Big Four & Leading Accounting and Consulting Firms – news, opinion and career opportunities for aspiring & current professionals & alumni

Fraud On The Rise: Auditors Anticipate Finding Fraud At Clients

By Richard Cornelisse

The aim of the blog is to discuss fraud in general and more specific VAT fraud.  What is the positive correlation? What is the impact on tax controversy, company’s prioritization and the game plan needed to mitigate risks?

“While 37.6 percent of respondents expected to find fraud among the accounts they audit, they anticipated their competitors would find fraud at a much higher rate of 66.9. That represents a disconnect between a given auditor’s expected fraud exposure risk and the general expectations for the industry” Auditors Anticipate Finding Fraud at Clients: Accounting Today.

Top Official Arrested For Bribery

In the Netherlands a top official of a housing organization has been arrested. The housing organization had invested in derivatives and speculated on interest rates. It went wrong and the housing organization needed EUR 1.6 billion to make the payments to the banks.

According to the prosecutor the top official received a kick back for purchasing these financial products and is now investigated for bribery, tax fraud, and money laundering.

In order to survive the housing organization has to raise rents and sell 15,000 houses (within a period of 10 years). The housing organization is the biggest Dutch provider of affordable housing, owning about 89,000 houses.

KPMG withdrew its approval for Vestia’s 2010 annual account.  KPMG said it doubts whether all derivatives have been processed properly in the annual account (Bloomberg).

VAT Fraud

Evaluating post Enron has much really changed from an internal and external control framework if top officials can still execute their ‘evil’ plans.

I have written in my recent blogs about VAT fraud.

Do external auditors investigate and review company’s indirect tax policies and controls?

The same question can be raised about the mandate and associated risks of top officials.

From Netherlands Intensifies Efforts To Combat VAT Fraud:

  1. Nasir Khan had a successful accessories business, a jet-set lifestyle and reputation as a pillar of the community. But all that vanished in December when he was jailed for his part in a £250m VAT fraud – March, 2012
  2. According to a PwC report: “11 percent of VAT revenue is lost annually through fraud – principally ‘missing trader’ or ‘carousel fraud’ – which equates to in the region of €100 billion.

Based on benchmark findings it is doubtful whether VAT fraud (caused internal or external) is in general managed and monitored closely via good functioning internal VAT controls.

“Only 32 percent rate their VAT / GST policies as very good or excellent. Worse still, only 20 percent rate their implementation as very good or excellent. Sounds like most businesses are well behind where they need to be” – KPMG Benchmark Survey 2012 

According to survey findings C-level (including external auditors) often considers VAT still a ‘cash in’ and ‘cash out’. That impacts prioritization and thus likely spending time and money on the set up of  good functioning internal VAT controls.  I refer to my Blog ‘How To Manage The Perception of C-level and Realize Tax Objectives‘.

However, it is recommended due to the intensified efforts to combat VAT fraud by the governments, the cause effect an increase of tax authority scrutiny, to reevaluate the prioritization of VAT overall and set up the right detection controls to manage VAT risks.

From VAT Throughput – Calculating The Taxes:

“What is the effect of increasing VAT/GST rates on this “VAT throughput”?  Governments increase the VAT rates to balance their budget. More VAT/GST in the system equates to more tax authority scrutiny and higher penalties for errors – the greater the amount of tax in the system, the greater the tax risk. Could be that an update of the tax risk register and tax risk evaluation is necessary.”

KPMG says that fraud is on the rise

We have seen similar fraud where goods or companies were sold lower than market value and a company’s official received a kickback or direct or indirectly ownership of the property sold.

Property traders were suspected of forgery, corruption and money laundering and involved in stealing some €250m from their companies. The two most important suspects were the former heads of Bouwfonds (Rabobank)  and the Philips pension fund.

‘The case came to light when a tax inspector checked out one of top official’s (red: name removed) receipts’ (red: a former director at Rabobank’s property development arm Bouwfonds)

‘He asked questions but did not get a clear answer. He then came across a money trail which led to more dubious bills.” DutchNews

KPMG says that fraud is on the rise. According to the latest KPMG Fraud Barometer a total of 546 large frauds were brought before the courts between 2008 and 2011, costing the Australian economy an aggregate value of over $1 billion.

