thinking growth *
connected with client issues
Fraud Auditing in
Turkey
Thursday 26 April 2007
Wayne Anthony
Head of Crisis Management Services
Advisory*
serving client priorities: transactions,
performance improvement, crisis
management
*connectedthinking
PwC
Overview
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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.
PwC
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Why do people commit fraud?
The “Fraud Triangle”
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).
PwC
Incentive
Fraud
Opportunity
Ability to
rationalise
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Why do people commit fraud?
Self-rationalisation
26.8%
Insufficient controls
Incentive
20%
23.5%
External collaboration
39%
Management over-ride
Internal collaboration
Opportunity
Anonymity with the company
Foreign business customs
PwC
16.3%
41%
14.4%
8.5%
Source: PwC GECS 2005
10.5%
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Why do people commit fraud?
Self-rationalisation
Expensive lifestyle to maintain
Incentive
20%
52.7%
39%
Dissatisfaction with the company
Career disappointment
18.9%
41%
18.9%
Opportunity
Layoff/redundancy
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9.5%
Source: PwC GECS 2005
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Why do people commit fraud?
Self-rationalisation
Incentive
20%
Lacking awareness of wrongdoing
40.6%
39%
Low temptation threshold
39.1%
41%
Opportunity
Self-denial of consequences
20.3%
Source: PwC GECS 2005
PwC
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Common frauds in Turkey?
PwC
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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.
PwC
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Case Study 1 – Employee misappropriation
PwC
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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.
PwC
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Case Study 2 - Employee misappropriation
PwC
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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.
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Case Study 3 – Regulatory (FCPA) violation
PwC
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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.
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Case Study 4 – Off-book payments
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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.
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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
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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;
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What to look for – Red Flags 2
• 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.;
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What to look for – Red Flags 3
• 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.
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What to look for – Red Flags 4
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.
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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.
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Questions
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Contact Details
Pwc Crisis Management Services*
Dispute Analysis & Investigations
Business Recovery Services
Hüsnü Can Dinçsoy
Advisory Services Partner
+90 212 326 6054
husnu.dincsoy@tr.pwc.com
Wayne Anthony
Crisis Management Services Leader
+90 212 326 6152
wayne.anthony@tr.pwc.com
*connectedthinking