should remind management of their
  responsibility to maintain proper ICS
Auditor is not and can not be held responsible
  for fraud and error.


                APT Financial Consultants
                   Sako Mayrick, 2008            21
In planning an audit, audit team should
discuss the susceptibility of entity to material
misstatements resulting fraud and error
Discussion will help members of audit team to
gain a better understanding of the potential
material misstatement in F/S resulting from
fraud and errors




               APT Financial Consultants
                  Sako Mayrick, 2008               22
In planning and the audit, auditors should
make inquiries of management for
  Management risk assessment on fraud
  ICS should address such risks
  ICS to prevent and detect fraud
  Management awareness of any known fraud
  which has affected the entity
  Management discovered any material error




              APT Financial Consultants
                 Sako Mayrick, 2008          23
The auditor should approach his work with
professional skepticism
   f i     l k ti i
Need for management representation
 Acknowledgement of responsibility of ICS
 A k     l d           f         ibili    f
 Disclosure of all significant fact on fraud.




               APT Financial Consultants
                  Sako Mayrick, 2008            24
Unrealistic time deadlines for audit completion
imposed by management
Reluctance for frank communication with third
party e.g. banker
Limitation of scope imposed by mgt
                  p      p       y g
Identification of significant matters not
previously disclosed by mgt
Significant difficulties to audit figures in
accounts

               APT Financial Consultants
                  Sako Mayrick, 2008          25
Aggressive application of accounting p
  gg        pp                       g principles
                                             p
Information provided unwillingly or after
unreasonable delay
Unsupported transactions
Fewer confirmation responses
Evidence of unduly lifestyle by officers or
employees
Long outstanding account receivable balances



               APT Financial Consultants
                  Sako Mayrick, 2008            26
The type of fraud/error and likelihood of
occurrence determines the nature, timing and
extent of audit procedures




              APT Financial Consultants
                 Sako Mayrick, 2008            27
Additional tests ( procedures)
If it appears th t an error or i
               that             irregularity h
                                      l it has
occurred, the auditor should consider its
nature, cause and likely effect on F/s
If satisfied that irregularities are not material to
F/S, he should nevertheless concerns with
appropriate level of management , in order to
determine further action to be taken e.g.
amendment of ICS in order to reduce or
                  ICS,
eliminate such errors or irregularities in the
future

               APT Financial Consultants
                  Sako Mayrick, 2008              28
Employee fraud
 Example : outright theft, embezzlement,
 E      l     t i ht th ft   b l      t
 defalcation, misappropriation and manipulation
 of records
   Falsifying expense reports, staff claims, embezzling
   fund, using corporate property for personal benefit,
   stealing property, accepting gratuities from
   vendors, contractors and supplies
       d        t t        d      li




               APT Financial Consultants
                  Sako Mayrick, 2008                      29
Causes
  Weak ICS
  Employment of dishonest employees
  Personal financial problems to staff bringing
                       p                   g g
  financial difficulties

Indicators
  Poor documentation
  False & improper entries in records
  Unauthorized payments
  Unauthorized use of corporate assets
  Misapplication of funds
               APT Financial Consultants
                  Sako Mayrick, 2008              30
Deceitful practices, benefiting economically,
socially or sustain jobs to detriment of the
organisation
      i ti
Due to absolute powers, faith and trust
Management are not subject t ordinary checks
M             t       t bj t to di           h k
like subordinates,; they can easily capitalize on
opportunity to conceive or conceal fraud
  pp        y
Crimes are committed to deceive investors,
owners, tax authorities or inflate profits to earn
higher l i
hi h salaries and bd bonuses


              APT Financial Consultants
                 Sako Mayrick, 2008             31
Indicators
  Delay in submission of report
  Incompatible functions done by one person
  Flouting corporate directives, rules and regulations
   l                 d             l     d     l
  Personal interest
  Duplicate entries
  Uncorrelated entries
  High fly mgt decisions




                 APT Financial Consultants
                    Sako Mayrick, 2008                   32
Control
 Enhancement of control environment e.g. junior
 officer enjoying lavish entertainment, luxurious
 lifestyle
 Creation of check and balances system




                APT Financial Consultants
                   Sako Mayrick, 2008               33
Realistic targets, standards and business norms
Quantitative and analytical techniques to
discover diverse trends and abnormal
behaviour in operation
Feedback on quantitative and analytical
              q                    y
techniques
Comparison with norms of the industry



               APT Financial Consultants
                  Sako Mayrick, 2008          34
Clear distinction btn acceptable p
                           p     performance and or
efficiency operations
   substandard Vs standard
Introduce surveillance review procedures by
introducing strong IA or constituting surveillance
committee with necessary independence
                          y     p
   Consider departure from approved targets
   Identify instances or adverse trends in business
   operations



                 APT Financial Consultants
                    Sako Mayrick, 2008                35
Crime committed by officers ( Directors, CEO,
                    y                    ,      ,
Employees, agents) to employer e.g. fraud,
embezzlement or corruption
Crime committed b external f
Ci           itt d by t      l forces against th
                                         i t the
company e.g. robbery, larcency, bulgarly, piracy
Crime committed by senior offcers and other internal
                    y
agents on behalf of corporations e.g. non-compliance
with regulations, tax evasion, bribery and false
financial reports



                 APT Financial Consultants
                    Sako Mayrick, 2008                 36
Fraud means intentional deception, lying cheating,
most of fraud are discovered in normal financial audit
       ff d       di        di         l fi    i l di
Knowledge of existence of fraud comes to light when
one or both of the following events takes place
  Allegation/complaints by 3rd party
  Investigators’ intuition/ general suspicion that
  something is awry
            g       y
  Auditor discovery of accounting discrepancy
  Sudden discovery that something is missing




                 APT Financial Consultants
                    Sako Mayrick, 2008                   37
Crimes committed for entity
Crimes committed against the entity




              APT Financial Consultants
                 Sako Mayrick, 2008       38
Violations of laws or regulations; tax laws;
pension laws, labour laws
The entity is perpetrator if convicted
Th      i i                      i d
becomes victim of legal fees, fines,
penalties/damages
Usually are committed by senior managers
who wish to enhance financial position
through overstating incomes, sales, assets
and by understating expense and liabilities
Evasion of taxes of taxes and expenses (
overstated)


             APT Financial Consultants
                Sako Mayrick, 2008             39
,                       ,      p
Theft, embezzlement of funds, corruption by y
vendors, contractors, by external agents or
officers of the entity
The
Th company become victim of the crime e.g.
                b        i i    f h   i
purchasing officers defrauding the corporation
by substituting an inferior quality/
merchandize or double billing an order
Bribery of employees by vendors



              APT Financial Consultants
                 Sako Mayrick, 2008              40
Use of sampling
  Absolute assurance Vs reasonable assurance
  Ab l t                V          bl
  Use of judgement
  Inherent limitation of ICS
  Persuasive rather than conclusive evidence
The risk of not detecting material misstatement resulting
                        g                               g
  from fraud is higher than the risk of not a material
  misstatement resulting from error, because fraud may
  involve sophisticated and carefully organized schemes
  designed to conceal it such as forgery, deliberate
  failure to record transaction

                  APT Financial Consultants
                     Sako Mayrick, 2008                41
Skilfulness of the p p
                     perpetrator
  Frequency and extent of manipulation
  Degree of collusion involved
     g
  Relative size of the individual amounts
  The seniority of those involved
Audit procedures that are effective for detecting
  errors may be ineffective for detecting fraud.




                  APT Financial Consultants
                     Sako Mayrick, 2008             42
Possibility of override control procedures
Generally subsequent discovery of material
G     ll    b         t di         f    t i l
  misstatement of f/s resulting from fraud or error
  does not in and of itself indicate
    Failure to obtain reasonable assurance
    Inadequate planning, performance or judgement
    Absence of professional competence and due care
    Failure to comply with ISAs
  Audit i k
  A dit risk model t b remodelled f di
                  d l to be      d ll d for discovery of
                                                       f
    fraud or error


                   APT Financial Consultants
                      Sako Mayrick, 2008                   43
The auditor should assess fraud risk factors e.g
missing document, G/L out of balance or ARP
may not make sense
However, fraud risk factors do not necessarily
indicate the existence of fraud, they often have
been present in circumstances where fraud
have occurred.




