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IAS not foolproof anti-fraud tool

IAS not foolproof anti-fraud tool

by Jennee Grace Rubico

Corporations can protect themselves against fraud by strengthening internal controls and getting professional help.

However, the newly imposed international accounting standards (IAS) are not expected to prevent fraud from happening, speakers of a recently held seminar on fraud detection and prevention said.

The IAS is not a tool for detecting fraud, said Juan Carlos B. Robles, partner of audit firm Punongbayan & Araullo, in an interview on the sidelines of the fraud detection and prevention seminar held by the Center for Global Best Practices in tandem with P&A recently.

The IAS is a set of accounting standards that the Philippines adopted from Europe in an effort to align local accounting rules with international standards. Among others, the IAS seeks to promote fair market values in the financial statements and transparency in financial reporting by requiring more disclosures from companies.

Mr. Robles defined fraud as an act that has the intent to deceive, which results in losses for the company. Business fraud, meanwhile, covers asset misappropriation, including theft, skimming, and misuse of assets; fraudulent reporting of income statements; and corruption.

“The IAS is fair financial reporting, but it’s not a fraud-detection mechanism,” Mr. Robles said. He noted that while the IAS asks for more disclosures from companies, it is still prone to subjectivity.

“The concept of fair value is very subjective. What is fair? Under the standards, you can still play around,” he said.

Mr. Robles also said it is not the primary duty of the external auditor to look for fraud in the financial statements of companies. “Their responsibility is to say if the financial statement is a fair representation of what the company said,” he said.

He also said that when the external auditor does detect fraud in the financial statements, this would be “accidental.” Still, Mr. Robles said, in cases where the external auditor does detect fraud, he has the responsibility to inform management about it.

For his part, P&A senior manager Wesley Mintu said in his presentation that external auditors cannot be held responsible for prevention of fraud and error. “The fact that an annual audit is carried out may, however, act as a deterrent,” his presentation went.

Mr. Mintu said that management, internal auditors, and anti-fraud specialists play the primary role in preventing fraud in companies.

Auditors “assess the risk that fraud and error may cause financial statements to contain material misstatements,” while anti-fraud specialists check if the company is susceptible to fraud and conduct fraud investigation, he said. Management, meanwhile, needs to set up internal controls and shape the culture of the company, he said.

“Management should have established standards for hiring and promoting the most qualified individuals and have effective policies that minimize the change of hiring and promoting individuals with a low level of honesty, integrity, especially for positions of trust,” he said.

Private Investigator Conrado G. Dumlao, President of Truth Verifier Systems, Inc., said anonymous tipsters are the most common sources of information, with 40% of the fraud reports coming from them. Internal au dit is the next most effective fraud detector, with 24% of the reports sourced from it, while internal controls make up 19%. External audit, he said, makes up 11% of the report, while accidental incidents make up 6%.

Meanwhile, lawyer Charlie C. Yalung of the Picazo Buyco Tan Fider & Santos Law Offices said companies can avoid getting victimized by fraud by getting retainers.

(As published in BusinessWorld, May 25, 2006)