Stolen Fruit is the Sweetest..? or the Bitterest...?

The professorial lecture by Professor Dr Normah Omar, Director of the Accounting Research Institute (ARI) went smoothly as scheduled.  The lecture title - "Financial Criminology: Stolen Fruit is the Sweetest...? or the Bitterest? was able to capture interest as evidenced by a large audience turnout of more than 450 participants.  There's indeed a good mix of participants - fellow professors, industry players, bankers, regulators, enforcement agencies, professional bodies, academia and students. Special credits should be given to the organizing committee, Faculty of Accountancy for showcasing an interesting and "flawless" event - good food, great crowd, interesting lecture content and most importantly superb time management.  Everything was on schedule.  Participants were given a copy of the Professorial Lecture book as a momento.  Professor's Normah's lecture was divided into five segments: (1) Introduction to the concepts of financial fraud & criminology; (2) Financial Statement Fraud & its related theories; (3) International Auditing Standards - SAS 99 & ISA 240; (5) A Malaysian Empirical Study on "Consideration of Fraud in the Audit of Financial Statement and (6) Recommendations & Conclusion.  Considering audiences are from various backgrounds and experiences, Professor Dr Normah was deliberate in "engaging" them with her lecture.  As serious as the concept "Financial Criminology" may portray, Prof Normah nevertheless has successfully mixed humour, wit and professional wisdom to make the topic interesting and alive.  In her final message, Prof Normah further reiterated that the fight against financial crime is the responsibility of all.  Everyone should become a "whistleblower" to crime....

Al Rajhi AML Awareness Week

Two researchers (Prof Dr Normah & Associate Prof Dr Zuraidah) from the Accounting Research Institute (ARI) have been invited by Al Rajhi Bank to present a short lecture entitled "The Use of Non-Profit Organisations(NPOs) as a Conduit to Money Laundering and Terrorism Financing Activities".  Basically the topic discusses recent findings published by both the Financial Action Task Force (FATF) and the Asia Pacific Group of Anti Money Laundering (APG) on evaluation of NPOs globally.  Al Rajhi organises the event as part of its Anti-Money Laundering Awareness program.  In the United Kingdom, the NPO sector is also called the "third sector", following the public and private sectors.  The presence of a large non-profit sector in a country is seen as an indicator of a healthy economy in local and national financial measurements.  With a growing number of non-profit organizations focused on social services, the environment, education and other unmet needs throughout society, the nonprofit sector is increasingly central to the health and well-being of society (CSR) .  As a third sector, NPOs when transacting with financial institutions must also be subjected to the "due diligence" and "Know your client" policies.  The APG has also published a typology titled "Material Information" which necessitates NPOs to furnish the following:

1. Different types of revenues (e.g. membership fees, grants, donation etc)
2. Activities for generating funds (e.g. receipts from dinner and sales of books)
3. Investment income if any (e.g. rental, dividend)
4. Expenditure and its distribution
5. List of personnel (members, directors etc)
6. Governance  and anti-fraud (meetings, reports etc)
7. Beneficiaries (in and outside of Malaysia)

ARI-LZS Collaboration

The Accounting Research Institute (ARI) through its Deputy Director, Professor Dr Rashidah Abdul Rahman met with Tuan Hj Mohamed Izam Bin Mohamed Yusof, Chief Executive Officer of Lembaga Zakat Selangor (LZS) at his office in Shah Alam. Puan Ariffa Ariffin (General Manager Corporate Services, Puan Azimah and Puan Raja Maimunah Raja Ngah (Executive Payment Distribution) were also at the meeting. The meeting was held mainly to discuss possible research collaboration between Accounting Research Institute and Lembaga Zakat Selangor. An MOU will be signed between the two organisations in due course.   Professor Dr Rashidah is also currently heading ARI's Islamic Finance research cluster.

