More companies turning to forensic accountants to help deal with fraud

  • Business
  • Saturday, 19 Jun 2010

Sime Darby Bhd has done it at least three times. CIMB Group Holdings Bhd have done it too, back when it was known as Bumiputra-Commerce Holdings Bhd.

And so have dozens of other listed companies of various shapes and sizes. Among them are Alliance Financial Group Bhd, Petra Perdana Bhd, Transmile Group Bhd, Megan Media Holdings Bhd and Liqua Health Corp Bhd.

At one time or another, all of these companies have asked accountants, particularly those with specialised skills, to perform some kind of examination to determine the state of the companies’ financial affairs and operations, or specific aspects of these. Often, the focus is on addressing suspected fraud or abuse of authority.

Kenmark Industrial Co (M) Bhd is about to join the gang soon. On June 1, Bursa Malaysia ordered the appointment of a special auditor to investigate Kenmark’s affairs in view of the recent developments affecting the company.

(A special audit is sometimes called a review, a due diligence, an investigative audit or a forensic audit. Each label has its own connotations, but special audit is the most common and is used here as an umbrella term.)

Corporate Malaysia is in a mood for investigations. On Tuesday, the Securities Commission (SC) issued a curious but stern warning directed at listed companies, reminding the directors and top managers of the stiff penalties for destroying or causing loss of company documents.

“It is completely unacceptable that a company that is under investigation suddenly turns around and claims that documents are lost or stolen,” said SC chairman Tan Sri Zarinah Anwar in the press release.

Are companies more inclined to commission special audits nowadays? Most of the forensic accountants – the term refers to the fact that their work is usually used as evidence in court – think so.

KPMG Forensic head Tan Kim Chuan says companies are now more prepared to engage external help to investigate suspected fraud. Says his colleague, KPMG Forensic director Sukdev Singh: “We see that a lot of companies are hiring third parties to do investigative audits. Ten years ago, we didn’t hear of all this. Either such jobs were done quietly or these matters were swept under the carpet.”

David Lehmann, head of Deloitte Malaysia’s forensic practice, also observes that people are changing in how they tackle fraud and mismanagement. “Now there’s more of an onus on businesses to deal with such things appropriately, that is, to investigate properly and to take stronger action, rather than just terminating the employee and suffering the loss,” he says.

“A lot more companies now recognise that investigating thoroughly and referring matters to the police have a greater deterrent effect within their organisations. Also, the companies now aren’t willing to suffer the financial loss. So they’ll take recovery action, which usually involves engaging lawyers and forensic accountants.”

The toll of fraud

Part of the impetus for the growing preference for special audits, Patrick McPhee points out, comes from the increasingly tough stance of the SC and Bursa Malaysia on companies that fail to comply with the law and listing requirements, over the past five years or so.

“The regulators are really getting much stronger, and they will continue to get stronger as they develop,” says McPhee, a partner of Ferrier Hodgson MH, the consulting arm of accounting firm Baker Tilly Monteiro Heng and a specialist in forensics and investigations.

Given the rising frequency of special audits, we may be tempted to think that Malaysia suffers more corporate wrongdoings than other countries. McPhee rejects this notion: “The level of fraud in Malaysia is no different to any other country. Malaysia is not an exception to the rule. These things happen everywhere around the world.”

The US-based Association of Certified Fraud Examiners has the numbers to back this up. In the 2010 Report to the Nations on Occupational Fraud and Abuse, which is based on fraud cases around the world, association president James D. Ratley wrote: “What is perhaps most striking about the data we gathered is how consistent the patterns of fraud are around the globe.

“While some regional differences exist, for the most part occupational fraud seems to operate similarly whether it occurs in Europe, Asia, South America or the United States.”

According to the report, survey participants estimated that the typical organisation loses 5% of its annual revenue to fraud. The association applied the percentage to the estimated 2009 gross world product to come up with the potential total fraud loss of more than US$2.9 trillion.

