The fraud detectives. - Free Online Library To fight soaring white collar crime, South Africa has turned to the intriguing science of forensic accounting. The case of the Reverend Alan Boesak, ANC activist and former religious leader, has been an educative experience for the South African public. Mr Boesak set up the Commission for Freedom and Justice, an organisation dedicated mainly to child security and education. He solicited funds from such diverse donor organisations as Danish Aid, the Coca Cola Foundation and the singer Paul Simon - but he is now facing charges of embezzlement and theft involving a total of R9m.
The extent to which the craft of examining numbers and chasing paper trails will impact on the outcome of the trial remains to be seen. But what the High Court hearing has done is focus public curiosity on an intriguing new science: 'forensic accounting'. Through post mortems on accounting documentation and computer records, much damning evidence is now being gathered against white collar criminals who defraud government, private institutions and companies alike.
Smooth operators
The South African Office of Serious Economic Offences says some companies don't even know they're being defrauded, so skilfully are the crimes perpetrated, numbers manipulated and tracks covered. Some firms are beginning to get the message, however, and are
setting up snap forensic audits every so often, just in case.
Authorities point out that a key problem in combating white collar crime is that few victim companies, especially if they are-publicly listed, like to admit they have been fraud victims. It tends to expose weaknesses, actual or perceived, in their financial systems. Much fraud thus goes unreported and perhaps unsolved.
"When white-collar crime is detected in a company," says Robert Cameron-Ellis, partner of Deloitte & Touche forensic services in Pretoria, "our experience is that the employee is dismissed, for negligence or dereliction of duty, instead of being prosecuted for theft or fraud."
Petrus Marais, managing director of KPMG's forensic and investigative accounting group, agrees. "We've been involved in cases where clients have refused point blank to report fraud they have discovered in their company. There are also those organisations who will report the crime to the police as a matter of company policy. Others still take a more pragmatic Accounting firms in Johannesburg approach, particularly if the crime was committed at a very senior level. That raises questions of client confidence."
Unreported crime
Mr Cameron-Ellis says many reasons contribute to companies' reluctance to pursue justice - dwindling resources in the criminal justice system, management fears of being caught up in prolonged, time-consuming investigations, bad publicity and the risk of failure in prosecution. Of the approximately 55,000 commercial crime cases reported to the police in 1996, valued at R3.8bn, less than 7% resulted in convictions. More seriously, it is thought that police are notified of only half of the fraud offences committed in South Africa each year.
KPMG's forensic section is about 65-strong with five full-time forensic partners. Forensic accountancy is currently a singularly white occupation, something dictated by market availability. "Our single biggest problem in recruiting people from the traditionally disadvantaged communities at a chartered accountant or qualified legal level is the salaries they can command," says Mr Murals. "They are an incredibly scarce resource."
That's turned KPMG's attention to initiating schemes where they accept semi-qualified students who have not been able to complete their studies for some reason. "The firm picks up the tab for them to graduate, and you then live in hope that when they've qualified you'll have stimulated enough interest in the work and they'll stay."
Forensic accounting as a dedicated service is a relatively recent phenomenon. Traditionally, accountants have been testifying in court as
long as there have been accountants and courts. However, testimony has generally been in a strict expert witness capacity. But with the increasing sophistication and complexity of commercial crime, and the decreasing skill and resources within the police force, a vacuum has emerged regarding who can actually investigate such crimes.
Firms like KPMG and Deloittes have consequently started to put together multidisciplinary teams, with both prosecuting and accounting experience. KPMG has former civil engineers on its forensic staff, as well as ex-asset managers, merchant bankers and stockbrokers. "They provide skills in niche markets," says Mr Marais, "so that if the fraud concerns gilt-trading for instance, you have a resident expert put together with a lawyer and an accountant to assemble a team." Deloittes' approach is to assemble multi-discipline teams of forensic experts which include attorneys, chartered accountants and ex-police officers. "Our approach is a collaborative one," reports Mr Cameron-Ellis, "acting as a catalyst to encourage business to pursue prosecutions, with our experts assisting the police service with the investigation and presentation of evidence to secure conviction."
Trade secrets
Forensic auditors are not enthusiastic about sharing the knowledge they acquire and expertise they develop. "We find ourselves in a difficult position in that regard," says Mr Marais. "We
believe we pioneered the market. KPMG was the first firm to start a dedicated unit. We're still the only truly national practice and we try to stay ahead. So we are selfish in protecting our interests. We wouldn't want to take part in a seminar that would train the opposition in our methods. Unlike the medical profession, all practitioners in forensic accounting don't represent the same level of skills. So we quite jealously guard our skills base - our methodology and trade secrets."
KPMG focuses its specialisation on the nature of the assignment. "Banks, for example," explains Mr Marais, "and syndicated cheque frauds, represent a sophisticated market all of their own. We have our specialists in that type of investigation. But if a bank had a major treasury fraud in forex, a completely different skill would be called for. Specialisation focuses on the dictates of the assignment."
Reactive or proactive science?
"The reactive demands of our clients are what led us to set up our unit," says Mr Marais. "When we started five years ago, KPMG had forensic practices in about 80 countries. Those in the first world were substantially involved in proactive programmes. In Britain, half the practice is proactive." That led them to believe that a lucrative market would evolve in South Africa and they invested a fair amount of time and energy developing it. "We marketed it heavily
with our existing clients but had no takers, even though we're convinced it's the most cost effective way of spending money. We'd rather prevent 100 frauds than investigate one," remarks Mr Marais.