               APT Financial Consultants
                  Sako Mayrick, 2008               44
COMPANIES ACT

The Companies Act not fix any responsibility
to auditor for fraud/ improprieties.
The auditor is not bound to exercise more than
reasonable skill and care even situations where
there i suspicion of f d committed
 h    is     i i     f fraud       i d
Apart from absence of legal requirements to
detect
d t t corporate f d th auditing profession
                t fraud, the diti        f i
points to the nature of fraud committed as a
major reason for accepting extended detection
duties also the responsibilities on preceding
p
part
             APT Financial Consultants
                Sako Mayrick, 2008           45
One of the characteristics features of fraud as
opposed to error it is that the perpetration is
accomplished with attempts to conceal it
        li h d ith tt        t t         l
  This apply particularly to frauds commitment by
  management who usually have power to introduce
  complexity in corporate structure to make
  transactions or systems to override IC. Influence
  accounting policies and manipulate evidence
                                       e idence




              APT Financial Consultants
                 Sako Mayrick, 2008               46
Input, processing and output




              APT Financial Consultants
                 Sako Mayrick, 2008       47
Factors that promote the discovery of computer
theft, fraud and embezzlement
theft
  Internal accounting controls
     Separation of duties
     Rotation of duties
     Internal audit and surprise checks
     Development of policies, procedures, operating
     programs
     Parity f th i ti
     P it of authorization, authorization li it
                                th i ti limits
     and comparison with limit/budgets
     Off-line entry controls
                  y

               APT Financial Consultants
                  Sako Mayrick, 2008                  48
Factors that promote the discovery of computer
theft, fraud and embezzlement
theft
  Computer access controls
     Identification controls
     Authentication controls
     Compartmentalization (establish authorization
     by levels)
     Logging exceptions
       Out f
       O t of sequence, out priority aborted runs
                           t i it b t d
       Variance reporting


               APT Financial Consultants
                  Sako Mayrick, 2008                 49
Auditor s role
Auditor’s
  Aware of changes in control to avoid obsolescence of
  controls due to reorganisation, business re-
  engineering and business downsizing




                 APT Financial Consultants
                    Sako Mayrick, 2008               50
Auditor’s and fraud investigators must be
conversant with pre-conditions for detecting
                pre conditions
fraud
  Determining organisations risk of fraud by
              g g                           y
  studying its operational and control environment
  Thoroughly understanding symptoms of fraud
  Thoroughly understanding symptoms of fraud
  Being alert of occurrence of these symptoms




               APT Financial Consultants
                  Sako Mayrick, 2008                 51
Examine the operational environment and its
controls to identify weakness and deficiencies
(Opportunities)
Deterrence, detection and reporting of fraud
requires an auditor to have sufficient
knowledge of possible frauds to be able to
identify their symptoms




               APT Financial Consultants
                  Sako Mayrick, 2008             52
Unauthorized transactions
  Cash shortages
  C h h t
  Unexplained variation in prices
  Mi i d
  Missing documentation
                     t ti
  Excessive refunds
An effective approach is to develop a list of each
  type of exposure identified during the
  p
  planning stage of an audit by adjusting
           g g                 y j        g
  inventory files, increase amount of deposit in
  transit and unexplained variances

                APT Financial Consultants
                   Sako Mayrick, 2008            53
Once a typical symptoms have been outlined,
auditors must determine the most efficient
  dit        td t     i th      t ffi i t
way of detecting their presence
Other
Oth possible signs of fraud
          ibl i       ff d
 Living beyond ones means
 Drug and alcoholic abuse
 High personal debt/loses
 Compulsive g
      p      gambling/stock speculation
                     g/      p




             APT Financial Consultants
                Sako Mayrick, 2008        54
Management Environment
   Pressure
   P
   Management style and attitude
Competitive and business environment e g
                                       e.g.
technology
Employee relationship ( spouse receiving non
competitive contract)
Attractive assets
Internal controls
I t     l   t l
Lack of separation of duties
Too much trust placed on few employees
               APT Financial Consultants
                  Sako Mayrick, 2008           55
Fraud risk factors
Risk of increase IT, increases the risk of
manipulation, access control
     p        ,
Remember the use of CAATs can help




                APT Financial Consultants
                   Sako Mayrick, 2008        56
It is primarily concerned with collecting,
analysing evidence to assess allegations of
specific wrong doing.
After a thorough evaluation of control
framework, the weakness and fraud exposures
identifies may prompt fraud examination but
also they may not




             APT Financial Consultants
                Sako Mayrick, 2008            57
y p
Once the symptoms of fraud are found and
additional tests have indicated that there is a
strong possibility of fraud, the review enters
the formal investigation phase
Auditor must clarify;
  Results of investigation can be used later as an
  educational tools for auditors, fraud investigators
  and other employees




                 APT Financial Consultants
                    Sako Mayrick, 2008                  58
Briefing by the client, followed by letter of
engagement detailing the initial scope of work
Communication with parties involved e.g. external
auditors ( if not the firm) audit committee and
accounting staff
Determining the extent of fraud
Interviewing the defrauder
             g
Investigating the known area with detailed audit
test. E.g. Exhaustive checks, wages, cash debtors
and stock
Report to the management on the findings, with
copies to interested parties e.g. ex- auditor, audit
committee.
committee
                APT Financial Consultants
                   Sako Mayrick, 2008                  59
Circumstances which led to investigation
Fraud discovered and their extent
Identity of the defrauder
Effects on the reported profit of the past period
Effects on f/s of current periods




               APT Financial Consultants
                  Sako Mayrick, 2008            60
IC weakness which allowed the fraud and
recommendations for eliminating them
Report of any interviewing with the
defrauder, including offers of restitution etc,
which may be relevant to management in
deciding what action, if any they should
t k against hi /h
take      i t him/her
If there is any suggestion that the external
auditors has been negligent the extent of
claim against him.


              APT Financial Consultants
                 Sako Mayrick, 2008               61
Auditor should
 Consider the potential effects in F/s
 Where the fraud is material the auditor should
 modify th audit procedures so as t perform
     dif the dit         d           to   f
 procedures appropriate to circumstances depending
 on the type of the fraud/error suspected, the
 likelihood f th i
 lik lih d of their occurrence and extent of d
                                   d t t f damage
 in the F/s




               APT Financial Consultants
                  Sako Mayrick, 2008                 62
If some proof of fraud exists, management has
several options
 Cause a deeper audit to be done if amount of loss
 appears substantial
 Terminate employee responsible if loss is minimal
 File l i to
 Fil a claim t recover a l
                         loss f
                              from clients fid lit
                                    li t fidelity
 insurance agent
 Arrange with law enforcement agents to probe into
 the matter



               APT Financial Consultants
                  Sako Mayrick, 2008                 63
If some proof of fraud exists, management has
several options
 Engage a private investigator to probe into the loss
   g g                   g
 and document it for claim purpose/prosecution
 Disreard losses if minimal and tighetn controls
 Alert th di t
 Al t the directors, audit committees or the board
                       dit       itt     th b d




                APT Financial Consultants
                   Sako Mayrick, 2008                   64
g
Strong ICS is not a warrant from fraud
   Client should have an effective anti-fraud and
   corruption strategy which is aimed at encouraging
   prevention, promote early detection and respond to
   concern raised
   Awareness programs to employees
   Screening job applicants
   S      i j b      li  t
   Sound corporate policy on fraud
   AVOID atmosphere o d st ust and paranoia by
      O at osp e e of distrust a d pa a o a
   over-emphasising fraud deterrence measures.



                 APT Financial Consultants
                    Sako Mayrick, 2008                  65
It is important to stick to facts, and to discount
hearsay, rumour, or opinion and record what is
relevant to the cause of the incident and its
effect
Audit reports on fraud and other improprieties
should be addressed to the righ person who
can take action




               APT Financial Consultants
                  Sako Mayrick, 2008             66
p
Report must contain all details of fraud
Must provide framework to analyse the fraud case
Must enable the user to develop improved
management and security policies and detect and
prevent fraud.
Investigation and reporting should proceed in such a
way that the outcome will be litigated. Recording exact
times, data, names of person and specific; description
of evidence are critical in civil or criminal investigation
  f id            iti l i i il         i i li      ti ti
or litigation


                  APT Financial Consultants
                     Sako Mayrick, 2008                   67
p     g        g
Reporting to management
  Suspicion of fraud with potential effect on f/s
  Fraud/significant errors
Reporting to users of the audit reports
  Qualified opinion/disclaimer or limitation of scope
Reporting to regulatory/enforcement
authorities.




