managing the risk of fraud in the conversion to...

© 2002 Association of Certified Fraud Examiners. All rights reserved.South Florida Chapter of the ACFE, December 7, 2009 Fraud Seminar

Managing the Risk of Fraud inthe Conversion to IFRS

Fernando Cancino, CFE, CIA

BPO Executive Americas

Amicorp


A Road Frocked with Risk

• Conversion to IFRS• Conversion Risk of Fraud• Risk Mitigation Strategy

– Integration with Sarbanes-Oxley Act– Integration with enterprise risk management


Key characteristics of IFRS

• Principles-based approach that places greater emphasis on interpretation and application of principles,

• Need to assess the substance of transactions and evaluate whether the accounting presentation reflects the economic reality

• There is renewed focus on the need for professional judgment

• Greater use of fair value as a measurement basis placing emphasis on obtaining reliable measurements


IFRS Conversion for the US

• It is not a matter of if it will occur, but rather a question of when and how

• SEC and AICPA support the conversion• More than 113 countries around the world,

including all of Europe, currently require or permit IFRS reporting. Approximately 85 of those countries require IFRS reporting for all domestic, listed companies. Exceptions



Source: PwC

SEC Roadmap



• Empirically more than just a change of accounting standards affecting the finance function

• Fundamental change of accounting mindset from rules based (US GAAP) to principles based (IFRS)

• Paradigm shift of accounting and financial reporting from a compliance-based approach to an economic value approach


IFRS Conversion Risk of Fraud

• The shift will call for management to use judgment in presenting financial statements, which poses a human element risk factor leading to a higher risk of financial statement fraud and misstatement

• The IFRS conversion increases the opportunity to commit financial statement fraud, as accounting policies and internal controls over financial reporting undergo change



Situational Pressure

Perceived Opportunity

Personal Integrity

Total Propensity for IFRS Fraud

Dr. Steve Albrecht’s Fraud Propensity Scale RATING

High

High

Medium

Medium High to High


Financial Statement Fraud CorePrinciples

• 83% of financial statement fraud is committed by senior managers – COSO study

• Why?– To conceal true business performance

– To preserve personal status/control

– To maintain personal income/wealth

• How?– Playing the Accounting System

– Beating the Accounting System

– Outside the Accounting System



Revenue recognition

Expense recognition – share based payments, employee benefits

Assets – financial & non-financial

Liabilities – taxes & other

Financial liabilities and equity

Derivatives and hedging

Consolidation

Business combinations

De-Recognition

Changes in TimingInternal Controls

RecognitionProceduresValuations

Policies


Lessons Learned From Europe

Concerns About Development Costs:

“We are concerned about the capitalization of some internally developed intangible assets, not least because only some of the costs of developing the assets are capitalized. When applying the criteria for the capitalization of development costs, the scientists can run rings around the auditors.”

BDO – Attitudes to IFRS


Lessons Learned From Europe

• Cost varied (from average of $500k to $5,000k)

• The impact on technology was significant and clearly underestimated

• Project planning and assessments started too late

• System versus Data issues

• Several situations where the solutions were short-term and/or “quick-fixes” (e.g. spreadsheets, etc.)

• Many conversions were done at group level, i.e. not all embedded in a sustainable way into the systems


IFRS Conversion Fraud Schemes

• Generally, the schemes perpetrated will involve the manipulation of policies, procedures and internal controls causing:– Fictitious revenues

– Timing differences

– Concealed liabilities & expenses

– Improper disclosures

– Improper asset valuations



• The valuation of accounts receivable may be altered by failing to establish appropriate reserves and allowances and recognize related expenses

• Manipulation of the methods to value inventory creating an overstatement of inventory quantities and unit costs



• When preparing IFRS opening balances, the writing off of inventory when future value exists

• Misclassifying investments to gain or to avoid recognizing losses in current results

• Depreciating fixed assets using unreasonable methods and assumptions

• Overstating the value of assets



• Manipulation of restructuring, purchase accounting, and other reserves

• Misclassifying lease structures

• Inappropriate recognition of revenue and/or expenses

• Inappropriate recording of journal entries to reduce expenses or cost of goods sold


• Not disclosing related party transactions and balances appropriately

• Failure to appropriately disclose significant accounting policies and estimates and changes thereto

• Improper accounting for business combinations




• Manipulation of financial statements to manage the perceived value of the company.

• The restatement of the opening balances


IFRS Conversion Fraud RiskMitigation – A COSO Approach

“The five components of COSO’s Internal Control — Integrated Framework (the COSO Framework) work in tandem to mitigate the risks of an organization’s failure to achieve those objectives.”


IFRS Conversion Fraud RiskMitigation – A COSO Approach

• Creating a control environment including setting the “tone at the top,” code of conduct/ethics and whistle-blower hotline embedded in the conversion project and linked to the enterprise risk management program

• Performing an IFRS conversion fraud risk assessment that includes the identification of fraud risks, schemes and mitigating controls

• Designing and implementing antifraud control activities that link or map to identified fraud risks to control activities

• Effective communication of antifraud programs and controls both during conversion and in steady state

• Monitoring the effectiveness of antifraud programs and controls both during conversion and in steady state


Integration Across the Enterprise

ERM

SOX

ProjectsIFRS

Conversion

COSOThread


Risk Management in Action


Flawless Execution


Conclusion

• Risk is real and so is the likelihood of occurance

• COSO based control framework and risk management strategies will provide risk mitigation

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