It is no wonder that forensic accounting is in high demand. In June 2008, the American Institute of Certified Public Accountants formed a committee to develop a certification programme for financial forensics. The goal then was to award 900 credentials by the end of year one. By the end of September 2009, the institute had awarded more than 3,500 certifications.

Special audits are a lot different from the annual audits of companies, which are required by law and are meant to enable the external auditors to form opinions on the accounts of the companies.

The forensic accountants approach the assignments with a markedly different mindset than that of those doing the statutory yearly audits. This is perhaps why Prabhat Kumar, chief consultant at Alliance IFA (M) Sdn Bhd, which provides investigative and forensic accounting services, calls himself an investigator rather than an auditor.

“When auditors go for a job, there’s a presumption in their minds that everything is in good faith. When we go into an investigative audit, we never assume anything in good faith. We do not have any preset notions of good faith,” he says.

“Secondly, auditors are normally governed by the concept of materiality, whereas even small deviations may be to us a hint, a red flag, and we would go in deep to understand and reach a conclusion on what has happened.”

McPhee of Ferrier Hodgson has a similar view. “A forensic accountant is not an auditor. A forensic accountant is someone who can look at a set of financial statements, having an idea of what has actually or what may have transpired, leading to his appointment, and home in on those areas in the financial statements that would require further investigation work,” he explains.

Making it count in court

Another notable trend is the increasing use of special audits to gain leverage in corporate feuds, particularly when the disputes are likely to go to court. This also applies in cases when companies intend to recover stolen funds from the fraudsters.

Says Gabriel Teo, a partner of GTC Associates, an accounting firm that has done several special audits in recent years: “When there are sufficiently serious allegations and the company intends to pursue legal action, it needs to think about getting an external party to provide comfort. It’s about credibility. An independent accountant can state an issue more clearly and with more credibility as per the law.”

Having co-authored a book titled The Accountant as an Expert Witness, Prabhat knows a thing or two about the role of accountants in court cases. “A forensic accountant can assist the court by explaining complex financial issues in a simple manner so that it can be understood together with his expert opinion,” he says.

But the gathering of evidence comes first, of course. Generally, a special audit is only as good as the access to information and personnel, and the quality of the evidence accumulated.

“In a forensic approach, the first thing we tell the client is, ‘Preserve the evidence.’ Their files and computer hard disks must be preserved. There must not be any loss during the chain of events,” says KPMG Forensic’s Tan.

Typically, the forensic accountants review documents and financial data (including information extracted from computer disk drives), do third-party enquiries, sift through publicly available information and conduct interviews. Says Lehmann of Deloitte Malaysia: “It’s very, very much detective work.”

Tan offers another analogy: “In forensics, we’re very much dealing with a jigsaw puzzle. In trying to figure out the modus operandi, you have to piece together the puzzle.”

Most forensic accountants place a premium on information obtained through interviews. Says Teo of GTC Associates: It’s important how we manage people so as to get as much information out of them as possible. It’s all about persuading and using whatever means within the confines that we have. Tip-offs are very crucial. There are always disgruntled people and they are the biggest sources of information.”

But it is not about pushing a suspect into caving in and admitting guilt in the interview. It is no accident that Sukdev of KPMG Forensic and Deloitte Malaysia’s Lehmann are former cops. They understand interview strategies and how to read behaviour and reactions. Such things can be telling and can lead to valuable information.

Says Sukdev: “The interview part is important because we cannot bang tables and do those police stuff. We always say a confession is a bonus. We’re not there to get a confession.”

Then there are others who insist that the X-factor comes from deep experience in financial matters. “You can’t actually take a course in forensic accounting. To do forensic accounting, you should have a thorough understanding of the financial statements of a company, and how they are pulled together,” says McPhee.

Prabhat has a somewhat similar take. “Wherever I have worked as a finance manager, financial controller or finance director, a number of persons have been forced to leave their jobs. I don’t know why, but when I go through records, my eye will only catch those items that have been manipulated. And I normally don’t forget certain figures. If I see a repeat of a figure I saw six years back, the alarm bells will go off.”

Related Stories: Probing corporate Malaysia When findings are missing Not just greed Top thieving ways

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