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75 ANIVERSARIO DE LA Federación Nacional de Contadores del Ecuador
VIDEO: El Auditor Frente sus Tres Mayores Desafíos
MIAMI KEYNOTE: Public Financial Management, 2016
CONFERENCIA: CONTROL INTERNO Y ÉTICA: ESTARÍAN PERTINENTES EN 2025?
CONFERENCIA 6a Conferencia de Auditores Ecuador: El Auditor Interno Frente sus Tres Mayores Desafios
CONFERENCIA CReCER 2015: Empresas Estales en Busca de Etica---State Enterprises in Search of Ethics
CONFERENCIA QUITO HONESTO: Ambiente Etico = Municipio Eficiente: Principios de Conducta Etica, 2014
DOCTORADO HONORIS CAUSA - UNIVERSIDAD INCA GARCILASO DE LA VEGA, LIMA, PERU - 2013
DECORATION BY THE PERUVIAN GOVERNMENT 1972
My Work in Peru / Mi trabajo en el Perú
CONFERENCIA EN HUANUCO, PERU - El Auditor enfrenta la Erupcion de Corrup$ion del Siglo XXI -2013
CONFERENCIAS EN CHILE - 3 Mayores Desafios al Auditor Interno - 2012 - VIDEO y TEXTO
THE CONTINUING FINANCIAL CRISIS
GEORGIA CORRUPTION ON MY MIND
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SPECIAL INVESTIGATOR OF CORRUPTION IN STATE GOVERNMENT 1959-60
LEGENDS: Georgians Who Lived Impossible Dreams
Wesberry v. Sanders, 376 US 1 Landmark US House Reapportionment Case
POLITICS - MY FIRST CAMPAIGN 1961
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GA POLITICAL TRANSFORMATION
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MANILA LECTURES AT FAR EASTERN & SANTO TOMAS UNIVERSITIES: Good Governance and Social Responsibility
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Most of Jim Wesberry's public speaking is in the Spanish language, but occasionally he speaks in English.  Here is a sample. 

usaid-rigr11.jpg
Jim Wesberry thanking USAID Inspector General's Office officials for Washington Seminar program

Fraud Detection and Investigation 

Century 21’s Biggest Challenge to the Accountancy Profession

 

By Jim Wesberry, CPA

 

Director Project ATLATL - Mexico

Contracted by USAID to Casals & Associates

 

A presentation at the IA Annual Meeting

 

Mexico City, May 20, 2003

 

 

             "More cases of insolvency are to be attributed to Frauds than shrewd business men are aware of, and though the advice is almost universally unpopular, it is urged on merchants to overcome their disinclination for this species of labor, and give a little time to a thorough investigation of their accounts....Newspapers daily chronicle the detection of new cases of embezzlement, and still our merchants shut their eyes and believe all servants dishonest but their own.  While they admit the shrewdness of their accountants in other matters, they blindly imagine them too trustworthy, or too fearful of consequences to deceive them in regard to the manipulation of their finances; yet in case of the death of an old favorite bookkeeper, or even of a partner, who has had the management of the cash, how often do we find that their apparently beautifully balanced accounts are teeming with a succession of fraudulent entries that had been continued through years."

 

                                                                             H.J.Mettenheimer, AUDITOR's GUIDE,

 Being a Complete Exposition of Bookkeeper's Frauds, 1869 (The United States of America's first known book on auditing).

 

 

 

 

In the Beginning...

 

In its beginnings auditing was intended to detect and expose fraud, embezzlement and corruption in accounting records.  It was developed to serve the interests of absentee owners/investors who needed assurance their own employees were not robbing them.  During the 19th Century many auditors, in fact, are reported to have carried arms.  But the auditing profession's objectives evolved quickly to focus upon the certification of accounts and financial statements.  Fraud detection was a risky business.

 

Twenty-three years after publication of Mettenheimer's small Auditor's Guide audit objectives began to change as George Soule's Manual of Auditing, the second oldest known American book on auditing, states that "...the Auditor must not certify Statements of Account as correct, of his own knowledge, until he has investigated them from the source to the final exhibit."

 

Not much more time passed until auditors found that even "certifying" was risky and began to emit "opinions" on the "fairness" of presentation and the auditor's "certificate" was abandoned in favor of language less vulnerable to getting the auditor into trouble.

 

But in the late 20th Century auditors began getting into another kind of trouble.  Stockholders, creditors and others began to sue auditors alleging they had been misled after "fairly presented" financial statements were found with fraudulent content.  Despite the auditors' contention that they were not responsible for detecting fraud, many juries and courts began to suggest that in fact they did.

 

Thus we 21st Century, auditors are again becoming more and more interested once again in the detection of fraud...and a new adjective is being used to describe our work. 

 

"Forensic" accounting or "forensic" auditing are now frequently mentioned as fields of expertise offered by auditing firms.  And these "new" specialties are much more common that one might have thought.

 

During the century and a third since Mettenheimer we have turned a full cycle.

 

The Threat of Narcocybercryptocorruption

 

Corruption in cyberspace is challenging corruption fighters of Century 21 on a scale greater than we can possibly imagine.   The battle between Transparency International and Opaqueness Intergalactic, World War III, will be fought digitally with subatomic particles in a cyberjurisdiction never visited by humans which has no laws and is not on any map.

 

Here’s a flashforward to the possible future:

 

 

March 31, 2034 - The New York Times - Dateline Cyberspace:

 

Cybercorruption has created a new class of electroelites richer than all the kings, emperors and billionaires since time began.   Thirteen supermagnates now control all economic transactions on earth.  They are the creatures of cybercorruption which beginning early in the new millenium began to bypass all jurisdictions and borders, move at the speed of light, be cryptologically impenetrable, and defy tax collectors, auditors, criminal investigators, and prosecutors.

 

The originally illicit proceeds from narcocorruption, pornocorruption, gamingcorruption, eroscorruption, and armscorruption passed through multiple cyberlaundromats across the planet instantaneously and within a few seconds were available for reinvestment in legal enterprises which remultiplied profits through cyberevasion until ultimately the group of cyberzillionaires came to economically dominate the earth and control all organized affairs.

 

The decline in strength and eventual division and disintegration of the nation-state created the opportunity to maximize the economic power of the most lucrative transactions of the free economy democracies, those involving crime and corruption. Transparency has been opaqued by the cybernarcocryptocorruptors.  Bottom line:  Crime and Corruption now pay...and pay better than ever.

 

While  the US and Mexico worry about human border crossings, many of the world’s countries are invaded daily through the invisible border of cyberspace defying all possibility of the maintenance of controlled national territorial boundaries. 

