Learnings from investigating financial statement fraud

blog.post.6thMay.KPMG

This article comments not only on what has happened in corporate failures elsewhere in the world but also accurately describes the circumstances of many corporate failures in South Africa.

Although little has been recorded of the fraudulent activity that contributed to or resulted in the corporate failures in South Africa, KPMG had the opportunity to be involved in a number of those investigations to a larger or lesser extent.

Although greed, ambitious corporate growth, excessive interest in maintaining stock prices, stock market expectations and weak independent directors and audit committees, were definitely a common theme, these were not the only reasons that contributed to the frauds.

Another aspect that has always come up during these investigations into corporate failures and extensive financial statement fraud is the role the financial manager played in assisting management in concealing the true nature of the fraudulent activity going on. In many of these instances, the financial manager was not even directly benefiting from the fraudulent activity. However, their evasiveness during the audit or inability to answer probing questions, even during the forensic investigations, have made it impossible or very difficult to uncover the full extent of the financial statement frauds. The response of these financial managers differ from case-to-case, but trends that emerged were the following:

  • Pride in their ability to record the transaction in such a manner that the auditors did not pick it up
  • A belief that as long as they did not answer the auditor’s question, but referred him/her to management, they were not party to the fraud or the cover up
  • A belief that they are not to question their boss and therefore have to do what he/she says they should do
  • Rationalisation of their conduct and role in the transaction, to the extent that the financial managers do not believe that they did anything wrong.
  • Only recently, in a matter ongoing now since 1999, did the financial manager finally accept that although he may have an accounting explanation for the transactions he processed, legally, he is unable to substantiate the transactions. This distinction, in the mind of the financial manager, is something that can be definitely noted in future investigations to come.

Only recently, in a matter ongoing now since 1999, did the financial manager finally accept that although he may have an accounting explanation for the transactions he processed, legally, he is unable to substantiate the transactions. This distinction, in the mind of the financial manager, is something that can be definitely noted in future investigations to come.

This article was taken from KMPG’s South African blog, to visit the blog click here 

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