Fraud, Money Laundering and the Auditor

1
Fraud, Money Laundering and the Auditor

• Definitions-Fraud and Money Laundering
• Role of the External Auditor
• Combating Fraud and Money Laundering
• Some Questions for Discussion

2
Definitions Fraud and Money Laundering

• There are two types of fraud
• Financial Statements Fraud (FS). Intentional
  misstatements or omissions of amounts or
  disclosures in financial statements designed to
  deceive financial statement users
• The reporting entity involved suffers no loss of
  assets. This fraud is not designed to steal
  assets.
• It occurs through manipulation, falsification, or
  altering of records misrepresentation or
  intentional omissions of events or transactions
  or intentional misapplications of accounting
  principles.

3
Definitions Fraud and Money Laundering

• Asset Theft Fraud (AT). The theft of an entitys
  assets where the effect of the theft causes the
  financial statements not to be presented, in all
  material respects, in conformity with GAAP.
• There is a loss of assets, but the balances of
  the financial statements will reflect
  after-the-fact fraud.
• External users are rarely deceived.
• It takes place through embezzling receipts,
  stealing assets, paying for goods and services
  not received, or false or misleading records or
  documents.

4
Definition Fraud and Money Laundering

• Money Laundering. is processing the proceeds of
  criminal activities to disguise their illegal
  origin.
• It is designed to enable the criminal to enjoy
  the profits of their actions without jeopardizing
  their source.
• It has three steps placement, layering, and
  integration.
• Placement is the riskiest as criminals introduce
  the proceeds in the financial system using
  different means layering is initiating a number
  of related transactions to obscure the source of
  funds and integration is to use the funds for
  acquiring legitimate assets or further their
  criminal activities.

5
Role of the External Auditor

• We have the SAS no. 99 (December 2002) and the
  Sarbenes-Oxley Act (July 2002).
• SAS 99 states 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
  misstatements, whether caused by error or fraud.
• However, it is entitled considerations of Fraud
  in Financial Statements Audit. All in all, it
  cites the considerations and due diligence and
  care to be taken as to the possibility of
  existence of fraud in the entity being audited.

6
Role of the External Auditor

• The closest it come to actual auditing for
  possible Asset Theft Fraud is the statement
  requiring auditing large, unusual, or complex
  transactions.
• However, the focus of the auditor remains largely
  on verifying the balances in the balance sheet,
  and thus focusing on Financial Statement Fraud.
  Their search for Asset Theft Fraud is indirect.
• Emphasis on Balances in the balance sheet may or
  may not reveal Asset Theft fraud.
• Independent auditors currently accept
  responsibility for discovering FS fraud, but they
  do not accept respon-sibility for and do not
  attempt to search for AT Fraud.

7
Role of the External Auditor

• The Sarbenes-Oxley Act (1992) is mainly directing
  towards the officers signing the quarterly and
  annual reports of the entity.
• They have to sign that they reviewed reports,
  have no knowledge of any material untrue
  statements or omissions, and that they believe
  the statements fairly represent the financial
  situation.
• They are responsible for establishing and
  maintaining effective controls, and for
  presenting conclusions as to its effectiveness,
  and making needed changes.
• They are to inform the external auditors of any
  fraud concerning management or employees having
  significant role in internal controls, and all
  significant deficiencies in the design and
  operations of the internal control system.
• Again, the external auditors bears no
  responsibility as to AT Fraud.

8
Role of External Auditor

• Money Laundering. Tends to use the business more
  as a conduit than as means of directly
  expropriating assets. It is only an attempt to
  legalize criminal proceeds using the entity.
• It is very unlikely to affect the representation
  of the financial statements. Indeed, management
  will make every conceivable effort to have a fair
  representation.
• It involves the manipulation of large quantities
  of illicit proceeds to distance them from their
  sources quickly and without drawing attention.
• Both the financial system and other types of
  businesses are used in money laundering
  transactions.
• Again, the external auditor does take
  responsibility or search directly for discovering
  money laundering transaction even though he might
  discover them during the course of his audit.

9
Combating Fraud and Money Laundering

• Attempting to combat Asset Theft Fraud and Money
  Laundering must start with recognizing the fact
  that they are of different nature than Financial
  Statements Fraud.
• They might not change the Fair representation
  of the balances in the Financial Statements.
• Since external auditors stresses the verification
  of the balances and normally test only a small
  sample of actual transactions they are unlikely
  to discover AT fraud or Money Laundering.
• Financial Statements audit is balance
  verification based while AT and money laundering
  audit are transaction verification,
  investigation, and documentation based.
• Indeed, auditors for AT fraud or Money laundering
  are unlikely to bother about verifying the
  balances but rather they work on investigating
  and analyzing transactions related to suspected
  fraudulent activities.

10
Some Questions for Discussions

• Is there an expectation gap between the general
  public and even some professional and the legal
  responsi-bilities of the external auditors?
• Could we the external auditors responsible for
  Asset Theft Fraud and Money Laundering during his
  audit of the financial statements?
• What is the role of forensic auditors in checking
  for fraud and money laundering?
• Do we need to make obligatory for firms to have
  forensic auditing for the growing problems of
  Asset Theft Fraud and Money Laundering?