                 APT Financial Consultants
                    Sako Mayrick, 2008                  68
APT Financial Consultants
   Sako Mayrick, 2008       69
Understand the meaning of money laundering
Exemplify money laundering
     p y         y          g
Describe the money laundering process
Understand Tanzania perspective of money
l
laundering
    d
Describe the audit implication of money
laundering
Discuss the challenges of combating money
laundering in Tanzania



             APT Financial Consultants
                Sako Mayrick, 2008           70
Definition
  Just remember the literary word laundry ( cleaning)
  and therefore;
  Money laundering, the metaphorical quot;cleaning of
  moneyquot; with regard to appearances in law, is the
  practice of engaging in specific financial transactions
  in order to conceal the identity, source, and/or
  destination of money, and is a main operation of
  underground economy
     d         d



                 APT Financial Consultants
                    Sako Mayrick, 2008                  71
Definition
  “The process used to disguise the source of money
  or assets derived from criminal activity”
  Conduct        t d i     di
  C d t or acts designed in whole or in part to
                                 h l      i    tt
  conceal or disguise the nature, location, source,
  ownership or control of money (can be currency etc
  To move illegally acquired cash through financial
  systems so that it appears to be legally acquired




                APT Financial Consultants
                   Sako Mayrick, 2008                  72
Definition
  Money laundering is the process whereby the origin of
  dishonest and/or illegally obtained money is concealed
  so that it appears to come from a legitimate source.
      h                      f      l
  A process that makes money with an illegal origin appear
  legal so that it may be used.
    g                y
  the methods criminals use to hide and disguise the origin
  of the money they make from their crimes. The term
  laundering is used because criminals need to turn their
  quot;dirtyquot; criminal money into clean funds that they can use
  without arousing suspicion.




                   APT Financial Consultants
                      Sako Mayrick, 2008               73
Definition
  the willful concealment of the existence, illegal source, or
  illegal use of proceeds, and the disguise of them as
  legitimate
  There is international concern that the multimillionaire
  Osama bin Laden and his wealthy backers have created a
                                    y
  sprawling global network of funds.
  the process of converting illegally earned assets,
  originating as cash to one or more alternative forms to
                  cash,
  conceal such incriminating factors as illegal origin and
  true ownership.




                    APT Financial Consultants
                       Sako Mayrick, 2008                  74
Definition
D fi iti
 concealing the source of illegally
           g                  g y
 gotten money
  Include:
   Drug trafficking
   Extortion
   Corruption
   Fraud
             APT Financial Consultants
                Sako Mayrick, 2008       75
Money laundering is the process by which large amounts of
M        l d i i th                b hi h l                t f
illegally obtained money (from drug trafficking, terrorist activity
or other serious crimes) is given the appearance of having
                        ) g            pp                    g
originated from a legitimate source.

If done successfully, it allows the criminals to maintain control
         successfully
over their proceeds and ultimately to provide a legitimate cover
for their source of income. Money laundering plays a
fundamentall role iin f ilit ti th ambitions of th d
f d          t    l    facilitating the biti       f the drug
trafficker, the terrorist, the organised criminal, the insider
dealer, the tax evader as well as the many others who need to
avoid the ki d of attention f
     id h kind f           i from the authorities that sudden
                                      h    h ii h          dd
wealth brings from illegal activities. By engaging in this type of
activity it is hoped to p
       y         p       place the pproceeds beyond the reach of
                                               y
any asset forfeiture laws.
                      APT Financial Consultants
                         Sako Mayrick, 2008                     76
Criminals want to:
  Avoid prosecution
         p
  Increase profits
  Avoid i
  A id seizure of accumulated wealth
                   f        l t d     lth
  Appear legitimate
  Tax evasion
They are trying to conceal the origin of the
  cash

                 APT Financial Consultants
                    Sako Mayrick, 2008         77
y           g
Money laundering is often described as
occurring in three stages: placement, layering,
and integration.
Placement: refers to the initial point of entry
for funds derived from criminal activities.
Layering: refers to the creation of complex
networks of t
   t    k f transactions which attempt t
                     ti      hi h tt      t to
obscure the link between the initial entry point,
and the end of the laundering cycle.
                              g y
Integration: refers to the return of funds to the
legitimate economy for later extraction.

               APT Financial Consultants
                  Sako Mayrick, 2008            78
Money laundering is a complex p
       y           g         p    process, which is
accomplished through three main phases. The first phase
is the physical disposal of the cash, i.e. placing the
p
proceeds of p predicate criminal activities into bank or non-
bank financial institutions in order to disguise their
illegal origins and make them appear to be legitimate
funds. This may include the use of ‘front’ businesses such
                 y
as hotels, cinemas or casinos that may reasonably claim
to do business in cash. It may also involve the use of
‘smurfing’ techniques, through which launderers make
          g        q    ,     g
numerous deposits of amounts of money that are small
enough to avoid raising suspicion or triggering reporting
mechanisms. This process is called ‘placement’.
                     p                p

                  APT Financial Consultants
                     Sako Mayrick, 2008                  79
The second phase is the movement of funds from
institution to institution to hide their origins and
i i i          i i i          hid h i      i i     d
ownership, termed ‘layering’. It consists of putting the
funds, which have entered into the financial system,
through series of financial operations to mislead
potential investigators and to give the funds the
appearance of having legal origins. For this launderers
use financial institutions t at p o de legally p otected
       a c a st tut o s that provide ega y protected
banking or offshore mechanisms.
The final stage is to integrate criminal assets into the
mainstream of commerce and investment in an
ostensibly legitimate business. This is termed
‘integration’. The funds may be re-introduced into the
economy through, for instance, the purchase of luxury
items or through investment in assets such as shares in
it        th     hi      t     ti      t     h     h     i
companies and real estate.
                  APT Financial Consultants
                     Sako Mayrick, 2008                  80
The main objectives of money launderers are thus to
place their funds in the financial system without
  l    h i f d i h fi           i l           ih
arousing suspicion, to move them around, often after a
series of complex transactions crossing multiple
jurisdictions so that it becomes difficult to identify their
original sources, and finally to move the funds back
into the financial and business systems so that they
appear legitimate.
appea eg t ate.

Money laundering is performed systematically and
clandestinely,
clandestinely making it difficult to identify exactly
how much money is involved, what methods are
employed and what the magnitude of the problem is.
Likewise, secrecy makes it difficult to establish the
                y
magnitude of funds used for the funding of terrorism.
                   APT Financial Consultants
                      Sako Mayrick, 2008                   81
Hide: to reflect the fact that cash is often introduced to
the economy via commercial concerns which may
knowingly or not knowingly be part of the laundering
scheme, and it is these which ultimately p y prove to be
the interface between the criminal and the financial
sector
Move: clearly explains that the money launderer uses
transfers, sales and purchase of assets, and changes the
shape and size of the lump of money so as to obfuscate
the trail between money and crime or money and
criminal.
Invest: the criminal spends the money: he/she may
invest it in assets, or in his/her lifestyle
             assets
                  APT Financial Consultants
                     Sako Mayrick, 2008                  82
If a p               g                      g
     person is making thousands of shillings in
small change a week from a business (not
unusual for a store owner) and wishes to
deposit that money in a bank, it cannot be done
   p               y           ,
without possibly drawing suspicion. In
Tanzania, for example, cash transactions and
deposits of more than a certain shilling amount
are required to be reported as quot;significant cash
transactionsquot;.quot; In other jurisdictions suspicion-
based requirements are placed on financial
services employees and firms to report
suspicious activity to the authorities. Methods
to conceal the source are therefore required
                                     required.
               APT Financial Consultants
                  Sako Mayrick, 2008            83
One method of keeping this small change
private would be for an individual to give
money to an intermediary who i already
         t    i t      di        h is l d
legitimately taking in large amounts of cash.
The intermediary would then deposit that
money into an account, take a premium, and
write a cheque to the individual. Thus, the
individual d
i di id l draws no attention to himself, and
                        tt ti t hi         lf   d
can deposit his cheque into a bank account
without drawing suspicion. This works well for
                  g    p
one-off transactions, but if it occurs on a regular
basis then the cheque deposits themselves will
form a paper trail and could raise suspicion
                                      suspicion.
                APT Financial Consultants
                   Sako Mayrick, 2008             84
Corruption ( if y g $100,000 today through
      p          you get              y      g
corruption, will you deposit into your bank
account?)
Drug production and trafficking
Embezzlement, misappropriation and theft of
public funds
Tax exemptions and evasions
Smuggling of arms, minerals and dangerous
materials (It is reported that between 1995 and
2002 Tanzania lost more than Tsh300 billion
(US$300 million) through the smuggling of
tanzanite from the country )
               APT Financial Consultants
                  Sako Mayrick, 2008              85
Stolen motor vehicles
 (The trade in stolen motor vehicles or their parts
 generates substantial illicit proceeds. The police say
 they have identified the criminal syndicates
 responsible for these crimes. Gangs of motor vehicle
 thieves are concentrated in cities and towns such as
 Dar es Salaam, Arusha, Moshi, Mwanza and Mbeya




