TO CATCH A THIEF
White-collar crime is on the rise in Asia. Can CFOs reverse the trend?
By Margo Towie

"I knew from experience ... that when it came down to detail, no senior managers actually wanted to get their hands dirty and investigate the numbers. They always felt they were above that ... "
Nicholas Leeson in Rogue Trader

Fugitive financier Pin Chakkaphak makes the short trip from his lush London apartment to report to a nearby police station most days. Other days he's in court fighting extradition to Thailand on charges of embezzlement. Pin allegedly embezzled some 2 billion baht (US$53 million) while president of now defunct Finance One. He denies the charges.

Further afield in Canada, Rakesh Saxena, former flamboyant financial advisor to the collapsed Bangkok Bank of Commerce, sits in his luxury Vancouver apartment. Saxena has been under house arrest for more than two years while resisting efforts to extradite him to Thailand on charges of embezzling at least US$46.8 million from the bank. Saxena acknowledges the bank engaged in embezzlement schemes but denies he benefited.

The various fraudulent schemes that led to the collapse of Barings, Finance One and the Bangkok Bank of Commerce all had one thing in common - they depended on lax supervision for their success. But if any lessons have been learned from these disasters, the results are not yet evident. In fact, the value of detected fraud in Asia continues to climb. In Hong Kong alone, 1998 losses rose to 410 reported business fraud cases at a cost of HK$2.5 billion (US$323 million) from 313 cases costing HK$1.2 billion (US$151 million) a year earlier. In Thailand, police investigated some 960 cases of corporate fraud worth 6.3 billion baht (US$164 million) in the 11 months to November 1999. The amount represents only about a quarter of what's actually been lost to fraudsters, reckons Viraphong Boonyabhas, head of the Business Crime Data Bank at Chulalongkorn University. The rest goes either undetected or unreported.

The reason for this surge is not hard to find - the controls put in place by finance managers do not seem to be working. A recent client survey by KPMG Hong Kong revealed that most detected fraud - 32 percent - was found by accident, whereas internal audit uncovered only 16 percent of corporate rip-offs. Other internal controls and employee whistle blowing exposed the balance of detected fraud. Overall, some 58 percent of perpetrated fraud was put down to poor internal controls. Indeed, lax supervision and poor internal controls are contributing to a worldwide expansion of fraud, much of which is exposed by accident rather than design. And the problem is by no means a local one. Germany's main law enforcement agency successfully prosecuted economic crimes worth DM10.5 billion (US$6 billion) in 1998. It reckons the same amount went undetected. Meanwhile, the Association of Certified Fraud Examiners, a US forensic-accounting trade body, has calculated that fraud costs the average US company US$9 per employee per day. No such figure exists in Asia, as a frightening percentage of CFOs are not even aware of the problem. "The general perception is that this will not happen to us,'" says Neil Thamotheram, Asia Pacific internal audit leader at Deloitte Touche Tohmatsu Enterprise Risk Services.

No Gifts, Please

Tanadit Charoenchan, CFO at Shin Satellite, a 3 billion baht (US$80 million) a year satellite services company, freely admits that he doesn't have any specific fraud risk management system. "We haven't had any cases of fraud while I've been here. But if you ask me whether that's because we didn't have any or we didn't detect any, I [can't say] definitively one way or the other." Still Tanadit says the buck stops with him as CFO to ensure internal controls are tight enough to mitigate fraud. "We have a preventive strategy not a detective strategy," he says.

The Thai CFO's system starts at recruitment, with at least one check to candidates' most recent employer to verify credentials. Most experts in fraud control say this kind of check is essential. "In my experience most of the major frauds that I have investigated in Asia have been perpetrated by senior managerial staff," says Thamotheram. In addition, Shin Satellite enforces a tough code of conduct on its employees once they are hired. Among other things, the code precludes personal gift giving between staff, suppliers and customers. Procurement, finance and engineering functions are separated, low-level employees are rotated between departments, and long-standing supply orders are routinely queried. While Tanadit concedes internal audit primarily functions as a performance monitor, he contends that along with other controls, it plays an important detective role in mitigating fraud. External auditors and a board-level independent audit committee reporting directly to shareholders complete the control grid.

While the system has yet to turn up any evidence of wrong-doing, he agrees that the emphasis on internal monitoring is correct - outsiders are the least of his concern. "Our biggest risk is from insiders - our staff, suppliers and customers," says Tanadit. Mark Bowra, senior manager of forensic accounting at KPMG Hong Kong, agrees with Tanadit's general approach. "You need to have good corporate policy: zero tolerance and be prepared to show what you won't tolerate," says Bowra. "You need to review the process frequently, rotate and train people. Many companies don't have segregation of duties. It's amazing." Lack of segregation happens, he says, when you don't have a lot of staff. All over the world many small- and medium-sized companies have a few people doing several jobs. But in Asia, says Bowra, there's less control than you might find elsewhere. "Segregation isn't as well controlled in Asia. If there's a problem, they'll hide it with a bandage," says Bowra.

Thamotheram contends that external demand for better corporate governance will drive better fraud risk management. Risk management in general, he notes, is a relatively new concept for Asia, and most companies see it as a cost rather than an added value. "The issue to address is whether CFOs perceive fraud as a major risk to their organization." If they do, getting approval to fund a fraud risk strategy may still be an uphill struggle. While Shin Satellite's internal controls form the foundation of a good fraud risk strategy, it lacks benchmarking to prove its effectiveness. "Organizations need to invest in developing self assessment checklists and review them frequently," says Thamotheram.

Band-Aid or Cure?

Marshalling the numbers can help win budgets. "If they believe they are losing US$5 million a year to fraud and theft, they may well spend US$250,000 to reduce it to US$1 million. This puts it as a profitable scheme that is worth the money," says Stephen Payne, managing director of Hong Kong-based Wings Management Support Services. This sort of expenditure may well become a requirement before too long. In the UK, for example, the London Stock Exchange (LSE) is preparing tough risk-reporting rules, due to come into effect at the end of this year. Based on recommendations in the Turnbull Report on corporate governance published last year, the rules will require LSE-listed firms to assess non-core risks, such as the danger of fraud, and how well they have prepared for them. Regulators in Europe and Asia are studying London's initiative with an aim to follow its lead.

Meanwhile, experts say, most CFOs will pick up fraud in the books, but few are likely to look behind the numbers. Bowra cites a letter of credit fraud that had eased past internal controls. "It looked fine: a sea shipment from Korea to Hong Kong. But it was delivered in one day." Pressure to produce short-term results makes it harder for CFOs to justify fraud prevention expenditures, says Bowra. "If they are trying to cut costs to boost results they are likely to cut back [anti-theft measures], making it easier for fraudsters," he says. When it comes to fraud, taking the long view may be the best policy.

Margo Towie is a Bangkok-based business writer