At any given moment, there is a certain percentage of the population that s up to no good. J. Edgar Hoover. Compliance & Ethics Institute

Transcription

1 Compliance & Ethics Institute 604 Auditing for Corruption in Emerging Markets: Applying fraud detection skills to reduce corruption October 14, 2012 At any given moment, there is a certain percentage of the population that s up to no good. J. Edgar Hoover 1 Compliance & Ethics Institute - Auditing for Corruption in Emerging Markets 1

2 Discussion Contents 1. Compare and Contrast - Fraud vs. Corruption 2. Corruption Environment in Key Emerging Markets 3. How to leverage Fraud Detection and Fraud Auditing 2 Compliance & Ethics Institute - Auditing for Corruption in Emerging Markets Compare and Contrast Fraud vs. Corruption 2

3 Fraud vs. Corruption Fraud: Deriving undue benefit by bypassing some controls or bending some rules. Fraud schemes are used to commit corrupt activities. Asset Misappropriation Financial statement irregularities Unauthorized Expenditures Unauthorized Revenue Corruption 4 Compliance & Ethics Institute - Auditing for Corruption in Emerging Markets Fraud vs. Corruption Corruption: Takes place in the form of providing illicit benefits; subset of fraud; harder to find; narrower scope than fraud. 5 Compliance & Ethics Institute - Auditing for Corruption in Emerging Markets 3

4 Key Characteristics Fraud vs. Corruption Characteristics Fraud Corruption Committed by those inside the organization Committed by those outside the organization Loss to the company is fairly apparent or quantifiable Involves breach of trust and abuse of authority/access Act is intentional Requires the involvement of more than one person Requires elements of opportunity, incentive and rationalization 6 Compliance & Ethics Institute - Auditing for Corruption in Emerging Markets Dissecting Corruption FRAUD Unauthorized Expenditure/Revenue CORRUPTION Asset Misappropriation Corruption Bribery Extortion Nepotism Financial Statement Fraud Embezzlement Source: Antifraud Programs & Controls Deloitte FAS 7 Compliance & Ethics Institute - Auditing for Corruption in Emerging Markets 4

5 Corruption Environment in Key Emerging Markets Emerging Markets 9 Compliance & Ethics Institute - Auditing for Corruption in Emerging Markets 5

6 High Risk Markets for Corruption Compliance & Ethics Institute - Auditing for Corruption in Emerging Markets Corruption High Risk Areas and Red Flags Emerging Market Corruption Risks While emerging markets can present opportunities to access new customers and resources, they also bring significant integrity and corruption risks Travel, gifts and entertainment Use of agents, consultants, distributors and other third parties Bids & tenders Contracting Expense reports Commission payments Discounts/Rebates Donations Political contributions Customs payments 11 Compliance & Ethics Institute - Auditing for Corruption in Emerging Markets 6

7 Tender and contracting Critical success factors Key Corruption Risks Country 1 Russia Customs payments to minimize duties and taxes Expediting licenses and permits Payments for service execution Fictitious invoices/paperwork Free trips/lavish gifts Cash (loans/slush funds) Hidden interests/contract awards Unique corruption mechanisms Bribes to obtain services (medical/educational) Payments to avoid confiscation of property by district prosecutors Use of shell companies to facilitate bribes India China Brazil Slush funds Excessive commissions Awarding lucrative contracts to relatives of public officials Charitable contributions to relatives of public officials Red envelope (cash) Wine, liquor, cigarettes. Baby formula (in excessive quantities) Loans Hidden interests of public officials in contracts/vendor arrangements Vague contract definitions Bids rigged by public officials Payments to customs / tax officials Mexico Mordida or bites low level bribes Use of third-parties to funnel funds to government officials Customs payments to facilitate import/export of goods (particularly raw materials) 12 Compliance & Ethics Institute - Auditing for Corruption in Emerging Markets How to Leverage Fraud Detection and Fraud Auditing 7

