Welcome to the first issue of Ernst & Young Forensic Services' "Know Fraud"

Having spent nearly 50% of my time during the last few years presenting at fraud seminars, the question I'm asked the most is "What are the fraudster's latest scams and how do I best protect my company?" This newsletter is therefore designed as an ongoing response to all your requests and as a reponse to the escalating growth of employee theft and organised crime syndicate activity.

Unfortunately, many organisations wait until they have been defrauded before they start taking the fraud threat seriously. This is where we come in. Each issue of "Know Fraud" will contain an actual fraud case study and it will also provide updates about the latest scams and anti-fraud technology developments. It will provide intelligent advice on how you can proactively protect your organisation from being defrauded.

If you have a story you would like to share with our readers please call me on 083 611 0161 or email fazekma@ey.co.za. By sharing knowledge we will all benefit in the prevention and detection of fraud.

"The statement that fraud, theft and corruption are taking on alarming proportions in SA, and other parts of the world, does not emphasise the true seriousness of the situation. The gravity of the extent, increase and consequence of these crimes cannot be overemphasised." - Business Day, Mar 01 2001.

Fraud can occur in any organisation. Take Enron, with a market capitalisation of $80 billion and rated No 7 on the Fortune 500 list. Just a year ago Enron was one of the world's most admired companies while today, because of fraud, it's in bankruptcy!

What happened? According to a lawsuit filed in Houston federal court, Enron Corp. executives and board members defrauded shareholders by inflating earnings and engaging in insider trading before the energy company's collapse. The suit says officials of Enron, whose U.S. bankruptcy filing was the biggest ever, engaged in a 3-year pattern of fraud and deception that caused shares to plummet 99%.

"Enron is a grotesque fraud - a financial monstrosity of manipulation and falsification," court papers filed with the lawsuit said. "As a result, thousands of investors have been cheated out of billions of dollars and countless lives and retirements have been destroyed."

Both Enron's management and auditors have been blamed for the debacle. In addition to the question of 'where were the auditors?' other questions being asked are 'where were the press; the investment analysts; and the SEC (Securities & Exchange Commission)?'

Neither Ernst & Young nor our clients want to see our organisations' names in the following type of press headlines:

• "Enron Executives Face Subpoenas" Washington Post, 03 Jan 2002
• "Criminal charges threaten auditor's survival" The Wall Street Journal, 18 March 2002

The answer is a preventative partnership approach in which our forensic experts will, in conjunction with the audit team and your management, identify the major fraud risks and implement immediate corrective actions.

Don't wait until your proverbial fraud molehills end up as "Enron mountains" - act now.

CASE STUDY 1

Brief description of the fraud	Amount: R120 000
A junior manager perpetrated a fraud over a number of years by altering expense claims and other documents after approval. The original claim would be submitted for a minor amount which would be approved without reference to supporting documentation. The manager would subsequently dramatically increase the amount claimed before submitting it for payment. Suspicions from colleagues eventually resulted in an investigation and arrest.
	Who did it? Insider Junior Manager 7 years' service Ideal Controls Regular review and monitoring of expenditure on a department basis Proper segregation of duties so that the originator cannot get access to the claim once approved
Controls in place at the time Authorisation of all expense claims by management before payment Supporting documentation required for all expense claims Expenses were reviewed monthly Disclaimer: The information contained in the publication is intended to provide general guidance. It is not intended to replace the specific advice which should be sought from an appropriate professional advisor before taking any particular course of action. How they were circumvented The fraudster ensured the claims were properly authorised before altering any details Due to the size of the original claims, no supporting documents were checked Expenses were reviewed in total for the company - the increases were minor compared to overall costs What about? Employees can falsify supporting documentation therefore all documents should be reviewed Looking for extravagant costs such as 1st class tickets and expensive accomodation using a digital filter like EY3D or ACL Regular assessments of fraud resistant controls using a risk identification tool like EyMMUNE Fraud awareness training for all staff so that they are able to recognise the red flags for fraud Implementing a fraud reporting mechanism like a toll-free line

For more information on Ernst & Young's Fraud Risk Identification, call Mario Fazekas on 083 611 0161 or email fazekma@ey.co.za

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