                APT Financial Consultants
                   Sako Mayrick, 2008                     86
Poaching
Trafficking of human
Informal financial system (Another area that
has not been given sufficient attention, and
which can be used to facilitate money  y
laundering and terrorist financing in Tanzania,
involves informal dealings in funds without
the use of the formal fi
 h       f h f      l financial institutions)
                            i li i i        )


               APT Financial Consultants
                  Sako Mayrick, 2008              87
Terrorism
 Tanzania has experienced the adverse effects of
 terrorist attacks. On 7 August 1998, terrorists
 bombed the US Embassy in Dar es Salaam It is said
 that the terrorist attack in 1998 was co-ordinated,
 financed and/or carried out by al-Qaeda, led by the
              /                y Q       ,     y
 Saudi fugitive, Osama Bin Laden.61




               APT Financial Consultants
                  Sako Mayrick, 2008               88
Several regulatory mechanisms are in p
           g     y                      place to
address these problems. They include the Bank of
 dd      th      bl     Th i l d th B k f
Tanzania (BoT) Circular No. 8 of 2000, which
obligates banks and financial institutions to:
  d t ti
 adopt anti-money l      d i
                    laundering policies and procedures;
                                   li i     d     d
 verify and identify customers before establishing
 relationship with them;
 develop procedures relating to retention of records of
 transaction of their customers;
 establish reporting mechanisms of suspicions
 transactions of their customers to the relevant
 authorities; and
     h          d
 provide training and guidance to their personnel
 relating to procedures and control of money
 laundering.
 laundering
                APT Financial Consultants
                   Sako Mayrick, 2008               89
Co-operation with other nations and with
regional and global bodies
 Tanzania co-operates with other nations and regional
 and global bodies in their efforts to combat money
 laundering and the financing of terrorism. For
            g                       g
 instance, in compliance with the regional efforts of the
 Eastern and Southern Africa Anti-Money Laundering
 Group (
      p (ESAAMLG), Tanzania has established the
                       )
 National Multi-Disciplinary Anti-Money Laundering
 Committee, which reports regularly to the ESAAMLG
 Task Force. A Financial Intelligence Unit (
                                       g      (FIU) to
                                                  )
 strengthen financial and economic intelligence
 gathering has been established. Tanzania also co-
 operates with regional g
   p              g          groups such as SADC and the
                                    p
 East African Community (EAC) and various
 international organisations such as Interpol
                 APT Financial Consultants
                  Sako Mayrick, 2008                   90
Vienna conventions
Palermo conventions
UN resolution 1373
UN Convention for Suppression of the Financing of
Terrorism
Other international agreements includes
The SADC Protocols (including the Protocol
Against Corruption the Protocol on
         Corruption,
Combating Illicit Drugs and the Protocol on
Mutual Legal Assistance in Criminal Matters);
          g                                   )
               APT Financial Consultants
                  Sako Mayrick, 2008            91
The Memorandum of Understanding among
members of the ESAAMLG;
The African Union Convention on Preventing
                                         g
and Combating Corruption; and
The African Union Convention on the
Prevention and Combating of Terrorism.




             APT Financial Consultants
                Sako Mayrick, 2008           92
Local legislation
  the Economic and Organised Crime Control Act of
  1984;
  the Mutual Assistance in Criminal Matters Act of
  1991;
  the Proceeds of Crime Act of 1991;
  the Drugs and Illicit Traffic in Drugs Act of 1995;
  the Extradition Act of 1965;




                 APT Financial Consultants
                    Sako Mayrick, 2008                  93
Local legislation
  the Banking and Financial Institutions Act ,2006
  the Prevention of Corruption Act of 1971;
                          p
  the Prevention of Terrorism Act, 2002;
  the Armaments Control Act of 1991;
  the Ammunition Act of 1991;
  the Police Force Ordinance, Chapter 322;
  the P
  th Penal C d Chapter 16 and
           l Code, Ch t 16; d
  the Public Leadership Code of Ethics Act of 1995


                 APT Financial Consultants
                    Sako Mayrick, 2008               94
p   y
the National Multi-Disciplinary Anti-Money  y
Laundering Committee;
the Ministry of Finance;
the BoT and banking financial institutions;
the Ministry of Justice and Constitutional
Affairs;
the Ministry of Home Affairs;
the Police Force;
the PCB;
 h C
the National Drug Control Commission; and
the courts
    courts.
               APT Financial Consultants
                  Sako Mayrick, 2008            95
Lack of f
       f force of administrative directives
                f
Lack of specialised prosecutorial skills
Corruption in legislative, judicial and
enforcement activities
Inter-sectoral conflict and lack of co-
ordination ( Police Vs PCCB)
Inordinate delays in police investigations and
in court cases
Lack of attention to the informal sector
Resistance to anti-money laundering measures

              APT Financial Consultants
                 Sako Mayrick, 2008          96
Lack of specialised p
       f p           prosecutorial skills
Corruption in legislative, judicial and
enforcement activities
Inter-sectoral conflict and lack of co-
ordination ( Police Vs PCCB)
I    di t d l      i
Inordinate delays in police i
                         li investigations and
                                  ti ti      d
in court cases
Lack of attention to the informal sector
Resistance to anti-money laundering measures


              APT Financial Consultants
                 Sako Mayrick, 2008          97
Forensic auditing could be defined as the
application of auditing skills to situations that
have legal consequences.

Forensic Auditing is the p
                  g      process of ggathering
                                             g
and reporting on data , in a pre-defined
context, for the purpose of finding facts and/or
evidence in the context of fi
  id      i h            f financial /l
                                 i l /legall
disputes and /or irregularities and giving
preventive advice in this area
                APT Financial Consultants
                   Sako Mayrick, 2008               98
Forensic investigation is carried out for civil or
criminal cases. These can involve fraud, . Asset
tracing for money laundering.

Forensic accounting is undertaking a financial
                    g              g
investigation in response to a particular event
where the findings of the investigation may be
used at evidence in court or to otherwise help
   d      id      i               h    i h l
resolve disputes.

                APT Financial Consultants
                   Sako Mayrick, 2008                99
Professional accounting skills
Investigative skills
Investigative mindset
Capability to understand disputes or
anticipated disputes
Understand risk concerns, fraud
allegations and ethical requirements
    g                     q
           APT Financial Consultants
              Sako Mayrick, 2008       100
Corporate governance has increased the
number of forensic audit due expectation of
corporate governance codes
  Company directors take seriously their
  responsibilities for the prevention and detection of
  fraud
  Government addressing risks of criminal funding of
  terrorist group
            g   p




                 APT Financial Consultants
                    Sako Mayrick, 2008               101
Fraud
 Quantifying losses
 Bribes identification
 Intentional misstatement on f
           l                 financial statements
                                     l
 Creative accounting
Negligence by auditor or others
Insurance claims when there are disputes
Contract disputes
Matrimonial disputes
Business sales and purchase dispute
                APT Financial Consultants
                   Sako Mayrick, 2008               102
Terrorist financing
Expert witness, owing a duty of skill and due
care to those instruction him
  Should be objective
  Should be aware of court consequences
  Should provide independent opinion not biased to
  payers
  Sh ld confine to material matters
  Should     fi t      t i l   tt
  Should inform client of change of opinion and
  reasons for it.

