What ‘fraud triangle’ can teach us about war on graft

Corruption has become a regular occurrence in our country at all levels. As a matter of fact, Kenyans get anxious if there is no news of discovery of a scandal caused by corrupt practices. Discovery of corruption is no longer news, but an expectation that can crystallise anytime. In addition to huge reported cases of corruption in the public sector, there are many other cases that are not reported, especially those occurring in the private sector and those of small magnitude.

A fundamental question we should be asking ourselves is; what really happened to us to be at a stage where we see corruption as a norm? Whilst we seek answers to this question, we must simultaneously work towards addressing this issue by adopting both proactive and reactive methods. Corruption in whatever form is bad. It undermines the very basic human right of dignity and denies citizens access to basic services such as education, health, food, shelter etc. it also makes the cost of doing business expensive and, therefore, discourages investment. Corruption is a direct enemy to economic development and must be wrestled from all quarters and by everyone.

INTERNAL CONTROLS

The mega scandals we have seen and experienced recently, including those that are currently under investigation, display similar characteristics; they are carefully designed and executed, they involve a number of people in the chain, including internal staff/employees and third parties such as suppliers and financial institutions, and they are procurement related and range from small to large amounts. Where small amounts are involved, they disguise the bigger scheme and cumulatively add up to huge amounts.

To enable us address the fundamental question we asked earlier on corruption, we will use the theory of the fraud triangle. The fraud triangle brings out three conditions or drivers which must exist for fraud to take place.

The first condition is the pressure to commit fraud. This could be internal within the organisation or external to the individual. The second driver is the opportunity to commit fraud through an existing loophole or weakness in internal controls. The last that must be present for a fraudulent thought to move to action is rationalisation, also known as justification. Because the three conditions must exist for fraud to occur, they must be individually addressed comprehensively to forestall fraud.

GOVERNANCE OVERSIGHT

Internal pressure to commit fraud is prevalent in private sector settings, where remuneration and especially the bonus component is linked to performance. This kind of fraud will take the shape of intentional manipulation of financial records to show favourable performance. This could lead to payments of bonuses and declaration of dividends which do not exist, thus eroding shareholder value over time. External pressure on the other hand is driven by an individual’s desire to live a life that is way beyond his means due to peer pressure or the urge to conform to societal demands. Such individuals can commit fraud to acquire property, luxury vehicles and other types of assets or blow the proceeds in an extravagant lifestyle.

The issue of external pressure is one that is heavily driven by the individual’s moral and value system and goes deep right into our value system, from the very basic unit which is the family, to institutions that shape up an individual’s life such as schools, churches and the society at large. As a country, we must dive deep down the value system in all our institutions, and ensure that individuals who interact and are churned out of those institutions have values engraved in them. There is no doubt that our value system as a country has decayed over time.

Internal pressure can be addressed by ensuring that a company/organisation has clear policies and procedures especially around compensation, which are strictly enforced and subjected to independent governance oversight.

NOTHING HAPPENS

The opportunity to commit fraud exists if there are loopholes or weaknesses in an organisation’s internal control framework around people, systems and processes.

The fraudsters would carefully study systems overtime for such weaknesses and commit fraud. In the public sector for example, the Integrated Financial Management Information System (IFMIS), which is the system designed for financial management processes and systems right from planning and budgeting through to procurement and payments and reporting, can be manipulated by fraudsters who have used and studied the system over time. If you recall, password misuse in IFMIS was attributed to NYS Phase 1. It is, therefore, important for an organisation, be it in the private or public sector to constantly review all its internal controls and update them as appropriate. More importantly, there must be commitment from all levels of leadership to enforce those controls.

The third driver which enables the individual to translate fraudulent thought into action is rationalisation or justification. In this case, the individual justifies his action by concluding that everyone commits fraud, including the boss, and nothing happens to them.

HUGE OPPORTUNITY

Actually, this is the most significant and compelling aspect of the triangle. Setting the appropriate tone at the top and walking and demonstrating that tone all through is the most effective way to address this condition. When tangible and demonstrable actions are taken against those who commit fraud, the would-be fraudsters will have no reason to translate their fraudulent thoughts into action. We have not set up an appropriate tone at the top and those who have been involved in mega scandals in the past have walked out scot free or not even taken through the judicial system at all, thus creating huge opportunity for justification.

As a preventive and reactive measure to combat corruption, we also need to ensure that institutions established to fight graft are independent and well-equipped to perform their duties. They should have clear performance indicators against which they are measured. These institutions include, among others, the Ethics and Anti-Corruption Commission (EACC), the Office of the Auditor-General, the Directorate of Public Prosecution (DPP), the Directorate of Criminal Investigation (DCI) and the Judiciary. These institutions must strike an accord and work together to ensure that all cases are followed through to successful completion.

OUR RESPONSIBLITY

In the wake of the current scandals being investigated, whilst the presidential order to suspend, vet and recruit afresh all heads of accounting and procurement functions is a step in the right direction, it is worth pointing out that these officers are part and parcel of the chain and mostly at the lower level of that chain.

It is important to take subsequent action in the entire chain to forestall this menace. Professional bodies such as Institute of Certified Public Accountants of Kenya (ICPAK) and the Kenya Institute of Supplies Management ( KISM) to which these officers belong must also take action in instances where officers have breached their code of conduct.

We desire for a better Kenya which we can all be proud of for good reasons. Our citizens need to have access to basic services and human requirements. To achieve this, we all have a responsibility to fight corruption.

Mr Okundi is the PwC Africa head of Government and Public Sector Business.