Namibia: Strengthening Ethics Against Fraud in Namibia

WHEN we think about fraud, we often imagine staunch criminal minds who have a very low moral compass or lack ethical conviction.

But the reality is that the majority of the world's population, given the opportunity, would potentially engage in some form of fraudulent behaviour.

There is a global principle which follows the 10-80-10 principle -- that 10% of the people in any society are honest.

These are the people who will find an open safe with a stack of cash inside, and they will not be tempted to take any of it, even if there is a guarantee that they will not be caught.

However, 80% of people in any society will use an opportunity if it presents itself, depending on their particular circumstances at the time.

So, in the safe scenario, if they find it open, depending on their circumstances and ability to justify it to themselves, they may take what they need or what they can from the safe.

The remaining 10% are the people who deliberately look for opportunities and plan to commit fraudulent activities, which in this scenario would be to access even the locked safe.

To think that 10% of society is generally prone to fraudulent activities, and that 80% could be, is a concerning statistic.

From an auditing perspective, the International Standard on Auditing 240 (ISA) deals with the auditor's responsibilities relating to fraud.

In terms of this standard, the primary responsibility for the prevention and detection of fraud rests with both those charged with the governance of an entity; being the board of directors, and the management.

The standard further states: "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."

This is in line with the requirements of the King Code on Corporate Governance that those charged with governance and management are responsible for risk management, which includes managing the risk of fraud.

ISA 240 indicates that the auditor's responsibility is to obtain reasonable assurance that the financial statements as a whole are free from material misstatement, whether by error or fraud.

There are three factors that make individuals engage in fraudulent behaviour: those being incentive/pressure, opportunity and attitude/rationalisation. All three aspects must usually be present for an individual to commit fraud. This hypothesis was developed by the criminologist, Donald Crossey, and is referred to as the "Fraud Triangle".

1. Incentive or pressure relate to either a need or greed.

In Namibia, the high cost of living, together with the tight economic times, presents increased pressure on individuals to get involved in fraudulent activities to make ends meet.

Materialism (greed) is another factor that can contribute to fraud. We live in a society where expensive cars, fancy houses and expensive private school education are some of the status symbols, and many people want to keep up appearances and compete with others, often resulting in them living above their means and having to supplement their income in less than legitimate ways to maintain their lifestyle.

2. Opportunity for fraud increases in an organisation where there are inadequate internal controls, resulting in loopholes in the system. If there are no proper policies or procedures regulating the flow and use of cash or other assets within an organisation, then it is easy for people to find a way to misappropriate resources.

Inadequate segregation of duties, inadequate oversight of senior manager expenditures such as travel expenses and other reimbursements, lack of mandatory vacations for employees performing key control functions, and inadequate job applicant screening of employees with access to assets are among the various factors that create opportunities for fraud in an organisation.

3. Attitude or rationalisation relates to the ability of an individual to justify to him/herself why they are committing fraud. In the work environment, the most prevalent attitude which leads to fraudulent activities is the "I deserve it" attitude. Often, people may feel that they are not being paid enough, and therefore they have the right to make money for themselves elsewhere.

In Namibia, many people have low-paying jobs and struggle to make ends meet, while they oversee projects with large amounts or have access to cash. In this case, they are tempted to enter into agreements with suppliers, where they receive kickbacks, or give business to their friends and families, who will repay the favour in other ways.

Other rationalisations could include: "I will pay it back" or "Everybody does it".

How to close the gaps and minimise risks of fraud

The good news is that the middle 80% group of the population can also be converted into honest citizens when proper measures are put in place. In this instance, ethical leadership is one crucial factor that contributes significantly to fraud prevention.

The leadership of an organisation, both management and the board of directors, must send a message of zero tolerance for fraud, and they must lead by example to build an ethical culture.

Ethical leadership is a topic that we do not talk about as often as we should. Business leaders of Namibia should engage one another to discuss this matter, and use the opportunity to learn from each other.

At PwC, we have a yearly refresher classroom and e-learning training on ethics because we believe that the issue of fraud can only be successfully addressed by creating strong ethics in individuals, and making sure that people understand the consequences of fraud.

We have a code of conduct that every employee is expected to read and familiarise themselves with, and we have 10 questions we give our people to consider as they carry out work activities.

Some of the ethics questions our employees have to ask themselves when they do anything include: Is it against PwC, or professional standards? Does it feel right? Is it legal? How will it look like in the media? Will it reflect negatively on you or PwC? Who else could be affected by this (others in PwC, clients, you, etc.)? Can you sleep at night?

As a firm, we have an ethics awareness campaign, and a committee which deals with ethical dilemmas.

We have ethics reviews and an ethics database where people can log queries and receive feedback. We believe that if we understand and embrace an ethical way of doing business, then instances of fraud will be minimised.

Organisations need to be aware of the factors that motivate people to commit acts of fraud, and address those factors within their context.

It is not a matter of conducting 'witch-hunts' and getting rid of people whose dishonesty cannot be proven, but it is a matter of creating awareness about fraud and its consequences, and developing a culture that touts and rewards honesty and integrity.

If the organisational culture supports employees and pays them salaries equal to the work they perform, giving regular incentives, then people are less likely to engage in deceitful ventures.

Creating platforms for ethical discussions within the workplace and ensuring that people are aware of the rules and regulations of the organisation make up part of an effective strategy for creating a culture that will help fight fraud.

Source: The Namibian.