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Minimising Fraud Risk through technology


Digital record keeping and data analysis can effectively combat fraud in the workplace

The perception of a corrupt business environment in Africa has long been seen as a barrier to those wanting to trade on the continent. But as business opportunities start to boom, especially across sub-Saharan Africa, local businesses, newly entered multinationals and governments need to put measures in place to create the kind of business culture that will inspire business confidence and improve the ease of doing business in Africa.

Companies and governments can only root out fraud and corruption if they employ tools to identify risks and then put measures in place to plug these gaps.

In my 16 years as a forensic expert in the public and private sectors, I have seen that fraud and corruption often stem from an official or employee’s failure to disclose financial interests from which they are able to profit unlawfully.

The risk of third-party interests

One of the major fraud risks that any organisation faces is the opportunity for fraud and corruption by employees with third-party interests that their employer is unaware of.

If an employee, especially at management level, has a financial interest in an entity with whom the organisation is transacting, then it will follow that he or she may be looking after his own interests, rather than those of the organisation, as he stands to benefit personally.

Undeclared financial conflicts of interest pose several risks to employers. Should an employee be deriving income from other sources, the focus on ‘non-employer’-related services can lead to abuse of company systems, telephones and time.

Apart from the financial risk associated with conflicts of interest, there is also a significant reputational risk posed to the employer, predominantly due to the fact that undetected conflicts of interest typically indicate poor internal controls.

Undisclosed conflicts of interest also have legal implications and can lead to further compliance issues, such as potential breaches of competition law, labour law and regulation in the supply chain space.

Although employees are the first line of defence against fraud in an organisation, they are also an organisation’s biggest risk factor for fraud. Company policy should require all employees to declare their external business interests, and other relevant information that may reflect a potential conflict of interest.

An African view on fraud and corruption

Governments in sub-Saharan Africa have announced various initiatives and have signed several international protocols to root out corruption in diverse sectors. Examples include Kenya and Zambia’s willingness to sign the Extractive Industries Transparency Initiative (EITI) to promote revenue transparency and accountability in the extractive sectors and South Africa’s signing of the Sustainable Mining Industry framework to stamp out fraud and corruption in mining.

However, the eighth Global Corruption Barometer published in July 2013 by Transparency International shows that respondents in 21 African countries (including North Africa, sub-Saharan Africa and the Indian Ocean islands) believe that corruption and lack of transparency are getting worse in their countries. Only three countries – Sudan, South Sudan and Burundi – felt that transparency improved from 2011/12 to 2012/13.

The global survey draws on 114 000 ordinary people’s direct experiences with corruption and lack of transparency in 107 countries. About 1 000 people were surveyed per country.

In this survey, 43% of respondents in South Africa said that in their dealings with the public sector, it proved ‘very important’ to have personal contacts to get a deal done, compared to only 3% who said it was not important at all. In South Africa, 47% of respondents said they paid bribes.

In Kenya, personal contacts in the public sector were considered marginally less important with 37% of respondents saying it was ‘very important’ to have contacts in the public sector and 11% saying it was not important at all to have contacts to get things done.

Nigeria is somewhere in the middle, with 39% of respondents in this West African country considering it important to have personal contacts in government, while an insignificant 3% said it was ‘not important at all’.

Significantly, in all of these countries there was a strong belief that civil society could play an important role in stopping corruption. In Nigeria over 40% of respondents believed this and in Kenya and South Africa, over 60% believed civil society could help put an end to fraud and corruption.

Practical solutions for an electronic age

Companies and governments need practical – and electronic – solutions to really take ownership of these challenges and tackle fraud and corruption in their ranks. Smart electronic financial disclosure tools can flag conflicts of interest, such as when a senior official, or his relative, is the director of a company he is awarding a contract to.

The only way to effectively combat fraud, corruption and conflicts of interest is through the use of technology. Verification of information acts as a huge deterrent to employees and individuals considering potentially unethical business relationships. It stands to reason that the only manner in which verification can be entrenched within an organisation is through the power of data.

The trouble is that many organisations still use paper-based systems to record employees’ declarations of financial interests. This makes it difficult to compare the disclosures made to other databases such as the organisation’s suppliers and clients, or for testing against the database of directors, members of companies and close corporations maintained by the Companies and Intellectual Property Commission (CIPC).

Other risks of paper-based systems are that employees can claim that a disclosure was made, but that the document was probably misplaced, and that data are hard to verify manually.

The receipt of gifts or sponsorships from suppliers is something that needs to be closely monitored and unfortunately a paper-based gift register has now become ineffective. By effectively harnessing data derived from the financial declarations, companies can effectively analyse trends in gifts and sponsorships.

In the graph below – in the first left pointing arrow – interests no declared should be interests not declared


Financial disclosure tools can provide practical solutions for the identification of fraud and corruption risks in an organisation.

Organisations’ codes of conduct should provide for the full declaration of all gifts and sponsorships received that are above a certain threshold amount. Electronic data comparisons can also show employers which suppliers are plying employees with the most gifts.

Electronically submitted financial disclosures can be independently verified and checked.

The promotion of electronic verification in any environment serves as a catalyst to improved fraud risk management, investor confidence and sound governance.

Improved transparency and better management of risk are what the African business environment needs. Over and above high-level policies in international transparency agreements, it needs practical on-the-ground solutions. If we want to make Africa the most exciting place to do business this decade, we also need to make it one of the safest.

Clayton Thomopoulos, Certified Fraud Examiner, BTech Degree (Forensic Investigations), NDip (Police Administration), Postgrad Dip (Cyber Law), Postgrad Dip (Compliance Management), Adv Dip (Labour Law), Dip (Criminal Justice & Forensic Audit), is Director of Risk Advisory, Deloitte.