Cutting corners may lead to fraudulent activity

PETALING JAYA: During times of economic downturn there tends to be a higher frequency of fraudulent activity but there are ways to protect businesses and identify the red flags.

Coalition of Business Integrity (CBI) director Lee Min On said this could be seen from past trends and surveys conducted by large accounting firms.

“During a downturn, there are comparatively more businesses falling into receivership and it is not surprising that assets of these businesses may have been stripped by the time receivers and liquidators come in,” said Lee in his fraud management risk talk at Dream Centre here yesterday.

In such times, to preserve cash in the organisation for survival, businessmen may “cut corners” in the companies’ internal control and monitoring system.

“So when these corners are cut, unscrupulous parties may leverage on the weaknesses to exploit the opportunities and to help themselves to the assets.”

Lee, who is also a retired partner with KPMG Malaysia, pointed out that fraud and misconduct were perfect for malpractice to take place in an organisation.

The first malpractice is the falsification of an organisation’s financial statements with the fear that share prices of the company may drop if unfavourable results are announced.

Second is theft, misappropriation or unauthorised use of assets.

“And the most hideous of all is corruption,” he added.

While there may be internal and external auditors, audit committee and management to provide the checks and balances, things may still go wrong.

Lee pointed out that there were remedial measures by corporations, such as establishing a code of conduct for directors and employees, setting limits of authority, and formalising a clear organisational chart with segregation of duties.

But he also emphasised on having in place whistleblowing policies and procedures.

“It works very well in the private sector or businesses located overseas as there are companies which embed a system where monetary rewards are given to the whistleblower if it results into a proven case.”

Lee said Corporate Guide – Towards Boardroom Excellence second edition, which could be downloaded from Bursa Malaysia’s website.

Those who wish to know more can go to www.cbi.org.my or e-mail Lee at minonlee@cbi.org.my.