 

One of the major problems of the Information Age is that most people don't feel like they are doing anything wrong when they are just “borrowing,” perhaps not even printing out, electronic data from across the world which someone left unprotected.

 

Now forward to today, 2003:

 

·       An accountant alters accounting records in order to conceal inventory shortages or accounts receivable kiting or diversion.

 

·       A Finance Ministry staffer obtains access to future project budget or tender records and communicates this information to a bidder.

 

·       A computer consultant obtains and sells the digital voter registration records of an entire country.

 

·       A clerk issues bogus checks or checks to phony suppliers.

 

·       The chief statistical officer of a major industrialized country sells computerized statistical information to private companies.

 

·       A purchasing manager buys from a colluding vendor at inflated prices.

 

·       A payroll clerk seeds disaffection amongst the staff by disclosing executive salaries.

 

·       Vehicle use records are altered to conceal unofficial use.

 

·       Expenses are reclassifies as capital investments.

 

·       A hacker impersonates a legitimate client or organization and fraudulently obtains products, materials or confidential data.

 

There's not too much that hasn't been invented in the fraud department, but computers facilitate new and innovate ways to implement time-tried methods.

 

Today here are some ways you may now use the computer for protection?

 

·       Force the selection of complex non-word passwords so that dictionary-based password cracking algorithms cannot be used. And of course, require that passwords be changed on a regular basis. This can be done automatically.

 

·       Activate a password-enabled screen saver that kicks in when you leave your computer unattended for 5 or 10 minutes.

 

·       Encrypt all sensitive files and their backups

 

·       Use hierarchical permission structures to limit each staff member's access and even the content of their computer screens to the areas that they are authorized to work in.

 

·       Incorporate into all applications comprehensive, historical audit trails that help identify users who make improper entries or manipulate data without proper authorization.

 

What will we do tomorrow when all transactions and communications are digitalized and opportunities for cybercorruption multiply faster than techniques for protection?

 

What will we do tomorrow when cyberrich supernarcocrooks are able to buy whole governments at a single purchase instead of the old way of bribing one official at a time?

 

What will we do tomorrow when proliferating new microstates cater to the whims and needs of the cyberwealthy while larger governments go bankrupt due to electronically diminishing tax revenues which escape jumping from one tax-free jurisdiction to another?

 

What will we do when cybercorruption becomes a way of governance?

 

Here are a few statistics and the lessons they are teaching:

 

1.  Electronic bank robberies average a quarter of a million dollars each.  Only two percent of the cyberrobbers get caught and only one percent go to jail.  Old fashioned pistol-toting bank robbers average about $7,500 and 80% are imprisoned, if not shot in the act.

 

Lesson: Cybercrime is more efficient and less risky than any other type.

 

2.      Bank robbers are estimated to grab about $60 million a year in the US of which about $10 million is recovered.  Cyberrobbery profits can’t be so readily measured but could be around $10 billion.  They are almost never reported nor is the money ever recovered.

 

Lesson: Cybercrime is almost unmeasureable, unspeakable and unstoppable, even today.

 

3.  Forty-two percent of Fortune 500 companies surveyed recently reported unauthorized penetration of their security systems.  Seventy-five percent of major business and public entities polled recently reported computer fraud losses in excess of $100 million but only 17% reported the crimes to public prosecutors.

         

Lesson: Cybercrime is often quickly covered up and forgotten.

 

4.  The US Defense Science Board’s Task Force on Information Warfare has warned of a potential national security disaster predicting that by the year 2005, attacks on US information systems by terrorist groups, transnational organized crime syndicates and foreign espionage agencies are likely to be “widespread.”

         

Lesson: Watch out! The Sendero Electroluminoso terrorists are coming.

 

 

Accountability

 

Few of U.S. Presidents have served in posts where they were accountable for Federal funds prior to living in the White House.  Abraham Lincoln did. When he was 24 years old Lincoln served as postmaster of New Salem, Illinois. His annual salary of $55.70. I hope it was a part time job.

 

The New Salem post office was closed in 1836, but it was several years before an official arrived from Washington to settle accounts with ex‑postmaster Lincoln. He was a forerunner of today's Federal internal auditor. By the time he arrived Lincoln was a struggling lawyer. He was not doing very well.

 

In his exit conference the official/auditor informed Lincoln that $17 was due the government.  Lincoln crossed the room, opened an old trunk and took out a yellowed cotton rag, bound with string. Untying it, he spread out the cloth and there was the $17 in bills and coin.  He had been holding it untouched for all those years.

 

Since I have been asked to speak about accountability, I must share with you the best definition of accountability I have ever heard or read.  It was written by the black Chief of Police of the City of Charleston, South Carolina with the unlikely name of Rueben M. Greenberg who practices the Jewish religion and has become a legend in law enforcement:

 

 

          "Accountability isn't hard to define.  It's the concept that every individual is responsible for his or her actions, is liable for their consequences, and must answer to someone if these actions harm others...Of the many shining values that hold together the fabric of civilization - honesty, kindness, truthfulness, generosity, decency - I truly think that accountability may be the greatest of them all.  Without it there can be no respect, no trust, no law --- ultimately, no society.

 

 

          "My job as a police officer is to impose accountability on people who refuse, or have never learned to impose it on themselves...We try to enforce external controls by enforcing the law...But as every cop knows, external controls on people's behavior are less effective than internal controls, such as guilt, shame, embarrassment, fear of punishment, and reluctance to face public condemnation or ostracism.

 

"The sense of guilt or remorse once associated with the commission of a felony has vanished...If we exempt...(the criminal)..., even partly, from accountability, we become a society of endless excuses, where no one is prepared to accept responsibility for anything."

 

During Greenberg's seven years as Police Chief Charleston's crime rate has dropped significantly.  Armed robberies are down more than 60 percent.  Homicides have been cut in half and burglaries are at a 30 year low.

 

While, as Greenberg points out, police officers must impose accountability...often on those unwilling to accept it, internal do not have such authority.  They are a part of the internal control structure.  Government internal auditors today must advocate accountability.  We must be a part of a movement to renew our respective nations' commitment to accountability.  We must be accountability salesmen.

 

Like police officers, internal auditors have a vested interest in the acceptance of accountability, but unlike them, if all the  internal controls collapse...internal ausitors are out of business and maybe out of work.

