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Global Economic Crime and Fraud

Survey 2018: Malaysia Report


 The survey reveals that 41% of Malaysian
companies reported experiencing economic crime
in the last two years, up from 28% in 2016.
 At the global level, we’re seeing figures that paint
a similar picture. Fraud rates are at an all-time
high.
 Worryingly, these numbers are “detected and
reported” fraud and do not necessarily cover all
instances of fraud.?

https://www.pwc.com/my/en/publications/2018-gecfs-malaysia.html 1
 PwC: 32% of fraud in Malaysian businesses
committed by senior management compared
with 24% globally.
 If leaders of the organisation don’t set the right
tone, it sends the message that acts such as
bribery and corruption are acceptable (PwC
Malaysia’s Managing Partner Sridharan Nair)
 41% of the survey’s respondents, which were a
combination of listed, public and private
companies, reported that they had suffered
fraud or economic crime during the survey
period, an increase from 28% in 2016.
https://www.pwc.com/my/en/publ
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ications/2018-gecfs-malaysia.html
 KPMG's Global Banking Fraud Survey was
conducted between November 2018 and February
2019 across 43 retail banks, 13 of which are in the
Asia-Pacific, 5 in the Americas and 25 in Europe,
the Middle East and Africa (EMA) region. Based on
the survey, 61 percent of banks surveyed have
reported an increase in external fraud – in value
and volume – over the past three years. The
survey also found that over half the respondents
recovered less than 25 percent of the fraud losses,
thereby demonstrating that fraud prevention is key.
 Cybercriminals scammed Malaysians of
RM67.6m in Q1 2019, new ministry data
reveals.
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https://www.pwc.com/my/en/publications/2018-gecfs-malaysia.html 4
Fraud and Error
 The Council of the Malaysian Institute of Accountants has
approved ISA 240: Fraud and Error standard in October 1997.
 The purpose is establish standards and provide guidance on the
auditor’s responsibility to consider fraud and error in an audit
financial statements.
 FRAUD: refers to an intentional act by one or more individuals among
management, employees or third parties, which results a
misrepresentation of financial statements. Fraud may involve:
 Manipulation, falsification or alteration of records or documents.

 Omission the transaction (e.g. sales bring forward to the next


period)
 Recording of transaction without substance

 Misapplication of accounting policies .

 Misappropriation of assets such as theft of an entity’s assets,


inventory, cash etc, then accompanied by falsification (change
figure) of accounting records.
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Fraud and Error
 ERROR: refers to unintentional mistakes in financial
statements such as:
 Mathematical mistakes in the underlying records

and accounting data


 Misinterpretation of facts

 Misapplication of accounting policies

 Thus, primary distinction between Fraud and Error is


whether the misstatement was intentional or
unintentional. And off course “INTENT” is difficult to
determine.

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ISA 240: AUDITOR’S REPONSIBILITIES
RELATING TO FRAUD IN AUDIT OF
FINANCIAL STATEMENT
 Characteristics of Fraud
 Misstatements in the financial statements can arise from either
fraud or error. The distinguishing factor between fraud and
error is whether the underlying action that results in the
misstatement of the financial statements is intentional or
unintentional.
 Although fraud is a broad legal concept, for the purposes of the
ISAs, the auditor is concerned with fraud that causes a material
misstatement in the financial statements. Two types of
intentional misstatements are relevant to the auditor –
 misstatements resulting from fraudulent
 financial reporting and misstatements
 resulting from misappropriation of assets.
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ISA 240: AUDITOR’S REPONSIBILITIES
RELATING TO FRAUD IN AUDIT OF
FINANCIAL STATEMENT
 Responsibility for the Prevention and
Detection of Fraud
 The primary responsibility for the prevention and detection of fraud
rests with both those charged with governance of the entity and
management.
 It is important that management, with the oversight of those
charged with governance, place a strong emphasis on fraud
prevention, which may reduce opportunities for fraud to take place,
and fraud deterrence, which could persuade individuals not to commit
fraud because of the likelihood of detection and punishment.
 Oversight by those charged with governance includes considering the
potential for override of controls or other inappropriate influence over
the financial reporting process, such as efforts by management to
manage earnings
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Auditor’s responsibilities
relating to fraud
 The objectives of the auditor are:
(a) To identify and assess the risks of material
misstatement of the financial statements due to fraud;
(b) To obtain sufficient appropriate audit evidence
regarding the assessed risks of material misstatement due
to fraud, through designing and implementing appropriate
responses; and
(c) To respond appropriately to fraud or suspected fraud
identified during the audit.

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THE FRAUD DIAMOND

Incentive Opportunity

Rationalization Capability

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How can fraud occur?
 Incentive/pressure – I want to or have a need to
commit fraud
 Excessive pressure exist on management to meet the financial
target
 Personal financial obligations may create pressure on
management or employees with access to cash or other assets
that available to theft
 Excessive pressure on management to meet the requirement of
third parties such as investment analyst, investors etc
 Opportunity – There is weakness in the system
that the right person could exploit…ability to
commit fraud
 Nature of the industry and business provides opportunities.
Complex transactions
 Lack of good internal control, inadequate monitoring, high staff
turnover, ineffective accounting systems
 Handling large amount of cash/inventory
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How can fraud occur?

 Rationalization (Attitude) – involves a


person reconciling his/her behaviour of which
the person have convinced himself that
fraudulent behaviour is worth the risk e.g.
 Promise by management to achieve certain

target
 Excessive interest by management in

maintaining or increasing stock price of entity


 Disregard the internal control procedures

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How can fraud occur?

