fraud auditing in turkey thursday 2 6 april 2007 wayne anthony head of crisis management services

Fraud Auditing in TurkeyThursday 26 April 2007

Wayne AnthonyHead of Crisis Management Services

thinking growth *connected with client issues

*connectedthinking

serving client priorities: transactions,performance improvement, crisis

management

Advisory*

Overview

•What is fraud?•Why do people commit fraud?•Common frauds in Turkey•Case studies•What should you look for?•What to do if you suspect fraud?•Questions

What is fraud?

Definition:

“Fraud is a generic term used to denote wrongful or criminal activities to or in an organisation, intended to result in the gain of money or benefits for the perpetrator's. “ PwC GECS2005

UK – Fraud Act 2006 defines fraud under a number of sections including fraud by:

• false representation• failing to disclose information, and• abuse of position.

Why do people commit fraud?

Before someone can commit fraud, it is generally accepted that three conditions must exist:

• The individual must have an incentive (or cause) to commit fraud;

• The individual must identify an opportunity to commit fraud; and

• The individual must be able to rationalise the act (coupled with a low chance of detection).

Fraud

Opportunity Ability to rationalise

Incentive

The “Fraud Triangle”


Incentive

Self-rationalisation

Opportunity

39%

20%

41%

Source: PwC GECS 2005

Insufficient controls

External collaboration

Management over-ride

Internal collaboration

Anonymity with the company

Foreign business customs

26.8%

23.5%

16.3%

14.4%

8.5%

10.5%


Incentive


Opportunity

39%

20%

41%


Expensive lifestyle to maintain

Dissatisfaction with the company

Career disappointment

Layoff/redundancy

52.7%

18.9%

18.9%

9.5%


Incentive


Opportunity

39%

20%

41%


Lacking awareness of wrongdoing

Low temptation threshold

Self-denial of consequences

40.6%

39.1%

20.3%

Common frauds in Turkey?

Common frauds in Turkey

• Off-book transactions especially payroll payments;• Inappropriate use of expense and marketing accounts;• Unethical supplier and customer relationships;• Use of inflated/false invoices to reduce tax liability and also

generate off-book cash funds;• Breaches of local and international regulations relating to

bribing of government officials;• Financial statement manipulation;• Cash frauds covered by false/inflated invoices; and• Misappropriation of company assets for personal use.

Case Study 1 – Employee misappropriation

Case Study 1 – Employee misappropriation

• Multinational machine tools manufacturer – retail operations in Turkey;• Anonymous letter sent to HO regarding the actions of the MD;• Allegations included fraud, theft of company assets and unethical

relationships with suppliers;• The MD controlled through family members the major sub contractor of

the company which he had authorised numerous unofficial payments;• MD had falsified his expenses for the last 7-8 years and had used

company funds to buy personal assets to equip his second home; and• We concluded that company assets have been seriously

misappropriated by the MD. As a result, MD was removed from the company.

Case Study 2 - Employee misappropriation

Case Study 2 - Employee misappropriation

• Textile manufacturer based in Turkey;• A senior accountant, employed for 15 years by the company,

obtained unauthorised online control of one of the company accounts by submitting documents with fake signatures to the bank;

• We identified 67 unauthorised transfers from the company accounts during the last 2 years covered up by false entries in the company's accounting records;

• Transfers to the accountant's personal accounts totalled approximately $2 million; and

• The accountant has been arrested and prosecuted.

Case Study 3 – Regulatory (FCPA) violation

Case Study 3 – Regulatory (FCPA) violation

• Multinational pharmaceuticals manufacturer - distribution operations in Turkey;

• Anonymous call to the Company’s global hotline regarding bribery allegations against some staff of the Turkish subsidiary;

• Senior sales managers and field staff were accused of providing improper gifts to doctors in exchange of purchases;

• Based on our investigation we identified that the doctors were provided expensive gifts (Mobile phones, air conditioners etc.) and improper entertainment; and

• We concluded that several domestic and international regulations have been violated by the sales staff. Several employees involved in these violations were removed from the company.

Case Study 4 – Off-book payments

Case Study 4 – Off-book payments

• Multinational advertising and media company operation in Turkey;• Management used false/fictitious invoices from a ‘friendly supplier’

to generate a pool of off-book cash of approximately USD4-5m over three years period;

• The cash was used to make off book payroll payments for staff, management bonuses, payment to officials and purchase of luxury goods;

• Identified during review by auditors of supplier relationship and round sum cash payments; and

• Management removed and company restructured.

What to look for – Introduction

• Under today's condition and regulations such as SAS 99 - Consideration of Fraud in a Financial Statement Audit when performing an auditing you have to carry out your work with an increased level of professional skepticism

• You need to be looking for anomalies – variation from predictable patterns of behaviour or simply something that seems out of place. This is commonly referred to as:

RED FLAGS: Clues to fraudulent activities

What to look for – Red Flags 1

• Employees official salary too low for market rates or a number of employees on minimum wages which may indicate the practice of off-book payments;

• Employees who have an excessive life style for their level of earnings e.g. Expensive car, jewellery etc;

• Excessive use of journal transactions;• Use of suspense accounts within the financial statements; • Large number of reconciling items on control accounts such as

bank reconciliations;• Senior management related to major customers or suppliers

where favourable terms are used or kick back frauds;


• Inflated invoices are commonly used to generate off book cash which is sent back to the company for illegal uses such as bribes, off book payroll payments etc. consider:

- suppliers who have large frequent round sum transactions;- suppliers who will only deal with senior management or one person in

the finance department or purchase department has very little information on the nature of the suppliers business;

- suppliers with debit balances at the year end; and- suppliers who have high volume of transactions during the year but

zero balance at year end.• Unusual suppliers for the nature of the client’s business which may

indicate assets or services purchased for personal use such as electrical goods, computer equipment, mobile phones, building and decoration services etc.;


• Suppliers that are located overseas in off-shore jurisdictions such as British Virgin Islands;

• Suppliers that have multiple address and or entries on the clients purchase system;

• Bank accounts with large round sum payments or payments made to overseas bank accounts especially off-shore countries such as Cayman Islands, Switzerland etc.;

• Large amount of cash transactions within the business – is it normal or necessary for the type of business.


Recommendation

Conduct interviews and discussions to understand your client’s business in detail to help you to identify anomalies which may

be an indication of fraud and not just agreeing details to documents as they may be fake.

What to do if you suspect fraud or unusual transactions

• Clearly document your concerns;• Do NOT discuss with the client in

the first instance;• Report to the engagement

manager and partner as soon as possible; and

• Partners to seek legal advice and expert assistance on your role and responsibilities as auditor.

Questions

Dispute Analysis & InvestigationsBusiness Recovery Services

Hüsnü Can Dinçsoy Wayne AnthonyAdvisory Services Partner Crisis Management Services Leader+90 212 326 6054 +90 212 326 [email protected] [email protected]

Contact Details

Crisis Management Services*

*connectedthinking

fraud auditing in turkey thursday 2 6 april 2007 wayne anthony head of crisis management services

Documents

fraud trianglepwcwhy

fraud auditing

fraud andthe individual

company accounts

pwc gecs2005uk fraud

company funds

theft of company assets

personal assets