i-CSR @ BizMalaysia

The Accounting Research Institute (ARI) has been invited by Radio Television Malaysia (RTM) to be guest of its live business news segment BizMalaysia on RTM 1.  ARI was represented by its director, Prof Dr Normah Omar and Associate Professor Dr Faizah Darus, Head of the Asia-Pacific Centre of Sustainability (APCeS).  During the fifteen-minute live telecast, Prof Dr Normah firstly introduced ARI and explained ARI's aspiration in driving its niche research agenda in the area of Islamic Financial Criminology (IFC).  Essentially, IFC centres around two main domains of Islamic Finance & Muamalat and Financial Criminology.  Then discussions were focused on promoting one particular research project, namely  i-CSR.  The i-CSR framework has been jointly developed by ARI researchers, and the project is headed by Associate Professor Dr Faizah Darus.  Premised on the principles of Maqasid, Maslahah and Dakwah,  ARI hopes to showcase i-CSR as one of Malaysia's Islamic Finance products.  Preliminary works have begun in 2011 with ARI researchers and their Indonesian counterparts - researchers from Sabelas Maret University and Universitas Mujahid organizing Muzakarah with renowned Islamic scholars in Indonesia.  Two upcoming events will be held in Kuala Lumpur where both Islamic scholars and practitioners will participate in an intellectual discourse and a workshop to finalize the draft framework.  Once the draft is ready, selected Islamic banks will pilot test the product. 

i- CSR Intellectual Discourse

The Accounting Research Institute (ARI), Universiti Teknologi MARA (UiTM) is currently funding a research project to develop an Islamic Corporate Social Responsibility (i-CSR) General Practice Framework. This is in line with ARI’s niche area of research in Islamic Financial Criminology which comprises of Islamic Finance and Muamalat and Financial Criminology. The i-CSR research project which is under the Islamic Finance and Muamalat domain is currently undertaken by a group of ARI’s researchers headed by Associate Prof Dr Faizah Darus of the UiTM – ACCA Asia-Pacific Centre for Sustainability (APCeS) together with a group of researchers from Universiti Sains Malaysia (USM), Sebelas Maret University, Indonesia and Universitas Muhammadiyah Surakarta, Indonesia.  APCeS is one of ARI’s research centres which was set-up in 2008 in collaboration with ACCA with the objective to bring about qualitative improvements in the Corporate Sustainability Practices within the Asia-Pacific region. The aim of the i-CSR research project is to establish an i-CSR General Practice Framework for Islamic institutions based on Syariah principles in which, it will provide a holistic guidance on CSR for Islamic Institutions. In order to gather feedbacks on the Islamic concept of the proposed framework from Islamic economic scholars, Syariah Supervisory Board members, and Islamic jurist (ulama), ARI in collaboration with  the Islamic Banking and Finance Institute Malaysia (IBFIM) will be organizing a half-day intellectual discourse scheduled to be held on Tuesday 6^th November 2012 at IBFIM.

Implications of the Auditing Standards

Both SAS 99 and ISA 240 provide guidance to financial auditors to consider fraud in the audit of financial statement.  Within the Rule-Based, Sarbanes-Oxley environment in the USA, it is mandatory for auditors to include the proposed guidance into their audit planning.  For IFAC’s Principle-Based standards, auditors are to use the guidelines to provide reasonable assurance that the financial statements are free from risks.  There are nevertheless, several other implications of the standards on auditors. Firstly, it is important to note that both standards (SAS 99 and ISA 240) provide guidance to auditors in fulfilling their responsibility, as it relates to fraud, in an audit of financial statements.  Technically, both standards are only applicable to financial statement audits.  However, concepts and guidance are appropriate for other types of audits. Secondly, the standards ensure that “the auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.”  Although even in a properly planned and performed audit, auditor may not be able to detect a material misstatement resulting from fraud, the standards can only provide reasonable assurance and not absolute assurance. Thirdly, it is the management’s responsibility to design and implement anti-fraud programs and internal control system to prevent, deter, and detect fraud.  Such responsibility may include “setting the proper tone from the top”; creating and maintaining a culture of honesty and ethics; and establishing appropriate control mechanisms to prevent and detect fraud in organizations.

ISA 240

 Whilst the “rules-based” SAS 99 is enforceable in the United States of America, elsewhere, the International Federation of Accountants (IFAC), a global accountancy organization issues similar standard - the International Standard on Auditing 240 (ISA 240) which focuses on “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”.   ISA 240 is “principle-based”, which means that the standard provides a conceptual basis for auditors to follow instead of detailed rules.  Under principles-based approach, the standard lays out the key objectives, then relate the auditor’s “responsibility to fraud when auditing financial statement” to some common examples.  Some elements of judgments are allowed to be exercised by the auditors. In the case of ISA 240 on “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”, the standard outlines eleven key responsibilities that auditors should consider:  Characteristics of  Fraud;          Professional Skepticism; Discussion among the Engagement Team; Risk Assessment Procedures and Related Activities;  Identification and Assessment of the Risks of Material Misstatement Due to Fraud;  Responses to the Assessed Risks of Material Misstatement Due to Fraud;  Evaluation of Audit Evidence;  Inability of Auditor to Continue the Audit Engagement;  Written Representations;                 Communications to Management and with those Charged with Governance  and  Communications to Regulatory and Enforcement Authorities

