Internal Control: What Those Charged with Governance Should Know

Tempe, October 31, 2017; Technical Staff

This document is a part of The AACI series of anti-corruption resources made available to our CACM members . The contents of this document constitute an integral part of the CACM Review textbook that would be available in countries where the CACM will only be offered by exam. 

Those charged with governance should have proper and adequate anti-corruption intelligence to prevent and deter corruption and avoid negligence or gross negligence in performing their duties. 

The AACI defines anti-corruption intelligence as: 

" the minimum, optimum knowledge a decision maker should have to avoid fraud and corruption intelligently. Such knowledge includes the proper blend of due diligence, internal controls, anti-corruption, governance, decision making, process auditing ( from a management perspective and duties) to avoid anti-corruption and fraud. By avoidance, we emphasize the concept of deterrence and prevention.  Corruption prevention is less expensive and better than any cure."

Internal control is a pillar of anti-corruption intelligence. Regardless of her background, a decision maker should master the concept of internal control. This mastery should include, at the minimum, the executive summary of Internal Control - Integrated Framework. 

We issued "Introduction to Internal Control" in October of this year and emphasized the importance of the control environment component of internal control.  It is the foundation of other internal control components. It is unfortunate that too many decision makers and board members have misconceptions about internal control. 

Delusions of internal control include, but not limited to, the following: 

• Internal control is the policies and procedures of an organization.

• Internal control is not directly related to preventing, deterring, and detecting fraud and corruption.

• Internal control is not required in small and medium-sized (SMEs) entities.

• Internal control is not related to business risks.

• Good governance is not related to internal control.

• Strategic management is not related to internal control.

• Internal control is not related to the board responsibilities.

• Accountability, transparency, and responsibility are not related to internal control.

• Compliance is not part of internal control.

• Expenditure on internal control is a waste of resources and expense.

• Internal control is static.

• Internal control prevents and detects every fraud and corruption event.

The more widespread these misconceptions among decision makers of an organization, the higher the corruption risks and business failure. 

Why do we call these assertions and beliefs "misunderstandings about internal control"? 

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The First Interview with Mr. L. B. Files, president of The American Anti-Corruption Institute (AACI)

The First Interview with Mr. L. B. Files, president of The American Anti-Corruption Institute (AACI).

As The American Anti-Corruption Institute's (AACI) journey approached five years since launching its operations in late 2012, fraud and corruption scandals continued to make headlines. Though the Volkswagen Dieselgate costs exceeded $30bn to date, and Samsung's CEO will spend time in prison for corruption charges, the corporate world does not seem to be paying attention. Corruption removed several heads of states from power, in South Korea, Brazil, a senator in the United States, UN officials and Ambassadors and, EU officials.

Despite the setbacks, or maybe because of the exposure, the global political landscape became more determined than ever to fight graft. For the first time, the United States equated the efforts of combating corruption to the fighting financing terrorism.

Fighting corruption has, in fact, became a prerequisite to fighting financing terrorism. Amid the global turmoil of corruption, the media and public relations of The AACI met Mr. L. Burke Files, the president of The AACI, at its headquarter in Tempe, Arizona to discuss The AACI's global efforts in fighting corruption, among other relevant issues.

The AACI: On behalf of our members, constituents, and advocates worldwide, we thank you Mr. Files for this opportunity to answer our questions.

Files: You are most welcome.

The AACI: As you know, corruption is a prevalent phenomenon hitting all over the world. How do you evaluate the commitment of the international community to fighting corruption?

Files: The 1977 Foreign Corrupt Practice Act, The United Nations Convention against Corruption (2005), the UK 2010 Bribery Act and those of the OECD relevant anti-corruption demonstrate an unprecedented global commitment to unequivocally fighting corruption. The most explicit U.S. message in this regard came at the May 2016 London anti-corruption summit where John Kerry, the former US Secretary of State said:  “We are fighting a battle, all of us. Corruption, writ large, is as much of an enemy, because it destroys nation states, as some of the extremists we are fighting or the other challenges we face." This proclamation changed the global landscape for fighting corruption. It tied, in public, for the first time, combating terrorism and combating corruption.

"This proclamation changed the global landscape for fighting corruption. It tied, in public, for the first time, combating terrorism and combating corruption."

