Guest post: Occupational fraud and the auditor’s role – a view from South Africa

Below is a thought-provoking guest post on auditors role in fighting fraud and corruption from Morne Pienaar, Internal Audit Manager at RSM Betty & Dickson in South Africa.

In South Africa it is nearly impossible to read the news without seeing headlines regularly highlighting incidences of fraud, nepotism and corruption.

These headlines speak accurately of a business environment where “tender fraud” is more common than not. This has deeply negative ramifications for a country that needs to establish itself as a destination for international businesses.

The majority of fraud and corruption in South Africa occurs around the award of government contracts. On a positive note, companies in the private sector are beginning to implement stronger risk management controls to safeguard themselves against corruption.

Even so, we as a business community face real challenges in changing our business culture and we believe auditors should play an increasing role in protecting our clients. The evidence is quite stark.

The Association of Certified Fraud Examiners recently released The 2012 Report to the Nations on Occupational Fraud and Abuse. The study gathered information from 94 countries worldwide to provide a global view of occupational fraud.

Some of the key findings on the impact of occupational fraud in the report are:

• The typical organisation loses 5% of its revenue to fraud each year. Applied to the estimated Gross World Product this translates to approximately USD 3.5 trillion; • Nearly half of victim organisations do not recover their losses; • Most occupational fraudsters are first time offenders with clean employment histories; • Occupational fraud is a significant threat to small and medium enterprises.

We need to ask ourselves: as auditors, what are our responsibilities when it comes to the fight against fraud and corruption?

International Standard on Auditing 240 states that the primary responsibility for the prevention and detection of fraud rests with those charged with governance and management of the entity.

Even so, external auditors, and more so internal auditors, do play a central role in advising clients on prevention and detection of fraud, particularly by educating clients to appreciate the depth of risk within their operations, and we can advise on processes and procedures to reduce the risk of fraud.

In short, we believe it is vital that external and internal auditors communicate to clients the benefits of improving internal controls to reduce the risk of fraud.

There is naturally a greater possibility of fraud in instances where there are limited internal controls within a business. External audit, when not relying on internal controls, should still be aware of the increased risk and “red flags” and communicate to clients the possible consequence of the lack of controls or risk management within their organisations.

After all, the impact of business crime can include major financial loss, compliance and regulatory infringement and even criminal proceedings against management.

These scenarios are not acceptable, and as responsible auditors we should do all we can within our remit to ensure our clients are clearly warned of potential risks.