                APT Financial Consultants
                   Sako Mayrick, 2008                103
Index or list of contents
Brief CV
Instructions
Issues
Documentation
Chronology
Technical background
Opinion
References
Declaration
                APT Financial Consultants
                   Sako Mayrick, 2008       104
APT Financial Consultants
   Sako Mayrick, 2008       105

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FRAUD, MONEY LAUNDERING AND FORENSIC AUDIT

  • 1. APT Financial Consultants Sako Mayrick, 2008 1
  • 2. Fraud is a deliberate misrepresentation which causes another person t suffer d th to ff damages, usually, monetary losses Error is an unintentional misstatement in th E i i t ti l i t t t i the financial statements APT Financial Consultants Sako Mayrick, 2008 2
  • 3. Irregularities are intentional misstatement or omissions i fi i i in financial statements, i l di i l t t t including fraudulent financial reporting (management reporting) or misappropriation of assets (defalcation) APT Financial Consultants Sako Mayrick, 2008 3
  • 4. Mistake in gather or processing data from financial statements Incorrect accounting estimate arising from oversight or misrepresentation g p of fact APT Financial Consultants Sako Mayrick, 2008 4
  • 5. Mistake in the application of accounting principles relating to recognition, classification, classification presentation or disclosure measurement, recognition classification, presentation or disclosure Errors are therefore the normal risk factors of a well d i f ll designed ICS which i working d hi h is ki perfectly. APT Financial Consultants Sako Mayrick, 2008 5
  • 6. Intentional act by one or more individuals among management , those charged with governance, employee or third parties involving the use of deception to obtain an unjust or illegal advantage Auditor is concerned with material misstatement APT Financial Consultants Sako Mayrick, 2008 6
  • 7. Management fraud is a fraud which involves one or more members of management or those charged with governance Fraud involving employee of an organisation is referred as employees fraud A third party may be involved in whole SCAM h d b l d h l ( a clever but dishonest way to get money. APT Financial Consultants Sako Mayrick, 2008 7
  • 8. Larcency – is a wrongful taking and carrying away of personal property of another Embezzlement is a fraudulent appropriation of pp p the property by a person entrusted with its custody, thus breaching the trust or fiduciary responsibly APT Financial Consultants Sako Mayrick, 2008 8
  • 9. If the stealing occurs simultaneous with taking possession it is larcency If stealing occurs subsequent to p g q possession the crime is embezzlement APT Financial Consultants Sako Mayrick, 2008 9
  • 10. Fraud may involve p / Manipulation, falsification/alteration of records or documents Misappropriation of assets Suppression or omission of the effect of transaction from records or documents Recording transaction without substance R di t ti ith t b t Misapplication of accounting principles APT Financial Consultants Sako Mayrick, 2008 10
  • 11. Disguise – masking identity , activities so as to make it have appearance of legitimacy Divergence – departure from the norms, it must be masked Diversion – distracting relaxing Conversion - unauthorized at that deprive the owner his property permanently or for an indefinite time APT Financial Consultants Sako Mayrick, 2008 11
  • 12. Cash conversions Accounts payable diversions Stock diversions Debtors conversions Manipulations Lapping Kiting g Teeming and lading Undervaluation of stocks undercastingg Payments of fictitious debtors Ghost payroll registers Collusion with suppliers on discount or over invoicing APT Financial Consultants Sako Mayrick, 2008 12
  • 13. The primary responsibility for prevention/and detection of fraud and error rests with management and those who are charged with governance However, However the auditor should consider the risk of material misstatement in F/S resulting from fraud or error error. APT Financial Consultants Sako Mayrick, 2008 13
  • 14. Opportunity- due to weak And A d override of controls id f t l Pressure Fraud Need/ Unrealistic Corporate Rationalization Target can •Every one y Force Does it Employees to •Simply borrow Commit fraud -money APT Financial Consultants Sako Mayrick, 2008 14
  • 15. Fraudulent financial reporting Misappropriation of assets APT Financial Consultants Sako Mayrick, 2008 15
  • 16. Omission of amounts to deceive F/S users Deception – manipulation, falsification or alteration of accounting records or supporting documents Misrepresentation – intentional omission from, the p financial statement of events transactions or other significant information Intentional misappropriation of accounting pp p g principles l Misappropriation of assets Embezzling receipt g p Payment of goods and services not received APT Financial Consultants Sako Mayrick, 2008 16
  • 17. Primary responsibility for prevention and detection of frauds and errors rests with d t ti ff d d t ith those charged with governance of an entity Create a culture of honest and high ethics Establish appropriate controls to prevent and detect frauds and errors within an entity y APT Financial Consultants Sako Mayrick, 2008 17
  • 18. Those charged with governance Ensure oversight of management E i ht f t Integrity of organisation Integrity of entity’s accounting and financial g y y g reporting systems Appropriate controls Risk monitoring Financial control Compliance with law APT Financial Consultants Sako Mayrick, 2008 18
  • 19. Those charged with governance Establish a control environment and maintain E t bli h t l i t d i t i policies and procedures to achieve objectives Ensure as far as possible , the orderly and efficient conduct of entity’s business Implementing and ensuring the continued operations of accounting and ICS which are i f i d hi h designed to prevent and detect frauds and errors Audit risk can never be eliminated but can be reduced APT Financial Consultants Sako Mayrick, 2008 19
  • 20. Purpose of audit is to ensure F/S taken as a whole are free from material misstatement whether caused by error or fraud Auditor should act with skill and care that would be exercised by a reasonably competent auditor in circumstances APT Financial Consultants Sako Mayrick, 2008 20
  • 21. Audit should design his work to have reasonable expectation of detecting material misstatement which might i i t t t hi h i ht impair th t th i the truth and fairness of financial statements Misstatement should either be corrected or properly disclosed He should remind management of their responsibility to maintain proper ICS Auditor is not and can not be held responsible for fraud and error. APT Financial Consultants Sako Mayrick, 2008 21
  • 22. In planning an audit, audit team should discuss the susceptibility of entity to material misstatements resulting fraud and error Discussion will help members of audit team to gain a better understanding of the potential material misstatement in F/S resulting from fraud and errors APT Financial Consultants Sako Mayrick, 2008 22
  • 23. In planning and the audit, auditors should make inquiries of management for Management risk assessment on fraud ICS should address such risks ICS to prevent and detect fraud Management awareness of any known fraud which has affected the entity Management discovered any material error APT Financial Consultants Sako Mayrick, 2008 23
  • 24. The auditor should approach his work with professional skepticism f i l k ti i Need for management representation Acknowledgement of responsibility of ICS A k l d f ibili f Disclosure of all significant fact on fraud. APT Financial Consultants Sako Mayrick, 2008 24
  • 25. Unrealistic time deadlines for audit completion imposed by management Reluctance for frank communication with third party e.g. banker Limitation of scope imposed by mgt p p y g Identification of significant matters not previously disclosed by mgt Significant difficulties to audit figures in accounts APT Financial Consultants Sako Mayrick, 2008 25
  • 26. Aggressive application of accounting p gg pp g principles p Information provided unwillingly or after unreasonable delay Unsupported transactions Fewer confirmation responses Evidence of unduly lifestyle by officers or employees Long outstanding account receivable balances APT Financial Consultants Sako Mayrick, 2008 26
  • 27. The type of fraud/error and likelihood of occurrence determines the nature, timing and extent of audit procedures APT Financial Consultants Sako Mayrick, 2008 27
  • 28. Additional tests ( procedures) If it appears th t an error or i that irregularity h l it has occurred, the auditor should consider its nature, cause and likely effect on F/s If satisfied that irregularities are not material to F/S, he should nevertheless concerns with appropriate level of management , in order to determine further action to be taken e.g. amendment of ICS in order to reduce or ICS, eliminate such errors or irregularities in the future APT Financial Consultants Sako Mayrick, 2008 28
  • 29. Employee fraud Example : outright theft, embezzlement, E l t i ht th ft b l t defalcation, misappropriation and manipulation of records Falsifying expense reports, staff claims, embezzling fund, using corporate property for personal benefit, stealing property, accepting gratuities from vendors, contractors and supplies d t t d li APT Financial Consultants Sako Mayrick, 2008 29
  • 30. Causes Weak ICS Employment of dishonest employees Personal financial problems to staff bringing p g g financial difficulties Indicators Poor documentation False & improper entries in records Unauthorized payments Unauthorized use of corporate assets Misapplication of funds APT Financial Consultants Sako Mayrick, 2008 30
  • 31. Deceitful practices, benefiting economically, socially or sustain jobs to detriment of the organisation i ti Due to absolute powers, faith and trust Management are not subject t ordinary checks M t t bj t to di h k like subordinates,; they can easily capitalize on opportunity to conceive or conceal fraud pp y Crimes are committed to deceive investors, owners, tax authorities or inflate profits to earn higher l i hi h salaries and bd bonuses APT Financial Consultants Sako Mayrick, 2008 31
