Exploring The Dark
Side of Accounting (Fraud)
What is Fraud?
Black Law Dictionary said “Fraud is intentional perversion
of truth, false representation of a matter of fact, whether by words or
conduct. For the purpose of inducing
another, in reliance upon perversion of truth.
To part with some valuable thing belonging to him or to surender a legal
right.
Why Fraud is a Costly
Business Problem
Fraud losses reduce net income. If profit margin is 10%, revenues must
increase by 10 times losses to recover affect on net income. Fraud rob income. To restore income to Rp10.000, need Rp10.000
more Rupiah of revenue to generate Rp1.000 more Rupiah of income.
These Are
Inteeresting Time
Number and size of financial statements fraud are
increasing. Number and size of frauds
against organization are increasing.
Some recent fraud include several people, as many as 20—30 peoples. Seems to indicate moral decay). Many investors have lost confidence in
credibility of financial statements and corporate reports. More interest in fraud than ever before, now
a course on many college campuses.
Perspective on Fraud
Bad Fraud
Acquierer overpays.
Earnings management like false revuneu recognition schemes, costs and
expenses schemes, understatement liabilities, and many more. Illegal conduct like liablitiy for past
conduct, impoct upon future earnings, and many more.
Good Fraud
Acquierer underpays.
Misconduct that if discovered, reduces costs, and increase earnings.
Why So Many Financial Statement Frauds All of a Sudden?
Good Economy was maskng many problems. Moral deacy in society. Executive incentives, to achieve the
target. Wall street expectation, reward
for short term behavior. Nature of
accounting rules. Behavior of CPA Firms
like Arthur Andersen in the Enron case, Greed
by investment banks, commercial banks, and investor. Educator failures, the fraud knowledge not
deliver well to the student.
Types of Fraud
Employee fraud, vendor fraud, customer fraud, investment
scams, bankrupty frauds, miscellaneous frauds.
The common element is deceit or trickery.
The 21st Century
Landscape
Civil and crimina legislation like Sarbanes Oxley Act of
2002. Professional standards like
Committee of Standard Organinzation (COSO), Statement of Auditing Standards
(SAS) 99, Public Company Accounting Oversight Board Standards Integrated
Audit. Institute for Internal Auditors
(IIA) Standards, ABA Rules for Professional Responsibility.
Expenses Avoided by
Fraud
Tax crimes, failure to pay, false statement, evasion. Fraud against suppliers and customer. Improper labor practtices. Environmental, health, and safety
violations. Money Laundering.
Applying COSO
Framework
Control Environment
Code of conducts or ethics; ethics hotline; hiring and promotion;
audit committee oversight; investigative process; remedition.
Fraud Risk Assessment
Systematic process; level within organization; likelihood and
significance.
Control Activities
Linking controls to identified fraud risks.
Information/Communication
Information systems and technology; knowledge management; training.
Monitoring
Ongoing monitoring by management; separate “after the fact” evaluations
by internal aduit.
Educators
Need to teach ethics more. Need to teach student about fraud and offer a fraud
course. Need to teah student ho to think.
Do analysis not do copy and memorize.
Accounting Practice: Between
Evil and Angel
Company Overview
PT HM Sampoerna is the largest tobacco company in Indonesia.
In 2007 net sales is IDR29.8 Trillion, in
2008 (9 moths) growing 17.2%. Approximately
30,000 employees. Brand sold: A Mild, Dji
Sam Soe, Marlboro. Listed on Indonesian Stock
Market. Majority owned by Philip Morris International
(PMI). One of largest tobacco companies in
the world. Listed on New York Stock Exchane.
Tone at the Top
Nothing is more important than our commitment to integrity –
no financial objective, no marketing target, no effort to outdo the competition.
No desire to please the boss outweighs that
core commitment. Our commitment to integrity
must always come first (Louis Camilleri, CEO of PMI).
Company Culture
(1)
Establish compliance and integrity guidlines on business
ethics;
(2)
integrity is one of the core performance competencies;
(3)
Promote “whistle blower” with free hotline number
to report any suspected non compliances;
(4)
No tolerance for retaliation;
(5)
Stringent follow up and reporting of allegatios received;
(6)
Increase employees awareness on compliance and integrity
through training and campaigns.
Resources Qualifications
(1)
Selective recruitment and placement process to ensure
the right talents with high integrity.
(2)
Continuous training of soft and technical skills.
In example GAAP Academy Programs, accounting technical updates. Developing PMI Managers.
(3)
Develop key employees to be member of professional
accounting body (ACA, CIA).
Policies and Procedures
Establish policies and procedures for all aspects of the business
process. Finance policies (50 policies);
Accountting Guidelines (1); Capex/Lease/Disposal (10); Travel and Entertainment
(2); Cash management (8); Credit controls (6); Equity investent/acquisition (7);
other finance policies (8). Information systems
(11 policies). Compliance (16 policies).
Other (procurement, human resource, CA, operations
(17 policies).
Internal Processes
Adequates segregation of duties. Supervisory review and approval. Adequate approval authoriztions. Comprehensive automated IT controls within applications.
Adequate control on user access to systems
and applications.
Monthly reconciliation on balance sheet, income statement and
cash flow against the underlying financial accounts. Monthly review and analysis (Sampoerna & PMI).
In example mojor balance sheet accounts, income statement (against budget, standards,
and previous period), suspense, clearing and inter company account. Regular independent counts of cash, inventory and
fixed assets. Job rotation of executives
(averaging 3 years) to improve capacity and to prevent the abuse of power.
Internal Independent Review
Internal independet review by (1) Corporate Audit Department
(repporting to PMI). The audit based on risk
assessment, covered revenue, disbursement, payroll, marketing expenses, procurement.
And financial reporting. (2) Internal Audit
and Control Department (Sarbanes Oxley Act section 404), audit 18 major business
process, document and test over 300 key controls, external auditor independently
review SOX testing results. (3) Appoinment of Independent Audit Committees. Sampoerna (3 qualified members: senior accounting
lecture from state university, senior partner of local accounting firm, and ex managing
director of HM Sampoerna). Meet at least
quarterly. PMI: Independent, experienced international business leader.
External Review
External auditors conduct comprehensive review to ensure true
and fair reflection of financial statements. Substantive review of key accounts, systems and
controls.
Government & Shareholders
As listed company, sampoerna is required to comply with detailed
and tranparent reporting requirement form BAPEPAM. Published reporting in the company website. As a subsidiary of a company listed in NYSE, meet
the reporting requirements from NYSE SEC. Government tax audit. Shareholders inquiries.
Summary
HM Sampoerna condutcs business using sound internal process and
controls across all levels of the organization to ensure full compliance to (1)
all applicable laws and regulations; (2) local and international accounting standards
and best practices. This has provided a solid
platform to ensure the company’s financial statement are true reflection of business
performance and actual financial results.
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