Increase in assignments
But the tide is turning. Fraud has risen to such a level and has become so endemic in big organisations that over the past 18 months there has been an astounding change of heart in major organisations, especially in the financial sector where a rapid awareness is developing that fraud can be combated at the proactive level.
Mr Murais singles out Nedbank as being a proactive pioneer in their level of sophistication of the forward awareness programmes they have instituted throughout the organisation. Many other companies have followed suit. "It's now becoming clear that there is more of a market opportunity for us to get back to what we abandoned before. There's a tremendous amount we can do to raise the levels of awareness, prevention and detection rather than waiting to stumble upon the fact that you've been had, somehow or other. The chances of recovery after the crime are relatively low."
Mr Marais contends that there's no such thing as a proactive game plan, no document with simple instructions to follow to make the clients' problems go away. "We've spent a lot of time
convincing clients that there is no generic solution," he says. "A proactive programme requires first of all a specific analysis of the firm's business. The fraud risk and the business risk are two completely different issues. While clients are aware of what their business risks are, the fraud risk needs a different focus. It needs an understanding of how the entity spends money."
Major fraud is usually at that level: salaries and ghost employees, or, if it's a big organisation, procurement. Investment and asset management divisions of banks and life houses have totally different requirements for ongoing surveillance that can identify the potentially suspicious transactions, compared to a manufacturing concern or a cold storage warehouse.
Culture of ethics
Mr Cameron-Ellis says that any company senior management should furthermore continually be gauging the level of fraud awareness in the organisation. "It's important also to look at company ethics and moral values," he says.
"Is this a company that is seen to be ethical from the outside as well as the inside? If a company lives by its ethics then generally the employees will do the same. The creation of an ethical culture is an inexpensive and cost-effective way of preventing run-of-the-mill fraud. That won't stop the determined fraudster, and that's when you
look at your systems."
White collar criminals tend to develop modus operandi, the perpetuation of which often leads to their downfall. "Fraudsters learn that it works once," notes Mr Cameron-Ellis. "If they get away it, they increase the scale of the theft. Generally the first few thefts are accidents. They just happened. Then the employee starts planning and conniving and perhaps recruiting accomplices."
Ask any private investigator and he'll tell you he's indispensable to the white collar probe - simply because he'll do what auditors cannot, ethically, professionally or legally. Want a phone bugged, bank records, stake out? no problem, says the PI. But it is a problem to the accountant, because much of the evidence gathered by the private investigator is by dubious means and thus not admissible in court. It could even work against a prosecution.
But, says the PI, I'll wear the raincoat and you can wear the suit. In other words, let me get the evidence by whatever means, and you can use it as a lead to ferret out the information in a legal way and present it untarnished to the court.
A first step is then to find out who the employers suspect, and they will always have their suspicions. Investigators want to know what the suspects are saying, who they're talking to, are they living a new lifestyle and have acquired assets they can't really afford.
"You'll often hear forensic auditors comment that they'd love to be a fly on the wall," says the head of an international private investigations company in Johannesburg. "That's where classical detective work comes in. Detectives are the flies on the wall."
Fraud investigations should be carried out both covertly and overtly, according to the detective agency chief, who requested anonymity. Quiet investigations may turn up the clues which enable the auditing sleuths to home in on a particular problem a lot quicker. "Forensic auditors do things overtly. Everyone knows they're there and they probably know why they're there. They may do it covertly, but how do you examine documents covertly?"
That really worries Mr Marais. "Clients have said to us: 'get his (the suspect's) bank accounts, tap his phone, follow him, intercept his mail!' So we have to try and educate the client, and tell him 'we don't do that, and we won't help you to do that, either. If you want to do that, find someone who's in that kind of business'."
Mr Marais allows that both views have an upside. Stakeouts are a good example. "It's sometimes helpful to have information that your suspect was seen in the company of different people. That could help to widen our investigation. We have often had clients who have mandated a private eye and they have this wealth of illegitimately obtained
evidence, which could be useful in pointing us in the right direction. But we have to retrace those steps, because we can do nothing with illegally obtained evidence."
Answers first
"In fraud cases," says the PI chief, "the detective agency could act covertly, while the outside forensic auditors operate overtly in a coordinated investigative effort.
"If a client suspects he's a victim of fraud, and they believe it happened in a certain department, our advice would be to say: 'see which personalities are involved in that particular area and set in place some covert activity which would give us information and answers to questions we'll be asking later'. Investigators like to have the answers before they ask the questions.
"We have to advise our client that if he chooses the less than legal route to obtain evidence, he may well find himself in the dock as opposed to the suspect. He could end up finding himself the subject of litigation because he'd violated constitutional rights. Those are big risks."
Exit the gumshoe
And what's to become of the man in the shadows? The PI agency
chief concedes that the days of the raincoated PI are probably numbered.
White collar crimes of the future will be more electronically oriented - invisible high-tech thieves hacking into systems. For these
techno crimes: "A lot of the time victims won't even know it's happening."
South African forensic ace heads Albania pyramid probe
A South African is in charge of the international team of 36 forensic accountants investigating the Albanian pyramid scams which cheated the Albanian public of more than R6.5bn. Robert Cameron-Ellis, partner at Deloitte & Touche forensic services in Pretoria, was appointed joint administrator reporting to the Albanian government. Three other South Africans are also on the team.
"The pyramid schemes are hopelessly insolvent," Mr Cameron-Ellis reported at the end of the investigation's first phase. "Only about R350m is likely to be realised from the sale of the pyramid companies' assets, and even less if the administrators don't get full control over the operations of the companies."
Ethnic violence in Kosovo is compounding the problems faced by the administrators - including threats of violence and a bomb blast at their offices.