  • 32. Indicators Delay in submission of report Incompatible functions done by one person Flouting corporate directives, rules and regulations l d l d l Personal interest Duplicate entries Uncorrelated entries High fly mgt decisions APT Financial Consultants Sako Mayrick, 2008 32
  • 33. Control Enhancement of control environment e.g. junior officer enjoying lavish entertainment, luxurious lifestyle Creation of check and balances system APT Financial Consultants Sako Mayrick, 2008 33
  • 34. Realistic targets, standards and business norms Quantitative and analytical techniques to discover diverse trends and abnormal behaviour in operation Feedback on quantitative and analytical q y techniques Comparison with norms of the industry APT Financial Consultants Sako Mayrick, 2008 34
  • 35. Clear distinction btn acceptable p p performance and or efficiency operations substandard Vs standard Introduce surveillance review procedures by introducing strong IA or constituting surveillance committee with necessary independence y p Consider departure from approved targets Identify instances or adverse trends in business operations APT Financial Consultants Sako Mayrick, 2008 35
  • 36. Crime committed by officers ( Directors, CEO, y , , Employees, agents) to employer e.g. fraud, embezzlement or corruption Crime committed b external f Ci itt d by t l forces against th i t the company e.g. robbery, larcency, bulgarly, piracy Crime committed by senior offcers and other internal y agents on behalf of corporations e.g. non-compliance with regulations, tax evasion, bribery and false financial reports APT Financial Consultants Sako Mayrick, 2008 36
  • 37. Fraud means intentional deception, lying cheating, most of fraud are discovered in normal financial audit ff d di di l fi i l di Knowledge of existence of fraud comes to light when one or both of the following events takes place Allegation/complaints by 3rd party Investigators’ intuition/ general suspicion that something is awry g y Auditor discovery of accounting discrepancy Sudden discovery that something is missing APT Financial Consultants Sako Mayrick, 2008 37
  • 38. Crimes committed for entity Crimes committed against the entity APT Financial Consultants Sako Mayrick, 2008 38
  • 39. Violations of laws or regulations; tax laws; pension laws, labour laws The entity is perpetrator if convicted Th i i i d becomes victim of legal fees, fines, penalties/damages Usually are committed by senior managers who wish to enhance financial position through overstating incomes, sales, assets and by understating expense and liabilities Evasion of taxes of taxes and expenses ( overstated) APT Financial Consultants Sako Mayrick, 2008 39
  • 40. , , p Theft, embezzlement of funds, corruption by y vendors, contractors, by external agents or officers of the entity The Th company become victim of the crime e.g. b i i f h i purchasing officers defrauding the corporation by substituting an inferior quality/ merchandize or double billing an order Bribery of employees by vendors APT Financial Consultants Sako Mayrick, 2008 40
  • 41. Use of sampling Absolute assurance Vs reasonable assurance Ab l t V bl Use of judgement Inherent limitation of ICS Persuasive rather than conclusive evidence The risk of not detecting material misstatement resulting g g from fraud is higher than the risk of not a material misstatement resulting from error, because fraud may involve sophisticated and carefully organized schemes designed to conceal it such as forgery, deliberate failure to record transaction APT Financial Consultants Sako Mayrick, 2008 41
  • 42. Skilfulness of the p p perpetrator Frequency and extent of manipulation Degree of collusion involved g Relative size of the individual amounts The seniority of those involved Audit procedures that are effective for detecting errors may be ineffective for detecting fraud. APT Financial Consultants Sako Mayrick, 2008 42
  • 43. Possibility of override control procedures Generally subsequent discovery of material G ll b t di f t i l misstatement of f/s resulting from fraud or error does not in and of itself indicate Failure to obtain reasonable assurance Inadequate planning, performance or judgement Absence of professional competence and due care Failure to comply with ISAs Audit i k A dit risk model t b remodelled f di d l to be d ll d for discovery of f fraud or error APT Financial Consultants Sako Mayrick, 2008 43
  • 44. The auditor should assess fraud risk factors e.g missing document, G/L out of balance or ARP may not make sense However, fraud risk factors do not necessarily indicate the existence of fraud, they often have been present in circumstances where fraud have occurred. APT Financial Consultants Sako Mayrick, 2008 44
  • 45. COMPANIES ACT The Companies Act not fix any responsibility to auditor for fraud/ improprieties. The auditor is not bound to exercise more than reasonable skill and care even situations where there i suspicion of f d committed h is i i f fraud i d Apart from absence of legal requirements to detect d t t corporate f d th auditing profession t fraud, the diti f i points to the nature of fraud committed as a major reason for accepting extended detection duties also the responsibilities on preceding p part APT Financial Consultants Sako Mayrick, 2008 45
  • 46. One of the characteristics features of fraud as opposed to error it is that the perpetration is accomplished with attempts to conceal it li h d ith tt t t l This apply particularly to frauds commitment by management who usually have power to introduce complexity in corporate structure to make transactions or systems to override IC. Influence accounting policies and manipulate evidence e idence APT Financial Consultants Sako Mayrick, 2008 46
  • 47. Input, processing and output APT Financial Consultants Sako Mayrick, 2008 47
  • 48. Factors that promote the discovery of computer theft, fraud and embezzlement theft Internal accounting controls Separation of duties Rotation of duties Internal audit and surprise checks Development of policies, procedures, operating programs Parity f th i ti P it of authorization, authorization li it th i ti limits and comparison with limit/budgets Off-line entry controls y APT Financial Consultants Sako Mayrick, 2008 48
  • 49. Factors that promote the discovery of computer theft, fraud and embezzlement theft Computer access controls Identification controls Authentication controls Compartmentalization (establish authorization by levels) Logging exceptions Out f O t of sequence, out priority aborted runs t i it b t d Variance reporting APT Financial Consultants Sako Mayrick, 2008 49
  • 50. Auditor s role Auditor’s Aware of changes in control to avoid obsolescence of controls due to reorganisation, business re- engineering and business downsizing APT Financial Consultants Sako Mayrick, 2008 50
  • 51. Auditor’s and fraud investigators must be conversant with pre-conditions for detecting pre conditions fraud Determining organisations risk of fraud by g g y studying its operational and control environment Thoroughly understanding symptoms of fraud Thoroughly understanding symptoms of fraud Being alert of occurrence of these symptoms APT Financial Consultants Sako Mayrick, 2008 51
  • 52. Examine the operational environment and its controls to identify weakness and deficiencies (Opportunities) Deterrence, detection and reporting of fraud requires an auditor to have sufficient knowledge of possible frauds to be able to identify their symptoms APT Financial Consultants Sako Mayrick, 2008 52
  • 53. Unauthorized transactions Cash shortages C h h t Unexplained variation in prices Mi i d Missing documentation t ti Excessive refunds An effective approach is to develop a list of each type of exposure identified during the p planning stage of an audit by adjusting g g y j g inventory files, increase amount of deposit in transit and unexplained variances APT Financial Consultants Sako Mayrick, 2008 53
  • 54. Once a typical symptoms have been outlined, auditors must determine the most efficient dit td t i th t ffi i t way of detecting their presence Other Oth possible signs of fraud ibl i ff d Living beyond ones means Drug and alcoholic abuse High personal debt/loses Compulsive g p gambling/stock speculation g/ p APT Financial Consultants Sako Mayrick, 2008 54
  • 55. Management Environment Pressure P Management style and attitude Competitive and business environment e g e.g. technology Employee relationship ( spouse receiving non competitive contract) Attractive assets Internal controls I t l t l Lack of separation of duties Too much trust placed on few employees APT Financial Consultants Sako Mayrick, 2008 55
  • 56. Fraud risk factors Risk of increase IT, increases the risk of manipulation, access control p , Remember the use of CAATs can help APT Financial Consultants Sako Mayrick, 2008 56
  • 57. It is primarily concerned with collecting, analysing evidence to assess allegations of specific wrong doing. After a thorough evaluation of control framework, the weakness and fraud exposures identifies may prompt fraud examination but also they may not APT Financial Consultants Sako Mayrick, 2008 57
  • 58. y p Once the symptoms of fraud are found and additional tests have indicated that there is a strong possibility of fraud, the review enters the formal investigation phase Auditor must clarify; Results of investigation can be used later as an educational tools for auditors, fraud investigators and other employees APT Financial Consultants Sako Mayrick, 2008 58
  • 59. Briefing by the client, followed by letter of engagement detailing the initial scope of work Communication with parties involved e.g. external auditors ( if not the firm) audit committee and accounting staff Determining the extent of fraud Interviewing the defrauder g Investigating the known area with detailed audit test. E.g. Exhaustive checks, wages, cash debtors and stock Report to the management on the findings, with copies to interested parties e.g. ex- auditor, audit committee. committee APT Financial Consultants Sako Mayrick, 2008 59