 

 

I hope you will try to remember and share with others this code of ethics hat has endured for over 3,000 years:

 

                   Walk with integrity

                   Do what is right

                   Speak the truth from your heart

                   Do not slander others

                   Do your neighbor no wrong

                   Do not spread rumors

                   Keep your word...even when it hurts

                   Lend money without usury

                   Do not accept a bribe

                   Despise a vile man

                   Honor those who revere God

 

                                                by David

                                                King of Israel and Judah

                                                (adapted from Psalm 15)___________________________________________

 

The Role of Government Financial Managers in Combating Corruption

                                   

                        Government Financial Managers Play a Key Role in Preventing, Discouraging, Disclosing and Identifying the Responsibility for Fraud and Corruption by Fostering Sound Financial Management and Internal Control Policies and Practices

 

                                    by Jim Wesberry, CPA, CIA, CFE, CGFM, CFSA

                                                Principal Adviser on Accounting & Auditing

                                                for Latin America & the Caribbean

                                                The World Bank

The Little Known Weapon Against Corruption

 

Professionally qualified financial managers strongly supported by top management are indispensable to the growing global fight against corruption in government

One of the most powerful, yet least recognized, anti‑corruption weapons at the command of government is the establishment of sound financial management and internal control practices including a timely and efficient accounting system, made credible by punctual, professional review by internal and independent auditors.

Often where plans are made to combat fraud and corruption legislators, government commissions and officials  place great emphasis upon legal and prosecutorial mechanisms together with punitive measures. Many persons do not realize that in business one of the major purposes of  a sound financial management system is to combat and disclose internal white collar crimeÿand so it should be in government.  Others mistakenly think that the requirement of an annual audit is all that is needed not realizing that auditors= hands are tied where inadequate accounting systems obscure  the Aaudit trails@ which permit auditors to find irregularities and determine who is responsible for them.  Poor,  disconnected and untimely  accounting systems and  disintegrated approaches to financial management provide opportunities for fraud, serve to cover it up, and, worse yet, if  fraud is discovered or reported, make it impossible to determine and punish the person(s) responsible.

The tools of the trade of the professional government financial managerÿsound financial management and internal control systems and practices including timely and professional internal and external auditÿcounteract corruption in many ways and, perhaps even more importantly in these days of wide media exposure of fraud and corruption, protect honest employees from unjust accusation by making it possible to identify the guilty.

Where We Stand Now Nationally and Internationally

 

In the United States there have been a number of laws passed since 1977 to enhance and improve governmental financial management and audit.  More recently the Reagan, Bush and Clinton administrations have acted to improve government financial management with strong support from the legislative branch.  Acting in opposition to these efforts has been the need to balance the Federal budget by strong austerity measures and the well-intentioned reinvention of government programs which have proposed and achieved severe staffing cutbacks in financial management areas as well as in Inspector General Offices and GAO.  The fact is that the United States government today has more good intentions enacted into law in this area than it can possibly implement with present resource and staffing restrictions.  There is a clear and present danger that the public may lose confidence in the credibility of the Federal government=s accountability systems if the present trend toward more and more collusion, corruption and fraud in government and business continues to dominate the media and transfix a populace which has already lost faith in its political parties and their politicians.

A major challenge before government financial managers today is how to implement all the improvements in government financial management already in process and newly available through advanced technology, yet maintaining consistency with the trend toward smaller, less invasive government.  But this challenge must be met, because we government financial managers are one of the major defenses in the escalating war against fraud and corruption.

The International/Bilateral Financing Institutions (IFI=s) have supported  improved budgeting in the public sector for many years, but this did not attack the problem of poor financial management since a budget is only the plan for financing activities.  These efforts were more directed toward improving the usage of public funds, including those received as international assistance/lending.  Because of their limited focus projects aimed at improving public budgeting failed across the world between the 1950=s and the 1980=s.   As a by‑product they also made public sector financial management more complicated by divorcing budgeting from accounting and actually served to increase tremendously the opportunity for corruption and mismanagement.  Most international/bilateral Donors  failed for many years to take note of the large amounts of international assistance/loans, as well as national financial resources which were being filtered away for person gain by corrupt officials.  These amounts have been estimated  to be between 15% and 50% of  all financial resources handled by developing countries.  They also failed to consider the importance of  developing a cadre of professional government financial managers in each country which received large amounts of assistance/loans.  For many years all IFI=s relied upon audit covenants/clauses in agreements which they felt provided adequate protection.  Often they did not, however, actually enforce or professionally review compliance with such requirements.  Little attention was paid to financial management or to financial managers.

More recently, the IFI=s have taken measures to improve financial management both in their own projects (the enclave approach) and in national governments.   The strengthening of project financial management and audit protects the Donor from embarrassment, but does not protect the recipient government against fraud and waste since funds are fungible and national funds may easily be taken and replaced by those from international sources, leaving no record of any irregularity in the books of the project or their Aaudited@ financial statements.  The World Bank has specifically improved procurement and financial management policies in the past few months, but these relate only to its own projects and it remains to be seen whether the new measures will be strongly enforced.  Similar measures to improve financial accountability and auditing initiated around 1982 were never fully enforced.

 

Prospects look good for a much stronger position  by the World Bank as its president, James D. Wolfensohn speaking at the October 1, 1996 World Bank-IMF Annual Meeting said:

 

       "...let's not mince words: we need to deal with the cancer of corruption. In country after country, it is the people who are demanding action on this issue.  They know that corruption diverts resources from the poor to the rich, increases the cost of  running businesses, distorts public expenditures, and deters foreign investors...it is a major barrier to sound and equitable development...

      

       ...Working with our partners, the bank Group will help any of our member countries to implement national programs that discourage corrupt practices.  And we will support international efforts to fight corruption...

      

       ...Let me emphasize that the bank Group will not tolerate corruption in the programs that we support..."

 

In early January, 1997 the Ukraine news agency INTELNEWS citing Ukrainian Radio reported that Wolfensohn had sent a letter to that country's president criticizing corruption within the government.  The report went on to say: "That same day, Deputy Prime Minister Victor Pynzenyk admitted that the problem of government corruption exists, noting that international criticism has begun because of increased foreign investment in the country.  He said budgetary laws currently under review would limit the opportunities for corruption the government."

 

This is an indication that corruption is being taken seriously at the highest levels and that improvement of financial management and strong budgetary controls are part of its solution.  For too many years corruption across the globe has been aided and abetted by lax, undisciplined financial management and untimely, unprofessional auditing in national governments.  The recognition of corruption's effect upon a country's credibility before foreign investors and lenders will have a profound effect in coming years in four areas:  (1) providing better weapons, information and audit trails to fight corruption itself; (2) improving governance through informed decision-making based on reliable financial data; (3) placing a high priority upon timely, accurate internal and external financial reporting by governments; and (4) accelerating the demand for professional auditing by government auditors, not only of financial reports and statements, but of the underlying internal managerial controls which permeate financial management and other information systems while at the same time depoliticizing government auditors and audit institutions.

