No clear-cut formula to prevent fraud

By ELAINE ANG

ACCOUNTING scandals such as the ones uncovered at Transmile Group Bhd and Megan Media Holdings Bhd are not the first to have rocked corporate Malaysia nor will they be the last.

This has highlighted the importance for companies to have good internal controls, corporate culture, the right people and responsible leadership among others.

According to Pricewaterhou-seCoopers (PwC) Malaysia senior executive director Jiv Sammanthan a company needs to combine controls with its people and culture to strengthen fraud response or prevention.

“Fraud cannot be fully prevented. We can minimise the incidents but cannot fully eradicate it.

Jiv Sammanthan

“We must first acknowledge that fraud is, at root, a people issue. All that is needed is for one person to be motivated enough, combined with available opportunity, to commit fraud,” he told StarBiz.

He said experience had shown that controls alone were insufficient and even well designed controls could be circumvented.

“There is no a 'one size fits all' fraud prevention system that can be implemented due to the differences in size, industry and markets that companies operate in.

“Companies should consider what is appropriate after taking into consideration the organisational values, ethics and behavioural expectations,” said Jiv, who heads the governance, risk and compliance unit.

For starters, Jiv said a company should hire the right people, create a corporate culture which encourages ethical behaviour, create systems that have a chance of detecting fraud and define a process including specific actions to deal with ethical issues when they happen.

He highlighted two ways in which fraud could be detected – through risk management controls and system or by chance, for example, via tip-offs (internal or external).

Jiv said when fraud was detected, the management needed to be objective and focus on the facts and gather more information and evidence to support, corroborate or confirm their suspicions.

“The management must try to limit the number of people to discuss their suspicions with.

“However, the issue can be escalated if needed or required by internal procedures, for example by informing the audit committee or board of directors,” he added.

The management should consider whether assistance – lawyers or forensic accountants – is needed to resolve the matter as well as appropriate steps for immediate or further action.

Jiv also cautioned companies on what not to do when fraud is discovered or a tip-off is received:

·Don't dismiss it as a mistake or misunderstanding

·Don't assume other persons will deal with, or handle it

·Don't delay or procrastinate in taking action

·Don't approach the matter emotionally or impulsively or act hastily

· Don't “threaten” the suspect

·Don't “broadcast” your suspicions openly

·Don't make assumptions, conclusions or judgments without sufficient evidence.

However, Jiv sees setting a strong culture of ethics and integrity, coupled with clear boundaries, as one of the main challenges companies face in fraud prevention.

“Sometimes, doing the right thing may not be apparently beneficial to a company and even 'good' people/managers may make bad choices.

“This is especially when there is lack of clarity in the boundaries that they operate in,” he said.

Another challenge is for companies to have a responsible leadership.

“The senior people will need to walk the talk. Responsible leadership strives to deliver the triple-bottomline (economic, social and environmental) and achieve sustainable value creation.

“It builds sustainable relationships and creates an admired brand, one that is trusted by stakeholders.

“If a company has a strong culture of ethics, doing the right thing and integrity, it will attract the right people and that will pay dividends,” Jiv said.

On the regulatory aspect, Jiv noted that there had been an effective push in terms of regulations to minimise and prevent fraud – the Malaysian Corporate Governance Code as well as the Companies Act – which has been amended to give it more “bite”.

“The regulators are doing the right things but organisations need to do their bit too,” he said.