Internal controls barrier to fraud

PUBLISHED : Saturday, 18 May, 1996, 12:00am
UPDATED : Saturday, 18 May, 1996, 12:00am

The key to preventing and detecting commercial fraud is a strong internal control system, according to Nick Etches, partner of KPMG Peat Marwick and past president of the Hong Kong Society of Accountants.

In a recent survey of major Hong Kong companies, KPMG found that a third had been recently defrauded and that 51 per cent of cases could have been prevented if stronger controls were in place, Mr Etches said.

'Controls featured strongly in the survey; the most common reason for detecting fraud was internal controls,' he said. 'A control overlooked is no better than no controls at all'.

He said the incidence of reported fraud was low in Hong Kong compared with other places where KPMG carried out its fraud survey.

'This might be because in some places the companies are larger and have that much better systems and there is a higher incidence of disclosure.

'The important thing is that prevention is better than cure. Victims suffer expense in money from assets lost, expense in management time and in investigation and litigation,' he said.

Mr Etches said auditors were not likely to pick up fraud. 'In the last two years only 5 per cent of fraud has been picked up by auditors. Auditors don't generally go looking for fraud; even substantial fraud may not affect the 'true and fair view' of the business as it may not be significant for the business although a substantial loss.' When fraud was detected accountants and lawyers had sophisticated means of dealing with it.

'The chances of getting away with a fraud are not very high,' Mr Etches said. 'If it is an expenses fraud, you will probably get away with it for a while then get greedy and be noticed. If it is a purchasing fraud it will be very quickly picked up.

'People will generally try and destroy evidence but it can be quite hard. Even if you wipe a computer hard disk, we can read it. Even if you burn it we can probably recover data. If you want to destroy a hard disk you have to break it into pieces and scatter them,' he said.

Hong Kong's commonest fraud involved trusted and high level company executives purchasing goods for an above normal price, which they were then paid a commission for ordering. This was made possible by sloppy internal systems and insufficient separation of ordering and payment roles, Mr Etches said.