 

In recent years the World Bank and other IFI's have greatly increased the number of country projects which assist in the modernization and professionalization of government financial management and auditing systems.  While these projects have not been primarily designed as anti-corruption efforts, just good public sector management measures which permit informed decision-making by officials, they have important side effects in the battle against corruption as this article intends to point out.

In the Latin America and Caribbean Region the IFI's now have in place or in planning Integrated Financial Management Systems (IFMS) Projects in Bolivia,  Argentina, Guatemala, Honduras, Ecuador, Colombia, Venezuela, Nicaragua, El Salvador, Panama and the Dominican Republic.   The Spanish government is collaborating with Uruguay and Costa Rica.   USAID pioneered in the field with its Model Integrated financial Management System for Latin America   (SIMAFAL) which has served as the conceptual model for all such systems after being accepted by the Donor Consultative Group on Improving Governmental Financial Management in LAC.  Other Regions have begun to take the IFMS approach including projects in Ghana and Vietnam for example.   The approach has been widely disseminated through conferences held by the International Consortium on Governmental Financial  Management during the past two years cosponsored by USAID and the World Bank.

IFMS projects have not included specific anti‑corruption components to date with the exception of USAID's Panama IFMS Project which included funding of development of a Code of Ethics for Public Servants, the establishment of a government ethics office charged with conducting training in the government and in high schools, and the offering of courses in forensic auditing for the staff of the Comptroller Generals Office.  Many of the projects have not fully developed the concept of internal managerial control as a management responsibility, nor included the strengthening of the internal audit function.  

Most heads of Latin American Supreme Audit Institutions are not qualified auditors, but rather political appointees, a factor which severely limits the efforts their organization can contribute to anti‑corruption efforts, even where TA and training is offered them.  For example, the Comptroller General of one country (a very vocal supporter of anti‑corruption efforts) who had resigned a few hours earlier due to corruption allegations, was impeached and discharged from office by the Congress.  The allegations involved the Vice President of the country who had already fled into exile.  Subsequently, the next elected President  bullied the Congress into appointing one of his closest personal friends as Comptroller General, notwithstanding legal provisions for independence of that office.  Within six months both President and Comptroller General had been thrown out by the same Congress for blatant corruption at the urging of an estimated two million citizens who demonstrated in the streets against widespread abuses.  The action of the Congress was criticized for violating the Constitution and imperiling democracy.  Many of the allegations in both administrations revolved around Areserved@ or secret bank accounts containing funds for which no accountability was required.  Corruption could not have been eliminated by professional financial management in this country, but it certainly could have been reported earlier and more clearly and its more blatant aspects might have been reduced or prevented.

Donor  Aenclave‑based@ efforts to strengthen international project accountability have largely ignored entirely the importance of sound internal controls and the role of internal auditors in reviewing and reporting upon them.  Most Donors have been extremely lax in enforcing their own accountability requirements and have chosen austerity over accountability where accountability oversight staffing has been involved.   Most Donors, except USAID, have not exploited the resources available through the accountancy profession which has long played a leadership role in this area in the private sector.

In summary, while IFI=s have begun to face up to the problem of financial corruption in several ways, there is much more that can be done.  One thing that is urgent is to ensure that the IFI=s themselves as well as their beneficiary country governments employ professionally qualified and experienced government financial managers.  USAID has long been a leader in using professionally qualified financial managers and auditors. The World Bank is now moving to greatly increase its professional staff of professionally qualified financial managers and auditors.  Other IFI=s are beginning to do likewise.  But there is a monumental challenge at the country level as most developing countries have little or no professionally qualified financial managers in government, nor any means for developing, remunerating or retaining them.

One major obstacle has been the absence of  global generally accepted accounting principles and practices for the public sector.  Recently the Public Sector Committee of the International Federation of Accountants (IFAC) has launched a major effort to develop International Government Accounting Standards as compatible as possible with the already existing International Accounting Standards issued by the International Accounting Standards committee, sister body of IFAC.  The World Bank, International Monetary Fund and other organizations are providing financial support to assure that a highly professional job is done in this important area.  Once issued these new international standards will provide guidance for professional government accountants and financial managers throughout the world.

How Financial Managers Counterattack Corruption

 

Professional government financial managers are proficient in the techniques and practices of sound accounting budgeting, cash and debt management including the required internal controls which must be built into such systems.  These techniques and practices inhibit, disclose and help confirm and identify corrupt practices and their perpetrators in the following ways:

 

1.   Impose Discipline.  Financial manager supported practices and procedures force a disciplined, on‑time approach to public activity and financial reporting, as opposed to laxity permitting long delays in presenting information thus impairing its usefulness and making its acceptance long after the fact practically automatic since to question it would be to waste time on long past transactions.  Professional financial managers set up requirements that all transactions adhere to the same rules, eliminating the loopholes and alternative mechanisms which foster and cover up corrupt activities.

2.   Strengthen Probability of Detection.  Strong internal managerial controls put in place by professional financial managers, including appropriate Aaudit trails@ (requisites of sound financial management), increase the probability that corrupt practices will be discovered and identified as such permitting more prompt investigation.

3.   Create a Disadvantage for the Corrupt.   A professionally directed financial management system surrounds the potential corrupt person with internal control mechanisms as well as vehicles which promote and require transparency and timeliness in reporting placing that person at a real disadvantage, as compared to what the situation often is where lax controls and/or Afalse controls@  provide cover.  False controls are those controls, often legally imposed which appear to impede criminal conduct, but actually foster and camouflage it.  They are abundant in developing countries and often are designed intentionally to aid the corrupt or are well intended but facilitate corruption.  They now seem to be growing in the developed countries and are also often found in the IDI=s themselves.

4.  Protect Highly Vulnerable Areas.   Internal managerial controls implanted by professional financial managers especially as regards discretionary power over those resources and expenditures which are typically subject to a high degree of vulnerability (typical areas of abuse are travel expenses, consulting contracts often subdivided to come below thresholds of review, particularly valuable or attractive and portable assets such as vehicles and portable computers, etc., not to mention the inevitable temptation for kickbacks posed by very large capital expenditure projects or acquisitions in large amounts).

 

5.  Permit  Proper Management and Oversight.   Proper and timely managerial reporting on financial operations produces the feedback necessary to supervisory and oversight levels within the organization.

 

6.   Facilitate Audit.   Professional and timely internal and independent audit which focuses upon highest risk areas is made possible where financial managers are present to insist upon adequate systems,  especially accounting systems which comply with internationally accepted professional standards.

7.   Provide Psychological Control.  It has been well established that fear of discovery and punishment is a prime factor in discouraging corrupt

      practices.  The knowledge that internal managerial controls are in place,        constantly being emphasized and improved by financial managers and subject to selective audit review is a powerful disincentive to the potentially corrupt.

