SA corporate crime looks bad, but it's even worse
November 19, 2009
Despite the already high levels of fraud in South Africa - which at 62 percent is more than double the 30 percent global average - there is a strong possibility that many incidences remain undetected.
The crimes that companies have suffered in the past year include financial statement fraud, bribery and corruption, theft, data theft, money laundering and insider trading.
South African companies may not be aware of just how pervasive these practices are because business in cutting staff to slash costs has also trimmed the number of people employed to be responsible for internal controls. Meaning that instead of three people processing and authorising payments to suppliers, just one person may now be responsible.
The PricewaterhouseCoopers Global Economic Crime Survey said there had been a drastic reduction in the success rate of the internal audit function in detecting economic crime. In 2007, about 20 percent of South African respondents reported that internal audits were the means by which economic crime was detected.
This year, only 5 percent of South African respondents highlighted internal audits as the reason for detecting crime, compared with 17 percent globally.
Many economic crimes in South Africa were detected through a whistle-blowing system within a company. In South Africa 21 percent of respondents highlighted whistle-blowing as means of detection, compared with 7 percent globally.
Most worrying is that the second most successful "strategy" in detecting economic crime is by accident, 18 percent of respondents said crimes were found out by accident, compared with 3 percent in 2007.
A lack of oversight gives people who are already feeling financial pressures both at home and at work (where staff have to meet sometimes unrealistic targets) the opportunity to commit fraud. And if detecting crimes by accident is one of the most prevalent strategies then business really does not have this issue high on its agenda.
Beige sings the blues
Beige Holdings has found itself at the centre of an anonymous letter campaign in which it is accused of cooking its books.
The AltX-listed group, of which Thebe Investment owns a third, has responded to the claims with an internal audit committee probe, and has pledged to call in external auditors PricewaterhouseCoopers (PwC) for a special investigation if the allegations are thought to be founded.
Nevertheless, chief executive Mark di Nicola is inclined to believe it is the work of "mischief makers". He points out that Beige is embroiled in two lengthy disputes.
First, there is the matter involving the vendors of packaging company Crystal Pack, which Beige acquired in full two years ago. The purchase price for the deal had been subject to earnings warranties.
Beige suspected profit was overstated and commissioned a forensic audit, which found "serious manipulation" of financial accounts - both prior to the acquisition and during the warranty period. All but three individual members of the vendor consortium have agreed to pay Beige back.
Civil cases against the three are pending and criminal investigations under way.
Second, some workers and contractors at Beige's Chloorkop facility have been on strike for nearly four months over wages.
Beige will not accede to the demands, saying demands would raise the facility's wage bill by 53 percent. In the meantime, temporary workers have been brought in.
"That's about 250 plus three individuals who have a bone to pick with us," says Di Nicola. "The thing with anonymous letters is you just don't know who you're dealing with. Who do you respond to, and how do you respond?"
The allegations in the letter that is doing the rounds call for an investigation by an independent forensic team into Beige invoices generated in December and January that have resulted in "a huge fictitious turnover of millions of rand" rolling over each month. Di Nicola says the company's credit notes "couldn't be more than R1 million or R2m" a month. Beige, which switched auditors in the 2009 financial year, had just been through a rigorous first cycle audit by PwC, he says.
Law and borders
It is a rather troubling thought that one has to trawl down to 11th place on the 2009 ranking of Transparency International's corruption index before you reach a country that you might actually like to settle in.
It is a disturbing thought but, well, right up there at the top of the class are New Zealand, Denmark, Singapore, Sweden, Switzerland, Finland, Canada, Iceland and Norway; with the exception of Singapore they're all cold countries - at least for much of the year. And let's face it, Singapore is what you might call sui generis and should not be used in any comparative exercise.
And then there's Sudan, which isn't cold. It comes in 'th out of ' contestants and the one thing you have to wonder about Sudan is how did it manage to even score 1.1? Although that could just be a media-induced perception.
And Iceland? How did that manage to come in 8th place with 8.7 points? The government there has just launched a major probe into allegations of corruption around the recent implosion of the financial sector and then the economic meltdown. Things are so tough in that cold country that McDonalds has pulled out; its first retreat.
Like all perception-based comparative exercises, the Transparency International corruption index should be treated with some caution, but it does play a very useful role in keeping us on our toes and giving us something to aspire to. This is particularly important as corruption tends to be a greater burden on the poor.
Our competition authorities might be interested to see from Transparency International's website that public works contracts and construction are the sectors where firms are most likely to use bribes.
Edited by Peter DeIonno. With contributions by Samantha Enslin-Payne, Ingi Salgado and Ann Crotty
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