The AACI: Why does The AACI focus all its efforts on executive management and those charged with governance?

Files: To answer your question, let me remind you that our founders are visionaries and responded strategically to the financial crises of 2008. The financial meltdown of 2008 shocked us though we had SOX and all the other relevant laws. When you read the report of THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, you will find the crises was 100% avoidable. Further, that corporate of America suffered from significant weakness at the top. We found that the “tone at the top” was severely weak and at best sickened from significant lack of anti-corruption intelligence and short-term visions. We believe that the Board Of Directors and Executive Management must possess the minimum required anti-corruption knowledge and skills to enable them to meet their duties. As of today, The AACI is the only organization all over the world that targets decision makers to help them deter, prevent, and detect fraud and corruption through the methodical management anti-corruption certification program Certified Anti-Corruption Manager (CACM).

"The AACI is the only organization all over the world that targets decision makers to help them deter, prevent, and detect fraud and corruption through the methodical management anti-corruption certification program Certified    Anti-Corruption Manager (CACM). "

The AACI: What do you mean by anti-corruption intelligence?

Files: The AACI coined it to mean the minimum, optimum knowledge a decision maker should have to avoid fraud and corruption intelligently. Such knowledge includes the proper blend of due diligence, internal controls, anti-corruption, governance, decision making, process auditing ( from a management perspective and duties) to avoid anti-corruption and fraud. By avoidance, we emphasize the concept of deterrence and prevention.  Corruption prevention is less expensive and better than any cure.

Click here for the complete interview

Introduction to Internal Control

Tempe, September 26, 2017; Technical Staff

This document is a part of The AACI series of anti-corruption resources made available to our CACM members. The contents of this document constitute an integral part of the CACM Review textbook that would be available in countries where the CACM will only be offered by exam. 

Internal Control

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) defines internal control in its Internal Control - Integrated Framework as:

“Internal control is a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.” 

Elements of Internal Control Definition

Internal control

1. Is a process. Process means related and interdependent tasks. It is ongoing tasks and activities—a means to an end, not an end in itself. For example, a sales department would approve a credit sales invoice when management already approved dealing with the customer and granted it certain credit terms. The management decision also relied on a due diligence report carried out by another department of the organization. 
2. Effected by an entity’s board of directors, management, and other personnel. It is the responsibility of those who are charged with governance to establish and maintain systems of internal controls. However, those who are charged with governance should ensure that each member of the organization understands his role and duties with respect to the systems of internal controls.
   
3. Applies to any entity irrespective of its size, industry, geographical location, or legal structure ( for- profit, not-for-profit, and to any governmental unit). It also applies to each department and unit in any entity.

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Corruption Prevention, Deterrence, and Detection — Nonprofit Organizations — Part 2

Tempe, May 31, 2017

Technical Staff

Significant Fraud Schemes in Nonprofits

1. Skimming
2. Check tampering
3. Expense reimbursements
4. Payroll schemes

As we will discuss what nonprofits can do to assess and evaluate fraud risks, we will list efficient and affordable anti-corruption practices nonprofits may use to prevent, deter, and detect fraud and corruption.

1. Skimming

When an entity receives cash, it must record (recognize) it in its accounting system. Skimming occurs when an employee steals cash or checks BEFORE recording it in the entity’s accounting system. Skimming schemes are usually called “off-books” schemes. Because cash theft happens before cash is recorded in the accounting records, it is tough to detect such a scheme: there is no audit trail. (Read more)

2. Check Tampering

A check tampering scheme occurs when a fraudster (usually an employee) takes a physical control of one or more than one check of an entity where the employee-fraudster benefits from controlling who the payee would be by forging the signature of the check maker and/or make certain alteration on the face of the check (financial instrument).

A check tampering scheme requires a physical control of the entity’s check. If the employee-fraudster cannot access a check or a check book, he just cannot complete any check tampering scheme.

Most forgery schemes are committed by accounts payable clerks (Read more)

3. Expense Reimbursements

Nonprofit organizations like for profits reimburses its officers and directors for “legitimate” business expenses. Qualified expenses for reimbursement varies from one entity to another. However, such expenses should be known to the nonprofit employees, management, and directors. As long as these expenditures are for agreed on business purposes and incurred in compliance with the nonprofit policies and procedures, they are reimbursed to the employee or manager who incurred them. Airline tickets, transportation, and lodging are examples of reimbursable expenses.