     

The Anti‑Corruption Advantage of Integrated Financial Management 

Integrated Financial Management Systems are required in the United States by the Office of Management and Budget (IFMS ‑ a term first coined and used to describe the new systems developed after the near financial collapse and impending bankruptcy of both the City and State of New York  due to financial management inadequacy and fragmentation in the 1970s).   Professionally directed IFMS provide powerful new high‑technology tools which can be applied in the fight against financial fraud and corruption as well as mismanagement.  Here are some of the ways that IFMS counteract corruption:

1.   Multilevel Budgetary Control.  Budgetary review and control may be exercised at the operating, supervisory and central levels based upon varying thresholds of activity or other factors.   Automatic flash points may be built in to call attention to deviations in areas of high vulnerability as well as to repetitive inappropriate budgetary manipulations.

2.   Avoidance of Cash Flow "Surprises."   Actual cash flows can be monitored at appropriate levels through effective and timely cash management practices (as is done in business), cash flow forecasts can be prepared and the typical cash unavailability "surprises" causing draconian austerity crises which destroy possibilities of achieving budgeted objectives can be avoided.

 

3.    Spotlighting Weaknesses.   Exception reports can be designed by professional financial managers to provide prompt feedback to operating managers in areas where weaknesses are trending.

 

4.   Internal Validation of Integrity.   The appropriate internal validation of the integrity of transaction data is provided for at each key step during the processing of transactions and duly documented electronically so that internal controls do not delay execution and external controls may be limited to the post‑audit function.

 

5.  Accounting Control Over Resources.    The accounting system maintains general ledger controls over all valuable resources which are independent of the operational level.  Many governments (both for internal purposes and project accountability) have heretofore been unable to control or account for important assets such as receivables, land, buildings, other fixed assets, vehicles, computer equipment, software, and all types of electronic equipment. 

 

6.   Transparency in Public Reporting.  Complete and timely monthly, quarterly and annual financial reports are available for disclosure as is appropriate to Legislative oversight committees and their staff and to the public at large as provided for in most national constitutions but rarely accomplished.  Once transparency is achieved it is hard for officials to cover up "bad news" when it is contained in financial reports.  The tendency to assure that Abad news@ was never published has been a major reason why disciplined and transparent financial reporting has long been avoided.

 

7.   Consistent Enforcement of Criteria.   The consistent  policies and practices required by a professionally directed IFMS as regards resource control such as the a single Treasury bank account for all public funds and the prohibition of "off budget" expenditures inhibit corrupt and collusive practices, and even where they persist result in the entry into the accounting system of  non‑acceptable transactions which are labeled and reported as such (unless responsible officials are fired which, in itself, results in disclosure of corrupt practice).  In the United States we have been unable to prevent off budget expenditures and even manipulations to move items Aon and off@ the budget in different years to suit non-professional needs thus proliferating inconsistency, but at least we do record all such items in our accounting systems and publicly report them.  In many countries Aoff budget@ also means Aoff accounting.@

8.   Decentralization of Authority and Accountability.   Each unit or activity chief is in charge of financial planning and transaction authorization within their specific area of responsibility, original transaction entry is at the operating level and managerial reports are immediately available, thus they may be held accountable for the planning and execution of their own financial transactions, yet are subject to either on‑line or very timely supervision and oversight from higher levels.

9.   Reduced Need for Accountants.   Typical and repetitive transactions are precoded according to type and amount entered and therefore appropriate accounting entries are made automatically, thus reducing the need for accounting expertise while at the same time reducing the possibility that transaction data can be manipulated.

 

10. Immediate Audit Capability.  Timely entry of transaction data at point of origin permits immediate attention of the internal auditors to areas and kinds of activity identified as vulnerable to corrupt practice.

11. Disclosure through Comparability.   High speed computer comparison of data available in comparable format (such as double salaried staff, retirees also drawing remuneration, duplicate payments to suppliers, etc.) can disclose patterns of corrupt practices and their overall impact.

12. Computer Assisted Audit.   Computer audit software may be utilized in selecting transactions for audit sampling, vastly decreasing audit costs and increasing attention to areas which demand  more frequent audit coverage.  This is an anti‑corruption measure which has traditionally been unavailable in developing countries due to the incompatibility and disintegration of any existing computerized systems.

 

Advantages to the Honest

 

Finally, there is a tremendous need to protect honest employees from temptation as well as from the shadow of suspicion which constantly falls over them where corruption is suspected or discovered involving either international projects or public sector activities in general.  Every professional government financial manager has a double duty to do everything possible to protect other public servants 1) from temptation to perform dishonest acts, and 2) from damage to personal reputation due to unproven or unprovable allegations of wrongful acts, by enduring that internal managerial controls are adequate. Here is how professional government financial managers provide an integrity safety net for the many dedicated and honest public servants:

1.   Limit Number Placed Under Suspicion.    Professionally directed, sound financial management and internal control systems, especially IFMS, establish clear lines of responsibility and authority, provide for appropriate segregation of incompatible duties and provide for clear audit trails which limit the number of  individuals placed under suspicion during investigations where irregularities are discovered.

 

2.   Appropriate Documentation.   Professionally designed, appropriate paper‑based and electronic documentation of evidentiary matter which supports financial flows assure the eventual exoneration of the honest even when they may temporarily be placed under suspicion.

 

3.   Discouragement of Pressure and Executive Override.   Pressure may be applied directly (by higher officials or peers) upon financial managers, staff or

     others to act in disobedience to established standards and policies which inhibit corrupt practices.  Pressure may also be indirect in that they are urged to (or rewarded for)  do nothing, where duty demands action or reporting of  irregularity.  In this situation professional financial managers can appeal for professional organization support and resist such pressures.  Tragically honest staff soon leave public service if they have no means to resist  undue pressures.  A cadre of professional government financial managers backed by a professional organization which supports them can strengthen their resistance capabilities and give those under attack the courage to resist.  Professionally directed IFMS provides a disciplined control environment and a series of specific control practices which act to diminish the force of corrupt official and/or peer pressure upon financial staff.   This in turn makes their professional career service more personally rewarding as opposed to being an unbearable burden upon their consciences.

 

Conclusion

 

The purpose of this presentation has been to point out how professional government financial managers supporting sound financial management policies and practices play a key role in preventing,  discouraging, disclosing and identifying responsibility for fraud and corruption.  Much more could be written about the role of the internal system of managerial controls which must accompany a sound financial management system.  The Treadway Commission and the Committee of Sponsoring Organization (COSO), in the United States, the Cadbury Commission in the United Kingdom and the Criteria of Control Board in Canada have focused great private sector attention upon the importance of internal control to the safeguard of resources and assets.  Internal controls still need great emphasis in the United States government and are basically in their infancy in the governments of most developing countries, which heretofore have preferred to rely upon false and external controls thus fomenting fraud and corruption.