“We have previously found a positive correlation between levels of fraud and periods of financial instability. We are seeing the first of frauds committed against organisations with gaps in internal controls in this cash-constrained environment”  Gary Gill, National Head of KPMG Forensic

Significant findings in this Fraud Barometer include:

  • “80 percent of frauds against commercial businesses are ‘inside jobs’ committed by rank-and-file employees or managers, averaging $1.8 million per fraud. The largest recorded fraud in the Barometer ($45 million) and the largest against an Australian listed company ($19 million) were both insider frauds;
  • frauds committed by management cost Australian businesses $400 million over four years, averaging over $2.78 million per fraud, almost triple the average for non-managers. Managers were the culprits in nine of the eleven ‘superfrauds’ (frauds greater than $10 million);
  • accounting fraud, which invariably involves insiders, weak controls and a lack of detection processes, remains the most common type of fraud;
  • cases related to bribery and corruption are starting to come before the courts as Australia plays catch-up with many other developed economies in toughening its anti-bribery and corruption regime.”

The above study and findings relate to Australia. Are these findings also applicable for the rest of the world?

A Game Plan For Detection And Management

Based on the above examples it might seem that this relates to the real estate industry. That is not the message I want to get across as greed by top officials – Enron scandal, Parmalat scandal, Ahold scandal, Baring Bank (rogue trader Nick Neeson), Societe Generale (rogue trader Jerome Kerviel), Global Financial Crisis etc –  goes beyond that industry.

Sometimes it relates to budget-based incentive targets of the brass. Artificially boosting up company’s performance is not integer but profitable when your bonus is related to that KPI. Often it is simply greed and the opportunity as proper oversight is lacking.

I have written about pitfalls of Budget-based Compensation Targets in my Blog “Pitfalls Of Actual To Budget Exercises Especially In The Downturn“.  I focussed in that blog on disconnect and internal competition within an organization by employees, but a code of conduct such as integrity and common values is something to practice within the entire organization.  The brass has to be role models.

People are getting caught because the fraud itself becomes unmanageable or the company is suddenly not able to fulfill their financial obligations or somebody had reason to whistle. Based on Accounting Today it is not because of proper risk management and controls:

“… typically shows that external audits historically have been among the least effective means of uncovering wrongdoing—well behind accidental discoveries and whistle-blowing” Auditors Anticipate Finding Fraud at Clients: Accounting Today.

An example of a game plan

“Fraud continues to cost Australian organisations and in many cases it’s an internal problem, but fraud should never be seen as an unavoidable cost of doing business. Undertaking robust risk assessments, using data analytics to identify potential fraudulent activity, providing staff with fraud awareness training and putting in place an effective plan for responding to fraud will go a long way in minimising or avoiding losses,”  Gary Gill, National Head of KPMG Forensic

Above game plan can be copied paste from VAT strategic and VAT control framework perspective.

What is your view? Do you agree?

Related Topics

From Management of Reputational Risk:

“The contribution of a tax professional is nowadays not only on not paying more tax than necessary and evaluating associated tax risks when implementing (rate level of tolerance on a risk scale), but should also take in consideration the impact of such planning on the reputation of the company.”

From Recognizing Tax Avoidance Schemes:

“Check out this video by Paul Clitheroe a financial expert and financial commentator. Recommended as it is entertaining and educational at the same time.”

From Audit Defense: Key Considerations:

“The new trend is to have an open dialogue between revenue bodies, taxpayers and tax intermediaries.”

” (…) written ‘agreement’, by which the taxpayer undertakes principally to “actively notify the Tax Administration of any issues with a possible and significant tax risk.”

Richard Cornelisse is CEO of the KEY Group and worked previously as Big4 Partner in the Tax Performance Advisory and Indirect Tax Practice and blogs on Tax Function Effectiveness and Tax Control Framework developments.

Share this post:

Comments are closed.