8 Typical Fraud Audit Procedures Fraud Audit Vendor Audit Procedures Cash Reconciliations Electronic Data Collection & Analysis Informational & Targeted Interviews Transaction Analysis GL Account Analysis Key Initial Areas of Concentration in a Corruption Audit Review include those most relevant to auditing for Corruption 14 Compliance & Ethics Institute - Auditing for Corruption in Emerging Markets Where to Audit for Corruption: GL Accounts and Transaction Analysis High-Risk GL Accounts Travel Allowances Licenses & Permits Meals, Entertainment & Gift Expense Employee Loans & Advances Vendor Pre-Payments Contributions & Donations Internal Commissions/bonus Excess Payment & Facilitation Expense Consulting Fees & Services (Professional Fees) Promotional/Marketing Customs & Brokerage (Import/Export) 15 Compliance & Ethics Institute - Auditing for Corruption in Emerging Markets 8

9 Corruption Audit Interviews Who should be involved? CFO Internal Audit Operations International Finance Accounting IT/Systems Compliance Corporate Development Purchasing Human Resources Global Sales Marketing Supply Chain Real Estate Tax/ Treasury 16 Compliance & Ethics Institute - Auditing for Corruption in Emerging Markets Internal Audit Approach Integrating Leading Practices to Reduce the Risk of Corruption and Fraud Compliance generally driving process with minimal or no internal audit input Not doing stand-alone FCPA audits or FCPA risk assessments Internal audit not trained to detect FCPA violations Proactive testing, if any, is not risk based and often includes random selections FCPA policies do not adequately identify internal audit s role Dedicated and properly trained audit team focused on FCPA Structured risk assessment and gap analysis Marriage of compliance, legal, and audit Stand-alone FCPA reviews Testing of high-risk locations on at least a rotating basis Use of electronic data anomaly tools to identify and test high risk transactions Regular, open communication channel with Legal and Compliance in order to have timely information on potential risk areas and to assist Legal/Compliance and/or adjust internal audit projects to address such risk areas 17 Compliance & Ethics Institute - Auditing for Corruption in Emerging Markets 9

10 BP3 When Does An Audit Become An Investigation? Expand sample, expand scope, or perform additional procedures. Look for additional instances or patterns. Ask additional questions framed in the context of the internal audit (e.g., how could a situation like this occur?). Any indication of potential perpetrators? Cease audit work if there appears to be a predication for suspecting fraud. Maintain copies of documents and data files that support the indicators/red flags of fraud. 18 Compliance & Ethics Institute - Auditing for Corruption in Emerging Markets How to conduct a forensic investigation 19 Compliance & Ethics Institute - Auditing for Corruption in Emerging Markets 10

11 Slide 19 BP3 If you added a picture it isn't showing up in the bottom right corner. Pollard, William, 9/18/2012

12 Questions Leading Today s Presentation Bill Pollard Partner Deloitte Financial Advisory Services LLP +1 (312) wpollard@deloitte.com Bill is a partner in the Forensic & Dispute Services practice of Deloitte Financial Advisory Services LLP in Chicago. He has managed and conducted a broad range of forensic accounting and corporate investigations for public and private companies, government agencies and private individuals. He has spent almost two decades providing financial advisory services to clients in the manufacturing, construction, governmental, insurance, and not-for-profit industries, among others. The engagements have involved complex financial accounting related matters, including corporate investigations, accounting restatements, SEC investigations, white collar crimes and litigation support, as well as consulting with clients on FCPA compliance, fraud controls and anti-fraud programs. Vito Giovingo Senior Manager Deloitte Financial Advisory Services LLP +1 (312) vgiovingo@deloitte.com Vito Giovingo is a senior manager in the Forensic & Dispute Services group of Deloitte Financial Advisory Services LLP in Chicago. He has extensive experience providing forensic investigation and global anti-corruption consulting services to clients in a variety of industries including retail, manufacturing, life sciences, financial services, and technology. Vito has conducted investigations of allegations of bribery and corruption, including conducting interviews, reading witness documentation, and analyzing financial books and records. He has also assisted companies with pre-acquisition due diligence procedures related to anti-corruption in addition to providing assistance with corporate compliance program development and enhancement. Vito also has experience conducting financial fraud investigations, financial statement restatements and bankruptcy claims administration for clients in various industries. 21 Compliance & Ethics Institute - Auditing for Corruption in Emerging Markets 11

13 About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. As used in this document, Deloitte means Deloitte & Touche LLP and Deloitte Financial Advisory Services LLP, which are separate subsidiaries of Deloitte LLP. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Copyright 2008 Deloitte Development LLC. All rights reserved 22 Compliance & Ethics Institute - Auditing for Corruption in Emerging Markets 12