Under normal reimbursement procedures, …..

Expense reimbursement fraudulent scheme occurs through one of the following classifications:

1. Mischaracterization expense reimbursement — listing expenses that are not for legitimate business purposes where they are correctly classified to look authentic. (Read more)

4. Payroll Schemes

In a payroll scheme, the perpetrator usually falsifies a timecard or alters information in the payroll records. The most common payroll frauds are ghost employee(s), falsified hours and salary schemes, and commission schemes. We will briefly discuss the ghost employee scheme.

In a typical ghost employee scheme, the fraudster should do all the following: (Read more)

A ghost employee is not necessarily a fictitious person. It could be a real person who is conspiring with the fraudster to defraud the company. For example, (Read more)

Fraud and Corruption Risk Assessment

Those charged with governance and executive management of nonprofits should be aware of the nature and type of fraud and corruption risks their organizations face. It would be impossible to address such risks unless they are identified and quantified. (Read more)

The Minimum a Nonprofit Can Do to Prevent and Deter Fraud and Corruption

Recognizing that small charities and nonprofits do not have sufficient resource to segregate duties, too many identified fraud and corruption cases suggest that they could have been avoided with low cost and efficient controls and without a need for sophisticated financial expertise. It is common sense and a questioning mind.(Read more)

END

Note: Members will find the complete text of this paper at the membership portal

Certified Anti-Corruption Manager (CACM)

Developing effective Corruption Prevention Policy: CHECKLIST

Tempe, March 29, 2017

Technical Staff

This document is a part of The AACI series of anti-corruption resources. The contents of this document constitute an integral part of the CACM Review textbook that would be available in countries where the CACM will only be offered by exam. 

Definition: A fraud and corruption prevention policy is a formal, written statement recording the entity's attitude and response to fraud and corruption. 

The policy could be standalone or included within the code of ethics. It should state clearly what the organization expects from its employees regarding fraud and corruption. 

A successful policy is one that:

1. Embeds in it the “Perception of Detection” AND
2. Implements a swift and consistent action when fraud or corruption is suspected or detected

Corruption Prevention Policy Benefits

The following is a "partial" list:

1. Absence of confusion to what is fraud, corruption or misappropriation of assets
2. Clear consequences for engaging in fraud and corruption
3. Commitment of board of directors and management - the entity is not an easy target to fraud and corruption

Corruption Prevention Policy Benefits

Elements of Corruption Prevention Policy 

Pre-requites for Effective Corruption Prevention Strategies, Plans, and Programs

You may download the entire document when visiting The AACI Anti-Corruption Library: Free Resource

Fraud and Corruption Detection: Part 1 (D)

January 29, 2017

What is the resilience of an entity in preventing, deterring, and detecting fraud and corruption? 

Part 1(D) Fraud and Corruption Detection in a For-Profit Organization

Detection of fraud and corruption is directly related to fraud and corruption prevention and deterrence. While prevention of corruption is fundamentally based on anticipating what could or may go wrong, detection of fraud and corruption is principally designing and implementing policies, processes, and procedures to find out when fraud and corruption occur. Therefore, one will never systematically detect a fraud or corruption incident unless it was initially expected to happen. An effective internal control system is a partial answer for detecting fraud and corruption.

Presuming a proper tone is set at the top, the foundation of detecting fraud and corruption consists of the following pillars:

1.    Effective internal control system

2.    Effective corruption prevention policy

3.    Proper anti-corruption competencies of board members, executive management, and employees

4.    Effective support functions

As we will discuss each of these pillars separately in the anti-corruption series, the following section briefly discusses their fundamental importance and impact on fraud and corruption detection.

Read more when you log in. CACM members can access this series when they log in to the membership portal or click here.

We will start rolling over the CACM via exam in selected countries and regions. CACM candidates of these countries will find the CACM Review material helpful. 

Executive Anti-Corruption Programs in Europe

January 27, 2017

The AACI recently launched its cutting-edge executive anti-corruption training programs in London, Paris, Amsterdam, and Barcelona. All The AACI programs target executive management and those charged with governance.

The Duration of each program offered in these cities is four days (Monday - Thursday); 8:00 am - 2 pm.

For more information, you may contact us at Training@THEAACI.com