See no evil, hear no evil : Rationalizing corruption

See no evil, hear no evil : Rationalizing corruption Hendi Yogi Prabowo ;  Director of the Center for Forensic Accounting Studies at the Accounting Program of the Islamic University of Indonesia, Yogyakarta, He obtained his Master’s and PhD in Forensic Accounting from the University of  Wollongong Australia

JAKARTA POST, 13 Mei 2013

Recently, Transparency International Indonesia (TII) published a report called the Youth Integrity Survey. The survey examined the integrity of the youth of Jakarta. Similar surveys were conducted in Fiji, Sri Lanka and South Korea.

As a major national problem, one way corruption can be diminished is by removing its “healing factor” so as to prevent it from regenerating over time. According to the TII report, corrupt officials appear to be getting younger by the day, which indicates the vulnerability of our younger generation to the influence of corruption.

The Youth Integrity Survey produced some interesting results; among them is the fact that around half of the surveyed youths believed that lying and cheating for getting out of tight situations or for helping family was acceptable conduct. The survey also revealed that the education system is seen as the most influential factor that shapes the younger generation’s view on integrity. Mass media, according to the survey, is also very influential.

The fact that the survey shows that some young people tolerate corrupt behavior as long as it is for the right cause deserves our attention. Criminologist Donald R. Cressey, over a half decade ago, defined three causal factors that need to be present for a person to commit fraud: motivation, opportunity and rationalization.

Rationalization is particularly important. Rationalization is essentially justification of one’s immoral behavior so as to avoid guilt. It is through rationalization that in most, if not all, cases corruptors still see themselves as men of integrity even after conviction. 

Reasons such as “everyone is doing it”, “this is how business is done here”, “I’m just helping my friends and family” are among the most common forms of rationalization for dishonesty.

Contrary to common belief, fraud rationalization does not occur in a short period of time: it is a lifelong process. Studies on fraud rationalization suggest that students who often cheat at schools and college, for example, have a higher probability of doing it again at their workplaces in the future. 

Despite the function of schools and universities to build students’ skills and character (including integrity), ironically the three fraud causal factors (motivation, opportunity and rationalization) exist in these institutions corrupting young minds even before they jump into the workforce.

Various cases of plagiarism and other academic crimes by students or, in more than a few cases, by reputable academic staff, have created a fertile environment for fraud rationalization in education institutions. It is hard to imagine how we could produce honest and accountable professionals through our education system.

Regardless of how simple it might seem, fraud rationalization is a complex psychological process. Psychologists believe that fraud and its rationalization is similar in some ways to drug addiction. As evidenced in many fraud cases, offenders often start their careers with unethical conduct that is legally acceptable.

When the first offense is successfully perpetrated the offender feels the joy and satisfaction from it, then it is only a matter of time until the next fraud is committed. Generally, after his or her first offense a fraudster will experience what psychologists called as “cognitive dissonance” which is basically the feeling of discomfort (e.g. from guilt and disappointment) from holding two or more inconsistent ideas, or when behavior is inconsistent with an idea.

Fraud rationalization is a way fraud offenders try to reduce their cognitive dissonance. Experts believe that a fraud offender’s “cognitive dissonance management” will get better with each offence, up to the point where the process will happen automatically, without even thinking.

In criminogenic environments (e.g. corrupt organizations or nations), fraud rationalization may begin to develop in early childhood by various means, one of which is the mass media. The Youth Integrity Survey shows that television is the most likely medium to influence young people’s perceptions of integrity.

When children see news about white-collar crime on TV on a daily basis without proper supervision, for example, they will grow up believing that such misconduct is permissible in his or her society. Comparing the results of the Transparency International’s survey with Ernst & Young’s 2012 Global Fraud Survey, we see the link between the young generation’s perception and that of presumably older generation (the respondents for Ernst & Young’s survey were senior decision makers from large companies in 43 countries including Indonesia).

Ernst & Young’s survey revealed 60 percent of Indonesian respondents believed it was acceptable to pay cash to secure new business opportunities, whereas 44 percent believed providing entertainment to decision makers to win 
new business was also acceptable. Is this corruption-tolerant attitude is the fruit of lifelong exposure to unethical and unlawful conduct through the education system and mass media?

In conclusion, tolerating corruption can be seen as the earliest stage to becoming a corruptor in the future. It is important for young people to see corruption as evil regardless of its causes. Many argue that to maintain their integrity, young people, especially children must always be protected from bad influences that may impair their sense of “right and wrong”. To achieve this, as suggested by the TII survey, family and education systems can serve as catalysts for nurturing integrity so that today’s youth may one day become the honest and accountable people that our country deserves.. ●

A new strategy in combating fraud: Will it work?

A new strategy in combating fraud: Will it work?