The concept of internal control, which originated in the accountancy profession during the 1940's, has been expanded to now encompass the entire scope of managerial responsibility.  It forms today's generally accepted framework for the safeguard and maximization of limited resources in the private sector and should do the same in the public sector and as regards international development projects.

Fraud and corruption can never be eliminated, but they can be substantially counteracted and hopefully diminished by professional governmant financial managers duty bound to insist upon sound financial management policies and practices accompanied by appropriate internal managerial controls applied together with other disciplinary measures in the criminal prosecutorial and justice fields. 

Finally it is imperative that the areas of government auditing, criminal investigation and justice administration be completely depolitized in order that they be independent, effective and credible in our global society.

 ________________

 NOTE:  Variations of this presentation without the references to the U. S. government have appeared in exposure draft format in the APA Letter, the newsletter of the World Bank's Association of Professional Accountants, and in article format in the Public Fund Digest published by the International Consortium on Governmental Financial Management.  A more extensive version also appeared as Chapter 17 of the first edition Integrity Sourcebook published by Transparency International .  Spanish language versions have been published for their members by the professional accountancy organizations in Peru and Ecuador.

__________________________________________________________________

 

  

                      CYBERACCOUNTABILITY

VS.

HYPERCHANGE

  

  KEYNOTE ADDRESS

                                                  Presented by

 

                                        James P. Wesberry, Jr., CPA

                                Principal Adviser on Accounting and Auditing

                                                               for

                                       Latin America and the Caribbean

                                                     The World Bank

                                                               at the

                                  X Anniversary International Conference on

               New Developments in Governmental Financial Management

                                                   Miami, Florida, USA

                                                      April 29, 1996 

 

                        "...you can't make rapid, drastic changes in the

                       technology and the economy of a society without

            causing rapid nges in all other aspects of the society as well."

 

                                                                Unabomber's Manifesto, 1995

 

 

 

 

About the time we started this conference ten years ago there was an irreverent joke making the rounds of meetings like this about the computer researcher who was working with one of the world's largest mainframes the memory of which had been filled with great volumes of information for research purposes.  The computer had also had been outfitted with one of the first voice reply systems.  One night when no one was around the researcher had an inspiration.  He typed into the computer console the question, "Is there a God?".  The big console's lights blinked and its memory drums and tapes rolled for a long time and finally he heard a weak mechanical voice answer, "Trying to answer.  Not enough computing power."  

 

Well this computer was linked to several large university mainframe systems, so intrigued by the possibility of actually getting the computer to answer mankind's greatest question all were activated together and again the question was typed in the console, "Is there a God?"  After about two suspenseful hours of whirring and blinking lights again there was a very weak response, "Trying to answer.  Not enough computing power."

 

Now getting somewhat fanatic the expert called his colleagues around the country and after several weeks arranged to have all the principal computers in the whole country interconnected and again asked the same question.  Now the voice was a bit stronger, "Almost able to answer.  Need more computing power."

 

By this time the computer community across the entire world had heard about the pioneering attempt so there was a tremendous effort made worldwide and finally after three months time every single computer on earth was tied in to the research project and again the question was typed into the console, "Is there a God."  Lights flashed disk drums whirled, tapes rotated and suddenly the computers speakers boomed out "ON YOUR KNEES MORTAL, THERE IS NOW!"

 

My friends and colleagues, that is no longer funny...if it ever was.

 

While it hopefully takes more than a worldwide computer network to constitute deity, we certainly are well on the way to achieving the criteria for a higher power set forth in that old joke.  And it is said that some persons become quite devoutly attached to the Internet.  In fact my own wife felt that I had become to attached to it a couple weeks ago when I lost all track of time and spent almost all day one Saturday hypnotized by the attraction of being able to instantaneously leap from one Web site to another via HyperText.

 

Originated as a defense effort to secure computer communications against an attack Arpanet, as it was then called, linked four sites in the decade of the "60s.  By 1975 it had grown to about 100 sites, primarily universities and others doing defense work and research.  Another 100 sites had joined by 1983.

 

In 1995 there were an estimated 12 million computers linked to the Internet, half of them permanently attached, the rest PCs and laptops only intermittently on line.  Three of these were mine, one PC at home and one at the office, plus a laptop for travel.  I think the estimate of 12 million is low and have seen estimates up to 30 million.

 

The Internet is a network made up of about 50,000 lesser networks in 160 countries.  Traffic is about 20 trillion bytes per month and is increasing at a rate of 100% annually. Daily 50,000 new individuals join in.  It is a new planetary group wherein time and space have new meanings, national boundaries are largely ignored, and gender, race, religion, age and personal identity are completely irrelevant.  It is changing society, culture, hierarchies, economics, communication, language and thought processes.  It is also changing governmental financial management and reporting and may be the greatest force for public sector accountability since the advent of governance.

 

Speaking only for myself, I find surfing the Internet one of the most fascinating things I have ever done in my life...and I can do it from home.  The problem is there is not enough time to fully explore the mysteries of cyberspace.

 

Perhaps we should get on our knees to it after all, not in worship but in appreciation.  We'll hear more about the Internet and its children such as FinanceNet during the course of this conference.

 

 

CYBERACCOUNTABILITY

 

                                                            "...the real problem with business in cyberspace isn't providing security, it's creating an atmosphere of accountability."

 

                                                                                   Lynch and Lundquist

                                                                                      in Digital Money

 

 

Accountability is the duty to respond or give an account before a higher authority or power for a task delegated and/or resources handled.  Financial accountability is normally achieved by means of a written financial statement or report.  Cyberaccountability is achieved by an electronic document or report.  It is communicated in bits rather than on paper; at the speed of light, rather than by messenger, mail or publication; and unlike traditional practice may be achieved and audited automatically as a part of the normal operational process, often without the need for human action or intervention.

 

At this point I would like to pay a special tribute to the Argentine government and specifically the Finance Secretariat in the Ministry of Public Works and Services, some of whom we'll also hear from later today.   Argentina is the first, and to my knowledge, the only country on planet earth that so far has published all during a complete year its financial information and statistics on the Internet for all to see.   All four quarterly Finance Bulletins were put up in the Internet on a timely basis by Ricardo Gutierrez, Marcos Makon, Piky Frenkel, Alberto Arolfo, Carlos Alvarez and their great Argentine Accountability Team.  This included 1995 year-end financial results made public to the world during the month of March, 1996.  This is probably the most historic and laudable action in the field of governmental financial management and accountability of this century.  I hope that all of your governments will follow Argentina's leadership before the century ends, even though it will be hard to equal their timeliness unless you already have reforms under way.