  • 60. Circumstances which led to investigation Fraud discovered and their extent Identity of the defrauder Effects on the reported profit of the past period Effects on f/s of current periods APT Financial Consultants Sako Mayrick, 2008 60
  • 61. IC weakness which allowed the fraud and recommendations for eliminating them Report of any interviewing with the defrauder, including offers of restitution etc, which may be relevant to management in deciding what action, if any they should t k against hi /h take i t him/her If there is any suggestion that the external auditors has been negligent the extent of claim against him. APT Financial Consultants Sako Mayrick, 2008 61
  • 62. Auditor should Consider the potential effects in F/s Where the fraud is material the auditor should modify th audit procedures so as t perform dif the dit d to f procedures appropriate to circumstances depending on the type of the fraud/error suspected, the likelihood f th i lik lih d of their occurrence and extent of d d t t f damage in the F/s APT Financial Consultants Sako Mayrick, 2008 62
  • 63. If some proof of fraud exists, management has several options Cause a deeper audit to be done if amount of loss appears substantial Terminate employee responsible if loss is minimal File l i to Fil a claim t recover a l loss f from clients fid lit li t fidelity insurance agent Arrange with law enforcement agents to probe into the matter APT Financial Consultants Sako Mayrick, 2008 63
  • 64. If some proof of fraud exists, management has several options Engage a private investigator to probe into the loss g g g and document it for claim purpose/prosecution Disreard losses if minimal and tighetn controls Alert th di t Al t the directors, audit committees or the board dit itt th b d APT Financial Consultants Sako Mayrick, 2008 64
  • 65. g Strong ICS is not a warrant from fraud Client should have an effective anti-fraud and corruption strategy which is aimed at encouraging prevention, promote early detection and respond to concern raised Awareness programs to employees Screening job applicants S i j b li t Sound corporate policy on fraud AVOID atmosphere o d st ust and paranoia by O at osp e e of distrust a d pa a o a over-emphasising fraud deterrence measures. APT Financial Consultants Sako Mayrick, 2008 65
  • 66. It is important to stick to facts, and to discount hearsay, rumour, or opinion and record what is relevant to the cause of the incident and its effect Audit reports on fraud and other improprieties should be addressed to the righ person who can take action APT Financial Consultants Sako Mayrick, 2008 66
  • 67. p Report must contain all details of fraud Must provide framework to analyse the fraud case Must enable the user to develop improved management and security policies and detect and prevent fraud. Investigation and reporting should proceed in such a way that the outcome will be litigated. Recording exact times, data, names of person and specific; description of evidence are critical in civil or criminal investigation f id iti l i i il i i li ti ti or litigation APT Financial Consultants Sako Mayrick, 2008 67
  • 68. p g g Reporting to management Suspicion of fraud with potential effect on f/s Fraud/significant errors Reporting to users of the audit reports Qualified opinion/disclaimer or limitation of scope Reporting to regulatory/enforcement authorities. APT Financial Consultants Sako Mayrick, 2008 68
  • 69. APT Financial Consultants Sako Mayrick, 2008 69
  • 70. Understand the meaning of money laundering Exemplify money laundering p y y g Describe the money laundering process Understand Tanzania perspective of money l laundering d Describe the audit implication of money laundering Discuss the challenges of combating money laundering in Tanzania APT Financial Consultants Sako Mayrick, 2008 70
  • 71. Definition Just remember the literary word laundry ( cleaning) and therefore; Money laundering, the metaphorical quot;cleaning of moneyquot; with regard to appearances in law, is the practice of engaging in specific financial transactions in order to conceal the identity, source, and/or destination of money, and is a main operation of underground economy d d APT Financial Consultants Sako Mayrick, 2008 71
  • 72. Definition “The process used to disguise the source of money or assets derived from criminal activity” Conduct t d i di C d t or acts designed in whole or in part to h l i tt conceal or disguise the nature, location, source, ownership or control of money (can be currency etc To move illegally acquired cash through financial systems so that it appears to be legally acquired APT Financial Consultants Sako Mayrick, 2008 72
  • 73. Definition Money laundering is the process whereby the origin of dishonest and/or illegally obtained money is concealed so that it appears to come from a legitimate source. h f l A process that makes money with an illegal origin appear legal so that it may be used. g y the methods criminals use to hide and disguise the origin of the money they make from their crimes. The term laundering is used because criminals need to turn their quot;dirtyquot; criminal money into clean funds that they can use without arousing suspicion. APT Financial Consultants Sako Mayrick, 2008 73
  • 74. Definition the willful concealment of the existence, illegal source, or illegal use of proceeds, and the disguise of them as legitimate There is international concern that the multimillionaire Osama bin Laden and his wealthy backers have created a y sprawling global network of funds. the process of converting illegally earned assets, originating as cash to one or more alternative forms to cash, conceal such incriminating factors as illegal origin and true ownership. APT Financial Consultants Sako Mayrick, 2008 74
  • 75. Definition D fi iti concealing the source of illegally g g y gotten money Include: Drug trafficking Extortion Corruption Fraud APT Financial Consultants Sako Mayrick, 2008 75
  • 76. Money laundering is the process by which large amounts of M l d i i th b hi h l t f illegally obtained money (from drug trafficking, terrorist activity or other serious crimes) is given the appearance of having ) g pp g originated from a legitimate source. If done successfully, it allows the criminals to maintain control successfully over their proceeds and ultimately to provide a legitimate cover for their source of income. Money laundering plays a fundamentall role iin f ilit ti th ambitions of th d f d t l facilitating the biti f the drug trafficker, the terrorist, the organised criminal, the insider dealer, the tax evader as well as the many others who need to avoid the ki d of attention f id h kind f i from the authorities that sudden h h ii h dd wealth brings from illegal activities. By engaging in this type of activity it is hoped to p y p place the pproceeds beyond the reach of y any asset forfeiture laws. APT Financial Consultants Sako Mayrick, 2008 76
  • 77. Criminals want to: Avoid prosecution p Increase profits Avoid i A id seizure of accumulated wealth f l t d lth Appear legitimate Tax evasion They are trying to conceal the origin of the cash APT Financial Consultants Sako Mayrick, 2008 77
  • 78. y g Money laundering is often described as occurring in three stages: placement, layering, and integration. Placement: refers to the initial point of entry for funds derived from criminal activities. Layering: refers to the creation of complex networks of t t k f transactions which attempt t ti hi h tt t to obscure the link between the initial entry point, and the end of the laundering cycle. g y Integration: refers to the return of funds to the legitimate economy for later extraction. APT Financial Consultants Sako Mayrick, 2008 78
  • 79. Money laundering is a complex p y g p process, which is accomplished through three main phases. The first phase is the physical disposal of the cash, i.e. placing the p proceeds of p predicate criminal activities into bank or non- bank financial institutions in order to disguise their illegal origins and make them appear to be legitimate funds. This may include the use of ‘front’ businesses such y as hotels, cinemas or casinos that may reasonably claim to do business in cash. It may also involve the use of ‘smurfing’ techniques, through which launderers make g q , g numerous deposits of amounts of money that are small enough to avoid raising suspicion or triggering reporting mechanisms. This process is called ‘placement’. p p APT Financial Consultants Sako Mayrick, 2008 79
  • 80. The second phase is the movement of funds from institution to institution to hide their origins and i i i i i i hid h i i i d ownership, termed ‘layering’. It consists of putting the funds, which have entered into the financial system, through series of financial operations to mislead potential investigators and to give the funds the appearance of having legal origins. For this launderers use financial institutions t at p o de legally p otected a c a st tut o s that provide ega y protected banking or offshore mechanisms. The final stage is to integrate criminal assets into the mainstream of commerce and investment in an ostensibly legitimate business. This is termed ‘integration’. The funds may be re-introduced into the economy through, for instance, the purchase of luxury items or through investment in assets such as shares in it th hi t ti t h h i companies and real estate. APT Financial Consultants Sako Mayrick, 2008 80
  • 81. The main objectives of money launderers are thus to place their funds in the financial system without l h i f d i h fi i l ih arousing suspicion, to move them around, often after a series of complex transactions crossing multiple jurisdictions so that it becomes difficult to identify their original sources, and finally to move the funds back into the financial and business systems so that they appear legitimate. appea eg t ate. Money laundering is performed systematically and clandestinely, clandestinely making it difficult to identify exactly how much money is involved, what methods are employed and what the magnitude of the problem is. Likewise, secrecy makes it difficult to establish the y magnitude of funds used for the funding of terrorism. APT Financial Consultants Sako Mayrick, 2008 81