Hendi Yogi Prabowo, THE DIRECTOR OF THE CENTER FOR FORENSIC ACCOUNTING STUDIES AT THE ISLAMIC UNIVERSITY OF INDONESIA, YOGYAKARTA; HIS MASTER’S DEGREE AND DOCTORATE FROM THE UNIVERSITY OF WOLLONGONG, AUSTRALIA

Sumber : JAKARTA POST, 4 Januari 2012

Recently, Bank Indonesia issued a circular on the implementation of antifraud strategies for commercial banks. Many see this as a reaction to the recent spate of banking fraud cases in Indonesia that threaten the reputation of the nation’s banking system.

Essentially, the circular established an obligation for Indonesian banks to have in place an antifraud strategy covering four pillars: prevention, detection and investigation, reporting and sanctions.

Failure to fulfill the obligations will result in sanctions from Bank Indonesia. The strategy is intended to combat offenses such as trickery, asset embezzlement, information leakage and banking crimes, to name a few.

As evidenced in, for example, the Citibank fraud case, customers often become the ones who bear the consequences of insufficient antifraud measures. Their trust was misused by corrupt bankers to obtain unlawful benefits. For this matter, customer awareness is of importance in combating fraud in the banking industry.

The circular gave a place for customer awareness in the program’s first pillar, prevention. On the other hand, from offender’s side, many recent fraud cases were perpetrated by bankers themselves who presumably understood internal systems well and knew where to find weaknesses.

For this issue, the circular highlighted the importance of the “Know Your Employee” policy, covering areas such as recruitment procedures, position selection systems and employee monitoring, including monitoring of people’s character, behavior and lifestyle.

This personal oversight is necessary. Fraud studies suggest that there are often “red flags” associated with personal behavior, such as “wheeler-dealer” attitudes, an unwillingness to share responsibilities and living beyond one’s means.

As suggested by the ACFE’s global fraud studies, the most common means by which fraud is uncovered is by “tips” or inside information. The circular also emphasized the importance of having whistle-blower system as part of an organization’s anti-fraud strategy.

The system must include elements such as whistle-blower protection, a fraud reporting mechanism and a response mechanism for fraud reports. Such a system must be transparent, consistent and trustworthy to ensure its effectiveness.

A major challenge in establishing such a system is that generally the effectiveness of whistle-blowing in Indonesia is not yet adequate. Many people who know about fraudulent acts within their organizations are reluctant to say anything about them due to the fear of negative consequences. This requires banks to first build a culture of integrity and transparency within their organizations so that employees will have the willingness and courage to report any misconduct in their workplace.

An important principle in the science of crime prevention is that “a good crime prevention practice is one that is problem based, not practice based”. Under this notion, an important prerequisite in understanding the real problem is the availability of reliable crime data as the basis for the decision-making process.

The circular creates an obligation for commercial banks to report fraud incidents to Bank Indonesia in a standardized format that will make, among other things, trend analysis possible. Nevertheless, it does not say anything explicitly about whether or not such information, or at least a summary of it, will be available for public.

In other countries, such as the US and the UK, although most fraud data (e.g. names of the offenders and victims) remains confidential, a summary of trends is commonly available to the public.

This will be part of the consumer education process to raise awareness regarding current fraud trends and available prevention measures. This is of importance since no matter how sophisticated the antifraud prevention measures in place are, so long as consumers are unaware of the threats that stalk them, they will become an “Achilles’ heel” for the entire system. Many fraud cases were perpetrated simply by manipulating human factors without the need to penetrate, for example, existing fraud prevention technology.

The next challenge is to socialize the new guidelines among Indonesian banks. Although the purpose of the circular is clearly for the benefit of commercial banks, designing and implementing an antifraud system may mean incurring additional cost for the organization.

It is understandably common throughout the world that organizations such as banks are often late in implementing anti-fraud systems simply because there is no “business case” to rush to do so. Therefore, Bank Indonesia’s next task should be to convince those who are still reluctant to make additional investments in antifraud prevention to do so immediately, before the Indonesian banking industry’s reputation is severely damaged by fraud.

Indonesian commercial banks must realize that although in the short term implementing a comprehensive antifraud system may affect their bottom line, in the long term the decrease in fraud losses as well as increasing trust from customers will benefit for the entire banking industry. ●

So, what exactly is a forensic audit?

So, what exactly is a forensic audit?

Hendi Yogi Prabowo, THE DIRECTOR OF THE CENTER FOR FORENSIC ACCOUNTING STUDIES AT THE DEPARTMENT OF ACCOUNTING OF THE ISLAMIC UNIVERSITY OF INDONESIA, YOGYAKARTA

Sumber : JAKARTA POST, 2 Januari 2012

Ever since the completion of the forensic audit report on the Bank Century case and its submission to the House of Representatives (DPR) by the Supreme Audit Agency (BPK), the name “forensic audit” was suddenly all over the news again. The report reveals 13 findings of possible fraudulent acts surrounding the Bank Century scandal.

