Pacific Islands Financial Managers’ Association (PIFMA) Heads: Annual Meeting

1. Pacific Islands Financial Managers’ Association (PIFMA) Heads: Annual Meeting by Ms Rosie Langi (ACFE,CICA,TA(Fiji) Director, Transparency International -Fiji

2. Disclaimer Neither this presentation nor the materials you have been provided shall constitute legal advice or the opinions of the Transparency International – Fiji or the professional entities that the presenter is associated with (ACFE, IIC, FIIA, FAFE) While the practices and methodologies which will be presented are considered industry best-practices, specific circumstances and fact patterns should drive your process and approach. Any similarities of names or circumstances are purely coincidental

3. Overview • Interchangeable use of terms (Corruption vs. Fraud) • TI focus - Global Perception Barometer (The Barometer) - Corruption Perception Index (CPI) • Professional focus - Big Four (KPMG, PwC, E&Y, Deloitte) - Association of Certified Fraud Examiners (ACFE) - (Prevention, Detection and Deterrence) • Integrated Methods • The Corporate reporting Supply Cycle • Fraud Deterrence Cycle • GRC Toolbox • The Future – Where Do We Go From Here

4. Corruption vs. Frauddefined • Corruption • “the abuse of trusted authority for private gain”. (Transparency International) • Fraud (occupational) • The use of one’s resources for personal enrichment through the deliberate misuse or misapplication of the organisation’s resources or assets (Association of Certified Fraud Examiners)

5. THE FRAUD TREE Corruption Asset Misappropriations Fraudulent Statements Conflicts of Interest Cash Financial Bribery Inventory & All Other Assets Non-financial Illegal Gratuities Economic Extortion 5 5

6. Fraud in Historic Perspective • Fact of life for years • Babylonian era (1800BC) – Code of Laws • US-since colonies settled, 1616 Virginia case, Captain Samuel Argall, Deputy Gov – “...only six goats were left...” • Civil war –False Claims Act 1863 • Credit Mobilier scheme 1872 (double invoiced govt, distributed $50m to shareholders. Politicians involved. • Fiji cases (FMF, NBF,HA,C&E, Immigration, Agriculture, Fisheries)

7. Transparency International • TI, is the global CSO leading the fight against corruption. • Over 90 chapters worldwide, with its Secretariat in Berlin. • TI raises awareness of the damaging effects of corruption and works with partners in government, business and civil society to develop and implement effective measures to tackle it. (advocacy) • Membership is open (qualified) • Regional Classification within the Asia Pacific -------------------- • Fiji • Papua New Guinea • Solomon Islands • Vanuatu

8. Global Corruption Barometer 2010 • The Barometer is the largest cross-country survey collects general public’s views on and experiences of corruption. • In 2010, over 91,500 people in 86 countries • most comprehensive edition since 2003. • general public’s views about corruption levels in their country • government’s efforts to fight corruption. • Complements Perception Index & Bribe payers Index on the general public’s perceptions of key institutions • public willingness to engage with the fight against corruption.

9. TI Projects Regional • Advocacy and Legal Advice Centres (ALAC) • Forest Governance and Integrity • Preventing Corruption in public contracting • Transparency in political financing • National integrity systems • Corruption prevention in disaster relief National • Corruption in politics • Corruption in the public sector • International Anti -Corruption conventions • Anti-Corruption education • Corruption in public contracting

10. Changes in Corruption Levels in the past 3 yrs, by Region.

11. Perceived Levels of Corruption in Key Institutions

12. Corruption Affecting Key Institutions/ Sectors. Comparison Overtime, Overall Results

13. Assessment in Government Actions Against Corruption

14. Peoples’ Trust to Fight Corruption

15. Peoples’ Trust to Fight Corruption – By Region

16. Transparency International Corruption Perceptions Index (CPI)

17. Professional Bodies - ACFE • The world’s largest and Certifying anti - fraud body was formed in 1988 • The Association of Certified Fraud Examiners (ACFE) • based in Austin, Texas, USA. • over 55,000 members world – wide and offers the Certified Fraud Examiners (CFE) Examination. www.acfe.com • Membership is open to those of ‘good standing’. • Certification is in Law, Finance, Criminology and Ethics and Investigation (CFE)

18. Famous Quotes: Enron • “The company is probably in the strongest and best shape that it has ever been in…There are no accounting issues, no trading issues, no reserve issues, no previously unknown problem or issues.” (-Kenneth Lay, Enron CEO statement to Wall Street) • “I am incredibly nervous we will implode in a wave of accounting scandals, and our [successes are] nothing more than an accounting hoax.” (- Sherron Watkins, Former Enron, VP Corp Development and Whistleblower)

19. International Fraud Cases • Enron (US) 2000 - $US600 million loss; - $85m settlement, 20 000 employees. • Adelphia(US) 2002 - $US2.3billion • $0.01 per acct per month – 1million clients = $10 000pm = $120 000pa • UK Insurance claims for 38 teeth • UK pop 55 million, social security number 70 + million

20. Fiji Fraud Cases • National Bank Of Fiji (Fiji) 1990s $F300million approx. • Housing Authority of Fiji (1990’) • Customs & Excise Department (1990s) • Fiji Immigration Department • Shell companies • Phantom employees (Education) • Agriculture scam • Tender bidding • Peter Foster

21. THE FRAUD TREE Corruption Asset Misappropriations Fraudulent Statements Conflicts of Interest Cash Financial Bribery Inventory & All Other Assets Nonfinancial Illegal Gratuities Economic Extortion 21 21