 

Let's applaud Argentina for their historic contribution to cyberaccountability.

 

 

CYBERSHENANIGANS

 

                                                            "I think that's one of the great challenges that we face as we come into the cyber age - how we can use that computer the right way...the additional challenge...is to work with law enforcement authorities around the world, recognizing that this technology brings the world so much closer together in communication."

 

                                                                   U.S. Attorney General

                                                                   Janet Reno at March 29, 1996

                                                                   Weekly Press Briefing

 

 

The Information Age, introduced by the advent of the microprocessor 25 years ago, displaces the Industrial Age, brought about by the invention of the printing press 542 years ago.  It brings with it tremendous new risks, as well as tremendous new opportunities.  Another triumph by an Argentine, but of which Argentina might not be publicly proud, illustrates these risks, and caused the US government some humiliation.

 

Last December Argentine officials confiscated the computer from the home of a 21-year-old Argentine student.  One month ago the US Attorney General publicly charged him with illegally entering computer systems at the US Defense Department and the National Aeronautics and Space Administration, including the Naval Command, Control and Ocean Surveillance Center in San Diego, California, the Naval Research Laboratory in Washington, the NASA Jet propulsion Laboratory in Pasadena, California, the NASA Ames Research Center at Moffet Field, California, and the Los Alamos National Laboratory in New Mexico.  He obtained access to unclassified information about satellites, radiation and engineering but apparently did not access any classified information...or at least if so it wasn't admitted publicly by the government.

 

He first gained access through the Internet to a computer system at Harvard University's Faculty of Arts and Sciences, then moved into the US government systems.  He was also reported to have gained access to computers at the California Institute of Technology, the University of Massachusetts, and Northeastern University as well as others in Korea, Mexico, Taiwan, Chile and Brazil...all without leaving his home in Buenos Aires.

 

The Attorney General used cybersurveillance through court ordered wiretaps to gather evidence on the Argentine hacker but he is not extraditable under existing treaties.  One of the major problems of the  Information Age is that most people don't feel like they are doing anything wrong when they are just "borrowing," perhaps not even printing out, electronic data from across the world which someone left unprotected.

 

It appears that Argentina will have another very skilled computer security consultant available soon.  Many of the best such consultants in the US come from a similar background.  Some even begin their consulting careers from jail.

  

HYPERCHANGE

 

 

                                                            "You are living in the period of time that will produce more change for humanity than any previous era in history.  It is a time of extraordinary importance that will fundamentally reshape almost every aspect of your life during the next two decades.  Wholesale change is taking place in almost every segment of your reality - and the pace will only increase in the coming years."

 

                                                                                    John L. Petersen in

                                                                                     The Road to 2015

 

 

At the same time government financial managers are straining to  develop the skills tools and techniques necessary for cyberaccountability, they are faced with the stupefying challenges of hyperchange...the torrent of changes unleashed on all aspects of society which the Unabomber so aptly described. Navigating Cyberspace author Frank Ogden, also known as "Doctor Tomorrow," calls this the "River of Change" and he says the river is flooding the world...flooding it with technology.  Ogden says that technology makes the laws and breaks the laws whether we like it or not.  Key technologies over time were the plow which permitted man to farm, the stirrup which enabled him to fully control a horse, the astrolabe which enabled Portuguese sailors to navigate unknown seas, the printing press and movable type which caused schools in England to increase from 34 in 1480 to 440 eight years later and made possible the 300,000 new books now be printed annually across the world, and in recent years the flurry of new inventions which in turn spawn more new inventions.

 

Ogden, a Canadian and perhaps the most radical, flamboyant and controversial futurist of his generation (he was born in 1920), says that print is an outmoded medium and that the new aristocrats of technology now publish their ideas on computer disks.  By the time we hold our 20th Anniversary "New Developments" Conference Ogden says, "Within ten years, technology that is hardly out of the starting gate will change 90 per cent of our culture and society, as well as the way we think, learn, love, understand, work, and survive."

 

"One can no longer depend on big government, big business, or organized labor," declares Ogden. "Their days are numbered."  He points out that 40% of the companies that were on the prestigious Forbes 500 list of the largest companies in the world no longer exist.  "Ninety percent of all the goods, services and new technological developments that we will be interfacing with by the year 2004 have not yet been developed," he reiterates, gleefully pointing out that soon one 4.5 inch disk "made of eight cents worth of plastic beads flattened like a thin pancake" will be capable of holding magnetically "all the records and accounts of a midsize company" or the total content of 1,000 books of 300 pages each.  "All the institutions of the industrial age are disintegrating," he warns.  "The university degree was once a guarantee of intelligence, knowledge and power.  For most practical purposes it is now worthless," but "Individuals can now teach themselves  what they want to know, not what others think they should know," so today "The best investment on the planet, in any currency, is your own brain."

 

In the beginnings technology, and with it, change, was often unrecognized because it happened so seldom.  "But, whenever and wherever it did appear, life was irrevocably changed."  Now the flood of technology is creating waves of change.  Changes provoke more changes until we have hyperchange, excessive, unpredictable and likely to be uncontrolled change.

 

"No one is sure what is coming next.  Change itself is no longer predictable, either in acceleration, speed, direction or configuration," says Ogden.  Executives who can't make fast decisions find that "the new product they thought was so hot is, by the time it hits the global marketplace, overgoverned, overengineered, overpriced and over the hill.  This is why government grants are the kiss of death."  The lack of urgency of the bureaucratic process will cause competitors to gain the advantage against those who await government approvals. 

 

On planning under today's conditions of change Ogden says, "When change was nonexistent or painfully slow, we could plan what might be done next.  A plan could be tried, modified, and then put in place.  Time was abundant.  Now, because change is a constant part of our lives, there is no way, given existing knowledge, to plan for the multitude of technological surprises occurring every day.  One surprise can ruin an empire."  

 

Ogden's idea of long-range planning under today's conditions is planning for today's lunch.  He sounds a bit like the Unabomber when he says,  "Planners have problems anticipating what the next invention or innovation will be, so they are unable to cover the exigencies that will modify social structure.  Today the only effective planning is training for change.  Yesterday the best five-year plans belonged to the USSR and General Motors.  How is a corporation to survive if the planning process is erected in the quicksand of change?"

 

"Planning is not feasible.  You have no idea how long the journey will be, no sense of your destination or what will be required to get there.  You can only depend on the confidence that comes from experience...As the world enters the information age, you must rely on your experience and expertise to help you on trips to the unknown.  You are aboard a ship of change whether or like it or not."