Nevertheless, many questions arise regarding whether or not such findings will solve the Century case. House Deputy Speaker Pramono Anung, for example, argued that he is unsure if the BPK’s forensic audit’s result on the Century scandal will solve the case.

He further proposes that it can only be solved if the Corruption Eradication Commission (KPK) steps in and works independently on the case. But what is this “forensic audit” people are talking so much about?

The term “audit” itself has been around for quite a long time. It simply means assessing the compliance against a certain standard.

In the accounting world, “financial audit” is a process of verifying an entity’s financial statements to express an opinion that is intended to provide reasonable assurance that the statements are presented fairly in all material respects according to the existing financial reporting framework.

The audit itself is performed under a “Generally Accepted Auditing Standards” that also serves as a “how-to” guideline for the auditors in doing their jobs.

On the other hand, a forensic audit is a “problem-based” process rather than a “rule-based” one. Defined by Bologna and Lindquist as the use of accounting skills and other relevant knowledge to unresolved issues within the context of rules of evidence, unlike the ordinary financial audit, there are no generally accepted “how-to” rules to be used in the process.

This is primarily due to the fact that fraud cases can be very different throughout the world. This also explains the fact that the audit process itself is often called by different names, such as “fraud audit”, “fraud examination”, “financial forensics”, to name a few.

The “problem-based” nature of forensic audit processes is in itself strength as well as a challenge. On the one hand, unlike the conventional audit, a forensic audit is very adaptive and flexible in terms of methods and techniques depending on the issues that need to be solved.

On the other hand, the challenge of the process lies within the fact that it can be difficult to measure the quality of the works performed by the auditors.

This is evidenced in, for example, the debates regarding whether or not the BPK’s auditors have done their job well. The differences in expectations regarding the result of the forensic audit may have been the cause for this problem.

In practice, whereas the possible results of ordinary financial audit is pretty much predictable (e.g. unqualified, qualified, disclaimer or adverse opinion), the outcome of a forensic audit is far more unpredictable. For example, a forensic auditor may find that fraud has occurred within an organization.

However, there will be more than a few occasions where they will find that all allegations of fraud are wrong and that no misbehavior occurred whatsoever.

The absence of any “how-to” standard does not mean that forensic audits are conducted entirely without a plan. For this matter, forensic auditors will normally resort to the so-called “best practices” in planning their audits.

Based on common worldwide practice, for example, the entire process is started by the establishment of a sufficient predication based on preliminary “red flags” that fraud may have occurred. Subsequently, preliminary evidence gathering is conducted continued by the formulation of the so-called “hypotheses” that are basically a set of predetermined questions aimed to be answered by the audit such as: “Does fraud really occur?”, “If fraud does occur, then who is the perpetrator and how did he or she do it?”, and “How much has fraud cost the organization?”. Without clear “hypotheses”, the entire course of the investigation will lose its focus and resources will be wasted without bringing the desired results.

In principle, the “hypotheses” are then tested by collecting further data and information through means such document analysis, investigative interviews and direct observations.

A key to success in this stage is maintaining its subject’s (e.g. alleged offenders) settings so that problems involving alleged offenders escaping, disappearing or manipulating evidence will be less likely to occur.

To maintain its subject’s natural setting, it is important for a forensic audit to be as time efficient as possible to, for example, diminish offender opportunities to dispose of or alter evidences.

Regarding the use of “best practice” as a reference in planning and executing a successful forensic audit, it is noteworthy that auditors must consider its relevance.

In the case of forensic audits in Indonesia, just as in other countries, it is essential for forensic audit experts to sit together and formulate the most appropriate “best practice” to be used as a guideline in the country.

This is important because although Indonesian auditors can always refer to other countries’ “best practice” in performing forensic audits, the “problem-based” nature of the process also means that such guidelines are formulated based on the most common problems involving fraud in each respective country.

Although fraud is a global problem, despite some similarities trends often vary across countries, as do investigation methods. An investigation method that works well in one country may lose its effectiveness in another part of the world.

For example, the BPK’s forensic audit report states that one of the main obstacles in the course of investigation is insufficient access to required documents, such as those used by law enforcers in their fraud investigations and prosecution.

This implies that testing predetermined fraud “hypotheses” using the document analysis method in Indonesia cannot be expected to work as effectively as in other countries.

In Australia, for example, obtaining a copy of a recent court decision or any other public document can be as easy as downloading them from the Internet.

In other words, the effectiveness of fraud investigation by means of document analysis is highly dependent on the quality of data management within the country.

With regard to this limitation, Indonesian forensic auditors need to be resourceful in obtaining the required information from other sources, such as investigative interviews and direct observation.

Regardless of the obstacles that forensic auditors may face in performing their work, the fact is that forensic audit skills are currently in high demand in Indonesia.

Cases of fraud have haunted the country for decades but need to be addressed immediately and forensic audits are an essential means for doing so.  ●