  • 82. Hide: to reflect the fact that cash is often introduced to the economy via commercial concerns which may knowingly or not knowingly be part of the laundering scheme, and it is these which ultimately p y prove to be the interface between the criminal and the financial sector Move: clearly explains that the money launderer uses transfers, sales and purchase of assets, and changes the shape and size of the lump of money so as to obfuscate the trail between money and crime or money and criminal. Invest: the criminal spends the money: he/she may invest it in assets, or in his/her lifestyle assets APT Financial Consultants Sako Mayrick, 2008 82
  • 83. If a p g g person is making thousands of shillings in small change a week from a business (not unusual for a store owner) and wishes to deposit that money in a bank, it cannot be done p y , without possibly drawing suspicion. In Tanzania, for example, cash transactions and deposits of more than a certain shilling amount are required to be reported as quot;significant cash transactionsquot;.quot; In other jurisdictions suspicion- based requirements are placed on financial services employees and firms to report suspicious activity to the authorities. Methods to conceal the source are therefore required required. APT Financial Consultants Sako Mayrick, 2008 83
  • 84. One method of keeping this small change private would be for an individual to give money to an intermediary who i already t i t di h is l d legitimately taking in large amounts of cash. The intermediary would then deposit that money into an account, take a premium, and write a cheque to the individual. Thus, the individual d i di id l draws no attention to himself, and tt ti t hi lf d can deposit his cheque into a bank account without drawing suspicion. This works well for g p one-off transactions, but if it occurs on a regular basis then the cheque deposits themselves will form a paper trail and could raise suspicion suspicion. APT Financial Consultants Sako Mayrick, 2008 84
  • 85. Corruption ( if y g $100,000 today through p you get y g corruption, will you deposit into your bank account?) Drug production and trafficking Embezzlement, misappropriation and theft of public funds Tax exemptions and evasions Smuggling of arms, minerals and dangerous materials (It is reported that between 1995 and 2002 Tanzania lost more than Tsh300 billion (US$300 million) through the smuggling of tanzanite from the country ) APT Financial Consultants Sako Mayrick, 2008 85
  • 86. Stolen motor vehicles (The trade in stolen motor vehicles or their parts generates substantial illicit proceeds. The police say they have identified the criminal syndicates responsible for these crimes. Gangs of motor vehicle thieves are concentrated in cities and towns such as Dar es Salaam, Arusha, Moshi, Mwanza and Mbeya APT Financial Consultants Sako Mayrick, 2008 86
  • 87. Poaching Trafficking of human Informal financial system (Another area that has not been given sufficient attention, and which can be used to facilitate money y laundering and terrorist financing in Tanzania, involves informal dealings in funds without the use of the formal fi h f h f l financial institutions) i li i i ) APT Financial Consultants Sako Mayrick, 2008 87
  • 88. Terrorism Tanzania has experienced the adverse effects of terrorist attacks. On 7 August 1998, terrorists bombed the US Embassy in Dar es Salaam It is said that the terrorist attack in 1998 was co-ordinated, financed and/or carried out by al-Qaeda, led by the / y Q , y Saudi fugitive, Osama Bin Laden.61 APT Financial Consultants Sako Mayrick, 2008 88
  • 89. Several regulatory mechanisms are in p g y place to address these problems. They include the Bank of dd th bl Th i l d th B k f Tanzania (BoT) Circular No. 8 of 2000, which obligates banks and financial institutions to: d t ti adopt anti-money l d i laundering policies and procedures; li i d d verify and identify customers before establishing relationship with them; develop procedures relating to retention of records of transaction of their customers; establish reporting mechanisms of suspicions transactions of their customers to the relevant authorities; and h d provide training and guidance to their personnel relating to procedures and control of money laundering. laundering APT Financial Consultants Sako Mayrick, 2008 89
  • 90. Co-operation with other nations and with regional and global bodies Tanzania co-operates with other nations and regional and global bodies in their efforts to combat money laundering and the financing of terrorism. For g g instance, in compliance with the regional efforts of the Eastern and Southern Africa Anti-Money Laundering Group ( p (ESAAMLG), Tanzania has established the ) National Multi-Disciplinary Anti-Money Laundering Committee, which reports regularly to the ESAAMLG Task Force. A Financial Intelligence Unit ( g (FIU) to ) strengthen financial and economic intelligence gathering has been established. Tanzania also co- operates with regional g p g groups such as SADC and the p East African Community (EAC) and various international organisations such as Interpol APT Financial Consultants Sako Mayrick, 2008 90
  • 91. Vienna conventions Palermo conventions UN resolution 1373 UN Convention for Suppression of the Financing of Terrorism Other international agreements includes The SADC Protocols (including the Protocol Against Corruption the Protocol on Corruption, Combating Illicit Drugs and the Protocol on Mutual Legal Assistance in Criminal Matters); g ) APT Financial Consultants Sako Mayrick, 2008 91
  • 92. The Memorandum of Understanding among members of the ESAAMLG; The African Union Convention on Preventing g and Combating Corruption; and The African Union Convention on the Prevention and Combating of Terrorism. APT Financial Consultants Sako Mayrick, 2008 92
  • 93. Local legislation the Economic and Organised Crime Control Act of 1984; the Mutual Assistance in Criminal Matters Act of 1991; the Proceeds of Crime Act of 1991; the Drugs and Illicit Traffic in Drugs Act of 1995; the Extradition Act of 1965; APT Financial Consultants Sako Mayrick, 2008 93
  • 94. Local legislation the Banking and Financial Institutions Act ,2006 the Prevention of Corruption Act of 1971; p the Prevention of Terrorism Act, 2002; the Armaments Control Act of 1991; the Ammunition Act of 1991; the Police Force Ordinance, Chapter 322; the P th Penal C d Chapter 16 and l Code, Ch t 16; d the Public Leadership Code of Ethics Act of 1995 APT Financial Consultants Sako Mayrick, 2008 94
  • 95. p y the National Multi-Disciplinary Anti-Money y Laundering Committee; the Ministry of Finance; the BoT and banking financial institutions; the Ministry of Justice and Constitutional Affairs; the Ministry of Home Affairs; the Police Force; the PCB; h C the National Drug Control Commission; and the courts courts. APT Financial Consultants Sako Mayrick, 2008 95
  • 96. Lack of f f force of administrative directives f Lack of specialised prosecutorial skills Corruption in legislative, judicial and enforcement activities Inter-sectoral conflict and lack of co- ordination ( Police Vs PCCB) Inordinate delays in police investigations and in court cases Lack of attention to the informal sector Resistance to anti-money laundering measures APT Financial Consultants Sako Mayrick, 2008 96
  • 97. Lack of specialised p f p prosecutorial skills Corruption in legislative, judicial and enforcement activities Inter-sectoral conflict and lack of co- ordination ( Police Vs PCCB) I di t d l i Inordinate delays in police i li investigations and ti ti d in court cases Lack of attention to the informal sector Resistance to anti-money laundering measures APT Financial Consultants Sako Mayrick, 2008 97
  • 98. Forensic auditing could be defined as the application of auditing skills to situations that have legal consequences. Forensic Auditing is the p g process of ggathering g and reporting on data , in a pre-defined context, for the purpose of finding facts and/or evidence in the context of fi id i h f financial /l i l /legall disputes and /or irregularities and giving preventive advice in this area APT Financial Consultants Sako Mayrick, 2008 98
  • 99. Forensic investigation is carried out for civil or criminal cases. These can involve fraud, . Asset tracing for money laundering. Forensic accounting is undertaking a financial g g investigation in response to a particular event where the findings of the investigation may be used at evidence in court or to otherwise help d id i h i h l resolve disputes. APT Financial Consultants Sako Mayrick, 2008 99
  • 100. Professional accounting skills Investigative skills Investigative mindset Capability to understand disputes or anticipated disputes Understand risk concerns, fraud allegations and ethical requirements g q APT Financial Consultants Sako Mayrick, 2008 100
  • 101. Corporate governance has increased the number of forensic audit due expectation of corporate governance codes Company directors take seriously their responsibilities for the prevention and detection of fraud Government addressing risks of criminal funding of terrorist group g p APT Financial Consultants Sako Mayrick, 2008 101
  • 102. Fraud Quantifying losses Bribes identification Intentional misstatement on f l financial statements l Creative accounting Negligence by auditor or others Insurance claims when there are disputes Contract disputes Matrimonial disputes Business sales and purchase dispute APT Financial Consultants Sako Mayrick, 2008 102
  • 103. Terrorist financing Expert witness, owing a duty of skill and due care to those instruction him Should be objective Should be aware of court consequences Should provide independent opinion not biased to payers Sh ld confine to material matters Should fi t t i l tt Should inform client of change of opinion and reasons for it. APT Financial Consultants Sako Mayrick, 2008 103
  • 104. Index or list of contents Brief CV Instructions Issues Documentation Chronology Technical background Opinion References Declaration APT Financial Consultants Sako Mayrick, 2008 104
  • 105. APT Financial Consultants Sako Mayrick, 2008 105