Fraud and following the audit trail

Each year, I refresh my knowledge of the fraud scene for a presentation to post-grad accountancy students at AUT. My look into these obscure corners turned up some interesting material – confirmed by other revelations this week, in the Dominion Post – about how fraud is committed and what can or is being done about it.

The biggest target (or victim) of fraudsters is the government, or more literally the taxpayer. The largest (but as yet unproven in court) act of fraud was the consequences of a government decision to guarantee depositors in South Canterbury Finance.

That $1.8 billion loss, minus some clawbacks, is the country’s most outstanding failure of public accounting. Which raises the issue of what the government is doing to stop such outcomes.

You cannot say nothing is being done, as these new laws and regulations indicate:

• The Auditor Regulation Act 2011, which came into effect on July 1. It regulates and approves auditors and firms providing them.

• The Financial Financial Reporting Bill, a mammoth piece of legislation that, among other things, sets up auditing procedures and reporting standards.

• An international standard on auditing and fraud that comes into effect on September 1. It states that while auditors are charged with approving sets of accounts, it is actually the responsibility of directors and management to ensure these are not false. (In recent court cases involving finance companies, accounts failed that test.)

Fraud is largely carried out by people in a position senior enough to do so without being caught, unless uncovered by a whistleblower. It is not the responsibility of auditors to expose what the standard calls “material misstatement.”

In simple terms, fraud occurs when controls at the top are lacking and a culture of dishonesty is allowed to exist. For example, look at this Dominion Post report or check out Vernon Small’s “first reading” column (not yet online) on the Maori Language Commission, and make your own judgment about the quality of the public service before you listen to bleatings why it should get bigger rather than smaller.

The road the Ecuador
It must be something in the water. Wikileaks founder Julian Assange is using the same legal tactics as the Urewera 4 – mount as many legal roadblocks as possible to the hearing legitimate charges and then claim justice is being denied because of the delays.

Add to that the huge cost to the taxpayer, who may also be paying the legal fees to mount the delays, and you have a case of accusing your enemy of your own worst crimes.

Both Assange and the Urewera 4 claim to be the victims of political persecution when in fact they are trying to avoid potentially serious punishment for their actions.

For Assange, the tide appears to have run out already, if some recent media coverage is a judge. According to this lengthy account in Foreign Policy, and echoed by others you would expect to be sympathetic, Assange has stretched his credibility too far.

Yet Monday’s coverage of his speech from the Ecuadorian embassy in London indicates he still has his champions, both in the media and among those firmly rooted in the anti-American camp.

But perhaps his tie-up with the ratbag regime of President Rafael Correa, not to mention a TV show on the global Kremlin-backed RT channel (available on Sky), is finally getting through.

The problem, as most commentators now see it, is that Assange’s fears of being extradited and then executed in the US are wildly far-fetched.

So, too, is his attempt to smear the legal system in Sweden, where he faces serious sexual assault charges. Like the Urewera 4, found guilty of taking up arms against the state, he thinks his charges are trumped up.

The only difference, apart from supporters who believe both sets of charges are false, is that the police in New Zealand were denied access the full results of their surveillance, though the court still upheld the illegal arms charges.

The un-promising president
My subscription to Newsweek never fails to surprise – and be even more of an antidote to withdrawal symptoms from The Economist.

This week, Newsweek runs a provocative Niall Ferguson cover story putting the case against the re-election of President Obama.

Summarised, it is based on his failure to deliver on any of these promises made in his inaugural speech:

“not only to create new jobs, but to lay a new foundation for growth”

“build the roads and bridges, the electric grids, and digital lines that feed our commerce and bind us together”

“restore science to its rightful place and wield technology’s wonders to raise health care’s quality and lower its cost”

“transform our schools and colleges and universities to meet the demands of a new age”

In addition, Ferguson says re-election would mean more of the same failure to deliver.

Naturally, given Newsweek’s traditional political leaning, Ferguson – one of this generation’s best and most productive historians – received plenty of stick, which he has just as robustly brushed off.

Insight readers may recall Ferguson’s 2012 BBC Reith Lectures (which are due to be broadcast on Radio New Zealand National from September 4 at 9am). This and the Newsweek stuff is not for the faint-hearted and is good at putting our own pathetic debates into perspective.

China’s dirty secret
Without straying too far, Newsweek’s ability, through the pulling power of former Vanity Fair editor Tina Brown and her role in the New York publishing scene, to lift extracts from new books produces other gems in this edition.

One is from Melanie Kirkpatrick’s Escape From North Korea, due on Amazon.com from Sept 18, about the trafficking of North Korean refugee women:

Many of the buyers are farmers. Some have physical or mental disabilities that make them unsuitable as husbands in the eyes of Chinese women. In almost every case, the men are buying the one thing they want most in life: a wife.

And the reason:

Beijing has enforced [the one-child policy] through fines, imprisonment, forced abortion, sterilization, and even, human-rights groups charge, infanticide. The policy has had its intended effect of slowing the rate of expansion of China’s population. But there has been an unwelcome side effect: an unnaturally high male-to-female ratio.

This is a staggering 1:14 in the three Chinese provinces next to North Korea, as young Chinese women flee the countryside for the urban life and modern-minded husbands. It’s the underside of a society that goes largely unnoticed outside China:

Not so long ago in China, an unwanted baby girl might be drowned in a bucket at birth or left unattended to die. These days abortion is the preferred method, and ultrasound tests let couples find out the baby’s sex early in the pregnancy for about $12, well within the means of most couples.

The full extract can be read here and, again, this is not for the faint-hearted.