Managing Conflict of Interest - Organisation for Economic Co ...

164 Managing Conflict of Interest(ISA 240) 1 offers a simple definition: Fraud is an intentional act committedby one or more individuals in management—those chargedwith governance, employees, or third parties—involving the use ofdeception to obtain an unjust or illegal advantage.Measuring the Cost of Fraud and Conflict of Interest: MissionImpossible?Determining the true cost of fraud and abuse is an impossibletask, because fraud is a crime based on concealment. Some casesof fraud are never detected or the perpetrators are caught only afterfraud has occurred for several years. Many cases that are detectedare never reported for a variety of reasons, including the desire topreserve the company’s reputation. Moreover, incidents that arereported are often not prosecuted. Finally, there is no agency ororganization specifically charged with gathering comprehensivefraud-related information. These factors combined make it very difficultto estimate the true cost of fraud. Thus, the measure is justthat: an estimate.A 2004 survey conducted by the Association of Certified FraudExaminers (ACFE) in the United States examined occupational fraudand found that, on the average, US organizations lose 6% of theirrevenue, or an estimated USD660 billion a year—about USD4,500for every worker—to fraud. This study determined that 59% offrauds occur because of weaknesses in internal controls, and 95%of US companies report employee theft.Not surprisingly, it is much less expensive to prevent embezzlementthan it is to investigate it. It is estimated that for each USD1lost due to fraud, an organization loses an additional USD4. Thesecalculations are conservative, and do not take into account otherlosses the organization will ultimately suffer, including its good nameor reputation. To put it another way, each loss caused by internal orexternal fraud costs at least five times the original amount:1The International Auditing and Assurance Standards Board (IAASB), underthe aegis of the International Federation of Accountants, issues InternationalStandards on Auditing (ISAs), which are followed by professional accountantsand auditors in most jurisdictions around the world. ISA 240 outlines the standardregarding “The Auditor’s Responsibility to Consider Fraud and Error inan Audit of Financial Statements.”ADB/OECD Anti-Corruption Initiative for Asia and the Pacific