25. Initial Detection of Frauds

27. Governance and Corruption • Good governance is not a luxury but a basic requirement for development. • Corruption undermines development and is generally an outcome and a symptom of poor governance. • “It has reached global proportions and needs to be attacked directly and explicitly.” (Commonwealth Declaration) • It is now widely acknowledged that the control of corruption has to be an integral component of good governance.(TI) • Proactive and reactive measures necessary (ACFE)

28. The Use of Integrated Methods To Fight Fraud • Corporate Reporting Supply Cycle • The Fraud Deterrence Cycle • The GRC Toolbox

29. 1. The Corporate Reporting Supply Cycle

30. 2. The Fraud Deterrence Cycle

31. Conceptual Overview of the Fraud Deterrence Cycle An interactive process with 4 main elements; • Establishment of corporate governance • Implementation of transaction – level control processes (Internal control processes) • Retrospective examination of governance and control processes through audit examinations • Investigation and remediation of suspected or alleged problems

32. The Fraud Deterrence Cycle Corporate Governance • Independent board, chairperson, • management, stakeholders • Audit committee to have at • least a finance expert, all others • financial literate, Regular meetings • Explicit ethical commitment (“walking the talk”) • Prompt and appropriate • investigation • Budgeting / forecasting controls • Internal audit reporting to audit Committee • Clear, formal policies and • procedures, regular reviews, Well • defined financial approval • authorities and limits • Timely and complete • Information flow to the board.

33. Transaction – Level Controls • The Control Environment • Risk Assessment • Control Activities • Information and Communication • Monitoring

34. Important Control Processes • Information system access and security control • Proper employment screening procedures, background checks • Timely reconciliations • Cash management controls • Security of assets • Top level reviews of actual • performance versus budgets, • forecasts, prior periods and • competitors • Additions/changes/deletions to master file of customers, Vendors, employees • Disbursement approval processes • Write off approval processes • Revenue recognition procedures • Inventory controls • Segregation of duties

35. 3. The GRC Model • Governance, Risk Management and Compliance (GRC) • to eliminate corporate ‘silos’ • integrate organizational • management, protection against • fraud and theft and regulatory • adherence. • Problem? • GRC programs often underestimate fraud risk.

36. How The GRC Works? • Integration of governance, risk management and compliance • (GRC) and anti-fraud programs, creating synergies and efficiencies that will better detect and deter fraud. • Managers, CEOs’ to recognize the ubiquity and seriousness of the fraud threat. • Everyone works together, sharing best practices and using common tools to rely on each other’s work. • No unilateral ownership, but must be cooperative and well coordinated. • Need to identify appropriate strategic and tactical guidelines and best practices to get there.

37. 2010 KPMG Survey • 1,200 members on boards worldwide • oversight of fraud risk was a “great” concern for only 6 percent • only 72 say “Yes, fraud is a great concern to me.” (1,128 believe either that fraud is not a big threat or that ICs’ are very good) • Interests more on Gulf oil spill, Wiki Leaks’ disclosures of classified information, Political unrest in the Middle East and North Africa, Earthquake and tsunami in Japan. • Tone at the top (5th) and • Ensuring audit committee effectiveness (7th)

39. Opportunity The Fraud Triangle Pressure Rationalization

40. Beyond The Fraud Triangle • Since 1950s’ to understand fraudsters’ motivations • Inadequate for Prevention, Detectionand Deterrenceof fraud because Pressureand Rationalisation cannot be observed. • Case: 1978 Wal-Mart hired Thomas Coughlin, director of loss prevention, 2005 VC, resigned amid allegations of fraud and deceit. • Alligator boots ($ 1359), dog pen ($2 500) • Questionable transactions $100 000 - $500 000 • 2004 compensation over $6m. • Inconsistency with • Add Capability = The Fraud Diamond • MICE Model (Money, Ideology, Coercion, Ego/Entitlement)

41. Looking Forward - Where Do We Go From Here? • Evolution of discipline including boundary between financial auditing and forensic accounting investigations • Education and training for a new generation of forensic accounting investigatorsand fraud examiners. • The changing regulatory and legislative environments • The changing corporate environment in which the decision to investigate and the process and the results of investigation encounter real world benefits • Changes in corporate reporting especially re - non financial operating data (NFOD) .

42. Looking Forward - Where Do We Go From Here? A Historical Account of the Auditors Role • Auditing – ancient history 4000BC. • Growth of the auditing profession in the 19th Century • ...auditor who is able to detect fraud is – other things being equal – a better man than the auditor who cannot.(Auditing: A practical manual for auditors by L R Dicksee) • Current Environment – Sarbanes –Oxley Act 2002 - International Financial Reporting System (IFRS) • AICPA s99 Consideration of Fraud in a Financial Statement Audit. • Auditors are Not Alone.

43. Looking Forward - Where Do We Go From Here? • Reactive – Investigation & auditing (traditional) • Proactive – Prevention & Detection & Deterrence • Deterrence , Auditing and Investigation • - Increased size of reported scandals (Enron, WorldCom, Tyco, Food for Iraq) - Issues e.g. executive pay, benefits & perks, wilful deception, mumbo – jumbo, creative accounting, , cooking of the books • Systematic, Rigorous approach that uses both reactive & proactive methods. • Partnerships – TI, NGOs’and professional bodies

44. Vinaka Vakalevu • Valuable Sources • http://www.transparency-international.org • http://www.acfe.com • Golden Thomas et al, A Guide to Forensic Accounting, 2006, John Wiley & Sons Inc. • Wells, JT Corporate Fraud Handbook, 2004 John Wiley & Sons Inc. • Hare, Robert D, Without Conscious, The Disturbing World of Psychopaths Among Us, 1999 the Gilford Press, USA. • The GRG Toolbox by Robert Tie, The Fraud Magazine, September /October Issue 2011, ACFE. Ms Rosie Langi rosie_consult@yahoo.com.au