Fraudulent activity can make a severe dent in an organisation’s bottom line, and serves to undermine internal morale. What can CFOs do to combat fraud and what are the weaknesses that incite it in the first place?Fraud

The effects of fraud within an organisation are not just financial. When employees discover that their once-trusted colleagues have been involved with such an act, it has the power to damage morale and serve as bad publicity for the organisation. The latter alone is a potentially large deterrent for future external dealings, a dark stigma surrounding the organisation, potentially bringing down the company.

With a wide range of options available for potential fraudsters, Stuart Frearson, CFO, RIC, believes that a lack of transparency is the biggest threat to an organisation. “It’s a killer,” he says. “In some departments there’s only one person checking the accounts. A lack of outside transparency can also cause problems. All reporting must come back to an independent figure, either a department head, internal audit outside team.”

Stephen Crowe, Director, Forensic Services, Deloitte Middle East, believes that workload designation plays a huge part. “One procedural weakness that leads to most frauds is the lack of proper or functional segregation of duties,” he says. “Is the same employee who processes the payroll also the only person in the organisation seeing the payroll reports? Does the same person in finance with authority to approve payments also have the authority to record that transaction? Are they also the signatory to the bank account, and have responsibility to reconcile the bank statement at the end of the month? These types of circumstances provide opportunities to individuals who are encouraged into fraud by the absence of a second set of eyes on a process.”

Michael Adlem, Partner and Head of Fraud Investigation & Dispute Services, MENA, EY, is mindful of flimsy hiring practices that lead to a lack of research being done on employees, and teams consisting of people operating together to commit fraud. “Companies sometimes hire an employee in a senior position, and within months the entire team working under that employee will consist of people who are all connected to that person in some way or another,” he says. “Those employees are loyal to their hirer and not the company. It’s important to keep teams diversified and ensure there aren’t any such cliques. Unfortunately a lack of background research and too much trust of candidates contribute to a higher turnaround rate and higher risk of fraud.”

While fraud can range in its toxicity and scope, some types are more prevalent through their easier accessibility to culprits. “In terms of the most damaging types of fraud, history has shown that financial misstatement has the most catastrophic impact, both in terms of pure materiality, and in reputation,” Crowe says. “One only needs to think of the collapses of Enron and WorldCom to understand the far reaching implications of overstating earnings. Bribery and corruption matters are also high risk, and continue to be a concern in the Middle East, especially for those businesses who have connections to the US or Europe.”

Adlem sees cash theft as being the most common type of fraud in this part of the world. “We deal with a number of cases of senior management teams who misstate or hide their companies’ real financials, to make the figures look more impressive so they can get a better bonus or so they can hide failures from an auditor,” he says. “Bribery is also prevalent, particularly in cases where companies want to win contracts.”

Frearson, meanwhile, is wary of those who able to smooth-talk their way to cash. “In all the years I’ve been auditing, the worst examples are insurance scams,” he says. “More often than not, rather than relying on being cunning financial scams they depend on fraud of character and manipulation.”

One of the largest scale fraud types in the Middle East is that within the region’s supper-rich families, often of royal status. While the families themselves have vast amounts of cash to lose, the legal and economic implications for the region’s ordinary citizens could be great. The case of the Al Gosaibi family fraud in Saudi Arabia sticks out, where Maan Al Sanea – who had previously married into the Al Gosaibi family – was accused of committing a $150 million fraud. Positions of power are a common magnet for fraud, according to Adlem, who says that figures in senior management roles also pose a higher risk.

“Senior management figures should be the most heavily scrutinised,” he says. “They are in a position that gives them the greatest power to commit fraud. The more due diligence that can be done on these people, the better.”

Crowe agrees with the assertion, and says that the region’s CFO’s should not be intimidated into complying with such illicit practices. “There are a number of surveys that report asset misappropriation as the most prevalent in the Middle East,” he says. “From the matters we have investigated in these past five years, the most prevalent types of organisational fraud have stemmed from the abuse of position by a person in senior management who treats the business as their own cash point to extract money. CFO’s can be exposed to pressures from management to ‘massage’ the numbers with the obvious incentive being increased bonuses and stock options. Therefore it is important that other functions within the company also have responsibility for detection and fraud prevention.”

One of the most critical stages in combating fraud is what is done in the aftermath of an offence. Crowe says that implementing the correct protocols goes a long way in rectifying issues. “The key here is to ensure that the organisation has an established response plan, which is ratified by management, with clear responsibility and escalation points, and terms of reference,” he says. “Having established lines of notification and subsequent approval points for the compilation of an appropriate and proportional investigation plan is critical.”

Adlem says that although some regional entities have made progress in terms of their responsiveness, there is still work to be done. “Most corporate organisations in the Middle East don’t have appropriate fraud response plans,” he says. “The Abu Dhabi Government has done quite a lot to advance itself in this respect, but they are in the minority.”
He also believes that the decision to launch a full-blown criminal investigation should not be taken lightly. “In the heat of the moment a victim often decides that they want to take legal action against the culprit,” he says. “But that can take years in this part of the world. Two years down the line, a case can still be dragging on. Launching an investigation should be a last resort in reality. The earlier that action is taken, the shorter the trail and the easier it is to limit damage.”

Frearson also believes that faster action will lead to more effective results. “The biggest mistake that fraud victims can make is to bury their head in the sand,” he says. “They need to call the police as soon as possible; shying away from transparency is the worst possible approach.”