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Combating white-collar crime?

By Tan How Choon and Lee Zhen Ni

CUTTING-EDGE DIGITAL SKILLS AND TIMELESS ETHICAL VALUES NEEDED

White-collar crimes are increasingly sophisticated and transnational. The nature and scale of recent cases have been mind-boggling. In April 2018, forensic accountants from RSM Corporate Advisory highlighted issues involving possible roundtripping transactions, fabrication and alteration of transaction documents, as well as possible fraudulent and erroneous claims under the Productivity and Innovation Credit (PIC) tax scheme, with the involvement of senior company officers at a local listed company, Trek 2000 International. In December 2017, Keppel Offshore & Marine (Keppel O&M) agreed to pay US$422 million (S$567 million) to resolve a foreign bribery investigation involving authorities across three jurisdictions.

According to the Commercial Affairs Department (CAD) annual report released in November 2018, the number of suspicious transaction reports submitted in 2017 was 35,471, which is a 4% increase from the previous year. In 2018, the Corrupt Practices Investigation Bureau (CPIB) received 358 corruption-related reports or 3% lower than in 2017. But, there was a 4% increase in the number of new registered cases for investigation and 88% of these cases involved private sector individuals. With Singapore’s position as an international financial centre, there is increased risk of the country being exposed to cross-border money laundering and terrorist financing activities. The advancement of technology has added to the complexities of such financial crime.

To safeguard Singapore’s position as a financial hub, forensic accountants or professionals are more in demand than ever. The role of forensic accountants goes beyond traditional accounting, and specialised skills and competences are required as they take on some of the most challenging assignments to detect and counter fraud. There is a distinctive advantage that forensic accountants, with their business acumen, insights into financial statements and information analysis and knowledge of corporate governance, have in white-collar crime investigation over investigators who are non-accounting trained in white-collar crime investigation. Forensic accountants could be working internally within their organisations or with clients on suspected fraud investigations, strengthening internal control, fraud management and compliance frameworks or investigating white-collar crimes including financial statement fraud, misappropriation of funds, money laundering or activities surrounding the funding and financing of terrorism.

There is a distinctive advantage that forensic accountants, with their business acumen, insights into financial statements and information analysis and knowledge of corporate governance, have in white-collar crime investigation over investigators who are non-accounting trained in white-collar crime investigation.

FRAUD PREVENTION STARTS WITH HIRING FOR INTEGRITY

Integrity is key to financial crime prevention. Corporate governance and fraud risk management work well only with the right tone at the top, which will then cascade down to individual staff members of each organisation. Collusion at the senior management level will render any governance and internal controls ineffective. Therefore, recruiting personnel with integrity to fill key senior management positions is of utmost priority. The emphasis on care and prudence in governance and financial management within an organisation will reduce the opportunities presented to individuals to commit fraud, but it will not eradicate the pressure and rationalisation factors that influence fraudulent behaviour.

In the prevention of financial crime, organisations are increasingly aware of the importance of a robust fraud risk management framework. This requires more than effective internal controls as it also requires ongoing assessment based on a fraud risk management framework, mitigating anti-fraud controls, continuous monitoring of controls using digital tools, identification of red flags early and effective responses to fraud incidents when they occur to reduce the impact of such incidents. Digital technologies, deployed in investigations, are also used by organisations during ongoing monitoring of anti-fraud controls to identify fraud signals through links to accounting systems for extraction of data and scheduling of message alerts based on business rules for appropriate follow-up. Examples of such fraud signals include risky business partners and vendors as well as anomalies from past transactional data.

ISCA FINANCIAL FORENSIC ACCOUNTING (FFA) QUALIFICATION

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DIGITAL SKILLS ARE PART OF THE FORENSIC ACCOUNTANT’S TOOLKIT

To uncover and detect financial crime, forensic accountants employ various investigative techniques in the gathering and management of evidence and documents to provide litigation support for criminal prosecution, such as those identified in Trek 2000 International and Keppel O&M. Today, forensic accountants tap on data analytics and forensic software to gather the necessary evidence from the voluminous data generated in today’s businesses.

In the Trek 2000 International forensic review, RSM found that certain sales to two companies, T-Data Systems and S-Com HK, were not properly justified, and roundtripping transactions caused overstatements of revenue, cost of sales and profits. Roundtripping fraud, a type of financial statement fraud to fabricate fictitious transactions with no real economic value created, is generally committed by senior management staff who have the authority and whose remuneration is linked to the performance of the business. Forensic accountants leverage forensic software to uncover roundtripping fraud. The functions of such software include link analysis, which analyses the correlation between various types of objects; keyword indexing and search capability of hard disk documents; recovery of deleted files and reconstruction of missing data from the hard disk, and the review of log files in the server or personal computers. Evidence can also be picked up from the perpetrator’s electronic footprint through his or her access of the Internet and social media.

RSM’s review of Trek 2000 International found strong indications that bank advice amounting to US$250,000 and US$2.4 million were digitally altered to deceive and mislead the auditors. The use of digital tools also plays a key role in the detection and prevention of the fabrication and alteration of transaction documents. Data analytics software that incorporates artificial intelligence (AI) increases the efficacy in detecting such fraud as it has the capability to combine business rules, predictive modelling, anomaly detection, text mining and network link analysis to uncover hidden relationships and patterns of behaviour. Significant losses from fabrication and alteration of transaction documents can be prevented by identifying hidden relationships, subtle patterns of behaviour and suspicious activities using AI and data analytics.

Starting from 2001, for more than 10 years, Keppel O&M “knowingly and wilfully” paid bribes to win a total of 13 contracts with Petrobras and Sete Brasil. Detection of bribery and corruption is challenging as it usually involves willing parties who have decided to collude with each other. As such, corruption and bribery can still occur in organisations with sound corporate governance and internal controls. Uncovering bribery and corruption evidence generally involves tip-offs, and the analysis of bribery and corruption amounts in accounting records. In the case of Keppel O&M, the bribes amounting to millions of dollars were disguised as large commissions to a consultant under legitimate consulting agreements.

In CPIB’s annual report 2017 (cited earlier), the agency had highlighted the need for investment in terms of support capabilities and officers’ skills such as interview, financial investigation and digital forensics. It was also mentioned that CPIB has a highly specialised unit which conducts financial investigations to enable swift identification, tracing and confiscation of corrupt proceeds. The involvement of CPIB’s Computer Forensics Branch is crucial in providing support to investigations, which is increasingly important in today’s digital age as information and evidence will be stored in digital form.

With technology transforming the nature of financial crime and forensic investigations, today’s investigators and forensic accountants must possess not only strong financial statements analysis capabilities and deep knowledge of corporate governance, they need cutting-edge digital skills. However, no matter how rapidly the world changes, ethics and integrity, which are the cornerstone of the accountancy profession, remain timeless and ever more relevant.

This article was first published in IS Chartered Accountant on May 2019. You can read the original version here.


Tan How Choon is Deputy Chairperson, ISCA Financial Forensic Accounting Oversight Committee, and Lee Zhen Ni is Senior Manager, Professional Development and Learning, ISCA.