Category Fraud/Crime

Companies Act may increase Fraud

12 May 2011 BDO South Africa

Changes to the Companies Act, that allow private businesses that fall below defined thresholds to choose whether or not to have a financial audit conducted, could lead to an increase in fraudulent activity.

This is the opinion of Nigel Griffith, partner at BDO South Africa who says “I have personally noticed that company fraud appears to be on the increase amongst senior and long-serving employees. There are concerns that companies who choose to do away with audits after implementation of the new Companies Act will be exposing themselves as the checks and balances undertaken during an audit often serve to deter white collar criminals.”

With the implementation of the new Companies Act on 1 May, the auditing requirements for companies have been relaxed, with the effect that some companies could do away with audits altogether and opt for the review alternative. Griffith says “This could be short sighted on behalf of the companies as they could become victims of fraud exceeding the value they would have spent on an audit. For many the cost of an audit is a grudge purchase as the benefits are not easily quantified. Should a company make the choice not to participate in annual audits it is essential that the directors put other measures in place to protect the company.”

In order to improve their defenses against fraud and corruption companies should especially properly segregate key payment-related functions. Key duties such as requisitioning, authorizing, payment and reconciliation should be split among a number of employees, thus making it more difficult for employees to collude to defraud the business.

In addition, with the directors taking on greater exposure, they should consider the adequacy of their insurance cover and consult with their insurance brokers. “Under the new Companies Act directors and non-executive directors are responsible for good corporate governance, and should they be found wanting they could be exposed to heavy fines and/or imprisonment. The new Act requires directors to act in good faith for proper purpose, in the best interest of the company and with the degree of care, skill and diligence that may reasonably be expected. Their decision of whether or not to have an audit should be carefully considered in the light of these standards of conduct.”

King 3 is intended to apply to all entities, including private companies, and directors should consider whether this in fact establishes a benchmark against which their conduct could be measured.

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