 Capacity - I have the traits and abilities to


be the right person to pull it of.
 The individual’s personality traits and capability have a
direct impact on the probability of fraud.
1. The person’s position or function may furnish his ability to
create or exploit an opportunity for fraud not available to
other e.g A CEO or divisional head has the positional
authority to influence when contracts or deals take effect.
2. The right person for a fraud is smart enough to understand
and exploit internal control weaknesses and to use position,
function or authorized access to the greatest advantage.
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How can fraud occur?
Capacity
3. The right person has a strong ego and great
confidence that he will not be detected or the person
believes that he could easily talk himself out of
trouble if caught. The more confidence the person the
lower estimated cost of fraud will be.
4. A successful fraudster can coerce others to commit or
conceal fraud.
5. A successful fraudster lies effectively and consistently.
To avoid detection he/she must look auditors,
investors and others right in the eye and lie
convincingly.

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Responsibilities of Management

 The is ultimate responsible to take


reasonable steps to prevent and detect
fraud and error. This could be done
through implementation and continued
business operation within adequate
accounting and internal control systems.

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Responsibilities of Auditor
 The auditor is not and cannot be held responsible for the
prevention of fraud and error. However,
Risk Assessment
 In planning stage, the auditor should assess the risk that fraud
and error may cause the financial statements to contain material
misstatements. Condition or events which increase the risk and
fraud include:
 Internal control: poor, good or ignored by management

 Questions with respect to the integrity or competence of

management
 Example: Dominated by one person, no effective oversight

by board, high turnover rate of key accounting and financial


personnel
 Frequent change of auditors 16
Responsibilities of Auditor
Risk Assessment:
 Condition or events which increase the risk and fraud include:
 Unusual pressures within or on an entity

 The industry decline and failures are increasing

 Inadequate working capital

 Entity heavily depending on one or two product only

 Unusual transactions

 Bank transactions

 Related parties transactions

 Payment for services (Lawyer) that appear excessive

 Problems in obtaining audit evidence.

 Inadequate records, excessive adjustment, transaction not

recorded, lack proper authorisation, excessive different between


client figure and third parties confirmation
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Characteristics of Fraud and Error
 The auditor has responsible to assess the risk and detect fraud
and error. To carry out this duty, auditor should consider a
number matters such as:
 Management characteristic

 Dominated by one person, no supervision, one person

known everything
 High management turnover

 Management’s poor reputation in the business community

 Frequent changes of auditors

 Refuses to follow new accounting guideline

 Taking work home

 Refuse to take vacation

 Handle activities which other department’s responsible

 Misplace documents

 Inadequate system of authorization


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Characteristics of Fraud and Error

 Operating and industry characteristic


 Client less profitable that other companies in its

industry
 The industry itself declining and failures increasing

 Characteristic of the audit engagement


 Problem in obtaining sufficient audit evidence

 Prior period audit may reveal issues

 Unusual transactions, especially year end

transaction, complex transaction or accounting


treatments, transaction with related parties.

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Reporting Responsibilities
To Management
 The auditor should communicate factual findings to
management as soon as practical if:
 The auditor suspect fraud may exist even if the effect on

the financial statement would be immaterial


 Fraud or significant error found

To user of the Auditor’s Report on the Financial Statement


 If the auditor CONCLUDES the fraud or error has a material effect and
not properly corrected in the financial statement: Qualified or Adverse
Opinion.
 If the auditor is PRECLUDED (Prevent) by the entity from obtaining
sufficient audit evidence to evaluate whether fraud or error have
material effect, the audit should express qualified opinion or disclaimer
of opinion on the financial statement on the basis of limitation on the
scope of the audit of the audit.
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Reporting Responsibilities
To Regulatory and Enforcement Authorities
 The auditor’s duty of confidentiality would ordinarily preclude
reporting fraud or error to a third party. However, in certain
circumstances, the duty of confidentiality is override by law or by
court of law. Auditor should get legal advise on this matter

Withdrawal from the Engagement


 The auditor may CONCLUDE that withdrawal from the engagement is
necessary when the entity does not take the remedial action even
though the effect arising from fraud and error is immaterial.

 On the receipt of an inquiry from the new auditor, the existing auditor
should advise whether there are professional reasons why the new
auditor should not accept the appointment.

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Regulatory Authority to Deter
Corporate Fraud on PLCs/ PIE
 The two main agencies that regulate the Malaysian
capital market are the Malaysian Securities
Commission (SC), and Bursa Malaysia (formerly
known as Kuala Lumpur Stock Exchange).
 The SC is a self-funding statutory body with investigative
and enforcement powers. The SC plays an important role
in dealing with corporate fraud.
 It has investigative and enforcement powers over all
company listed and not listed in Bursa Malaysia.
 SC also has the power to charge company with fraud for
criminal prosecution.
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Regulatory Authority to Deter
Corporate Fraud on PLCs/ PIE
 Bursa Malaysia has its own listing requirements,
which essentially are the listing and disclosure
standards that must be followed by listed
companies (Ibrahim, Ayoup & Che Ahmad, 2002).
Bursa Malaysia, in its effort to ensure that listed
companies maintain its standards and abide by
the regulations, established Practice Notes for
distress companies. This is to monitor the
companies and maintain the quality of market
place.
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