 

 

US-Based SAS 99

SAS 99 is a US-Based standard established to provide guidelines to auditors (in the USA) when considering fraud in the audit of financial statements.  The standard was drawn in response to accounting scandals such as Enron, WorldCom, Adelphia, and Tyco, the Statement on Auditing Standards 99 (SAS 99) was issued by the Auditing Standards Board of the AICPA in 2002 within the powerful legislation of the Sarbenes-Oxley Act 2002.  The Sarbanes-Oxley Act or more commonly known as SOX “requires all public companies to provide more financial information than ever before, and holds corporate directors and officers personally accountable for the accuracy of financial disclosures”.  Essentially, the Act which is enforceable to all companies in the USA (and their respective subsidiary and associate companies elsewhere globally) is administered by the Securities and Exchange Commission (SEC).  For public companies, the SEC sets deadlines for compliance and publishes rules on requirements.  Because it is rules-driven, any standards or guidelines issued within its legislation are known as “rules-based”.  SAS 99 is one example of rules-based auditing standards.  Effectively, auditors must comply with all the detail rules when auditing a company’s financial statements.  Many  accountants and auditors favor the prospect of using rules-based standards, because in the absence of rules they could be brought to court if their judgments of the financial statements were incorrect. When there are strict rules that need to be followed, the possibility of lawsuits is diminished. Having a set of rules can increase accuracy and reduce the ambiguity that can trigger aggressive reporting decisions by management. SAS 99 is part of the AICPA’s anti-fraud program which aims to provide accountants and auditors with clarified and focused auditing guidance on fraud.  Similarly, it reemphasizes the role of entity management and boards in preventing and detecting fraud.  With the prospect of using SAS as a guideline to consider fraud when auditing financial statements, the standard has been arranged to cover nine key components: Description and characteristics of fraud;  Professional skepticism; Brainstorming sessions among key engagement personal; Information gathering;  Risk Identification; Evaluation of an entity's programs and controls;  Results of the Assessment; Communication of possible fraud and

Documentation of the auditor's consideration of fraud.

Financial Statement Fraud

Financial statements are traditionally prepared by accountants to provide business owners and other interested stakeholders with an accurate account of their financial status at any one specific point in time.  If however, the financial statements do not make accurate representations of the company’s financial status, they could be due either to errors or fraud.  Financial statement fraud  occurs when any pertinent information is either intentionally omitted or improperly disclosed on any of the four main financial statement components namely balance sheet, income statement, cash flow statement and shareholder’s equity.   There are several available classifications of financial statement fraud.  Schilit (2010) in his famous book “Financial Shenanigans” names seven common types of financial fraud: (i) Recording revenue too soon, (ii) Recording bogus revenue, (iii) Boosting income with one-time gains, (iv) Shifting current expenses to a later or earlier period, (v) Failing to disclose all liabilities, (vi) Shifting current income to a later period and (vii) Shifting future expenses into the current period.   On the same note, the US-based Association of Certified Fraud Examiners (ACFE) classifies the above financial statement fraud into five different categories.  They are namely (i) fictitious revenue, (ii) timing differences, (iii) improper assets valuations, (iv) concealed liabilities and expenses and (v) improper disclosures.  

Rules are to be Broken?...

Sometimes it is amazing to see how people just "ignore" rules and just do the opposites?... For example, people ignore the "No smoking" sign and smoke; people simply speeding in a "low speed" zone; selling stuff right at the  "do not solicit" sign board or littering in the "do not litter zone"?.  Like these non law-abiding citizens, fraudsters love challenges.  Companies may establish standard operating procedures; code of ethics; rules; guidelines and policies - frauders may just want to break the rules or defy the procedures.  As such, having the rules or the laws alone may not be enough.  Companies and organisations must ensure that such procedures are strictly enforced.  Effective enforcement is  key in fraud mitigation process.  Companies must adopt the "zero tolerance" policy for fraud....