 

Petersen is not as negative on planning but agrees that "A handful of extraordinary new advances in science are taking humans quickly and deeply into areas that will have profound implications for the future.  The process has already begun that will change every aspect of our lives."  He points out that "If you're an adult, during your lifetime science has learned more about how nature works than in the 5,000 years before you were born.  Fifty years ago, astronomers could only identify two galaxies.  Now we know that there are more than two billion.  Eighty percent of all the scientists who have ever lived are alive today...Some estimates say that the total amount of information in the world is now doubling every 18 months."

 

Hyperchange is here.  How can anyone be held accountable when everything is in a constant state of change?

 

This is the greatest challenge to government financial managers in the Information Age.

 

 

DIGITAL MONEY

 

                                                            "...a new world order is arising in mechanisms for value exchange among human beings.  Digital money is the cuneiform of a new age...Over the next ten years, the growth of electronic commerce will outstrip the growth of traditional commerce."

 

                                                                               Lynch and Lundquist in

                                                                                      Digital Money

 

How do we account for digital money?

 

How do we audit digital money?

 

Most importantly, how do we assure that digital money isn't digitally stolen, misused, mismanaged, or simply misplaced by being electronically erased?

In 1993 there were 1.3 credit cards in the United States for each citizen assisting in moving or borrowing $473 billion.  These transactions will be among the first be converted to digital money, The rest will follow.

 

The Internet is without a doubt, the centerpiece of the Information Age today, it is estimated that by the end of 1995 90% of all US major corporations were linked to it.  It is also estimated that 90% of these will experience at least one kind of security breach within one year of joining Internet.

 

A few banks are offering customers Internet access to account information.  Many more corporations are conducting electronic commerce pilots.   Some stockbrokers are operating on the Internet.   Governments must be very conservative here and let the private sector take the lead.

 

The ideal goal is full-scale EDI (Electronic Data Interchange) via the Internet.  Strong encryption is necessary to protect financial transactions on the Internet, yet this involves so many risks that the US government presently opposes because it might give an advantage to money launderers.  Many corporations are worried about its possible use to avoid detection by unscrupulous employees who might sell trade secrets to competitors.

 

The anonymity of the Internet user makes it possible to avoid accountability completely.

 

Lynch and Lundquist say that "Essentially the need for Internet security is just a symptom of the fact that no one has to be accountable in cyberspace -yet."  Going to the other extreme and imbedding identification in all users computers, smart cards, etc., would end all individual privacy since an individuals entire electronic life and credit history could be traced, possibly leading to a police state that would make Nazi Germany or Stalinist USSR look like a models of freedom.

 

Therefore, some balance must be struck between to much anonymity and too much authority, for us to really have all the undoubted benefits of digital money.

 

CYBERACCOUNTABILITY MECHANISMS FOR FINANCIAL MANAGERS CAUGHT UP IN THE VORTEX OF HYPERCHANGE

 

 

                                                            "Most of the contemporary and future history of the world through 2020 can be written in terms of the inexorable process of adaptation to the technological imperative."

 

                                                                             Carlson and Goldman in

                                                                                  Fast Forward

 

Cyberaccountability will be absolutely necessary in the coming years because there will no longer be hard copy records of any kind, nor visible, tangible audit trails.  All transactions and their support will be recorded digitally and filed magnetically. But there are tremendous risks involved where electronic media are employed and security measures must be taken which are just as technologically advanced as the financial management processes, perhaps moreso, since the Information Age also seems to be spawning a generation of brilliant informatics intruders intent on breaking into any system anywhere just to show they can do it, and others who see the path to electronic riches through digital fraud.

 

Government financial managers caught up in the vortex of the hurricane of hyperchange must develop mechanisms to achieve cyberaccountabily.  Obviously these will be based on those we now use to achieve paper-based accountability...the paper will just disappear.  We have to see that the money doesn't disappear with it.

 

The original accountability mechanism was a verbal report. This is where the word "auditor," as a hearer who gave assurance, came from.   Later the written papyrus-based, later paper-based financial report or "account" became the prime mechanism to achieve financial accountability.  It was necessary to "render an account" then in this century to issue annually audited financial statements.

 

We are now about to make a move just as dramatic as the move from voice-based accountability to paper-based accountability centuries ago.  We must move to cyberaccountability or digital-based accountability.  It will be quite a shock, especially to accountants and auditors.

 

Time does not permit a long discussion of this, but what will inevitably happen, in my opinion is that audited financial statements will soon become obsolete.   To me as an accountant/auditor this is pretty sad because most governments don't even have them yet and I have spent most of my professional career trying to help produce them.  On the other hand, there will be some tremendous advantages. Let's take a quick peek at how cyberaccountability may be achieved in Century 21.

 

Basically digits and digital data can now be arranged and rearranged in any sequence or order.  That is what manual accounting was all about, getting them in reasonably appropriate order for understanding and assurance.  The big difference is that it can now be done at the speed of light.  Therefore what is important is the digit-base or data base, if you prefer.   It must be correct, properly established, secure and accessible to those who need information without risk of unauthorized invasive intrusion.  Therefore the name of the cyberaccountability game is secure and store the data and assure its integrity permitting users to access and use it as needed.  We don't need to prepare financial statements.  The user will access download, analyze and organize the financial data however he or she desires.

 

Auditors, or whatever they may be soon called, will no longer issue opinions on paper documents, they will opine or give assurance regarding the integrity of the all important digit-base or data base.   Their work will devolve to something very similar to what it was originally.  At first auditors were real time, on-line hearers of verbal information.  Now they will be real time, on-line monitors of digital information.  They will develop their own tools for monitoring electronically on a continuous basis all data sent to the data base and all entry, modification and use of that data.  Much of the auditor's work will be done electronically, but major exceptions will be reported to humans.  Auditing firms will give on-line assurance that the data base is secure at all times and working properly.

 

Let's look at an example of this.  It's being called "data warehousing" by some.   Last July the State of Massachusetts in the US won the award for the "Best Data Warehousing Project for 1995."  State officials described the "warehouse" as more than just a database for decision support.  Financial, payroll and budget information that once took months to obtain is now available in minutes.  Old style after-the-action reports were phased out and more than 1,000 managers, financial analysts, budget analysts, accountants and auditors now have access to critical data in the Massachusetts government according to Emerging Technologies a special supplement to the monthly Government Technology magazine.  This is basically where we are going with the integrated financial Management systems being put in place by governments across the Western Hemisphere.  Our real problem is keeping up with new technology and the impacts its the related changes in everything we do.

 

Basically whatever we do today will be technologically obsolete by tomorrow.  Now let's talk about just two examples.

 

 

 

HYPEROBSOLESCENCE

 

                                                            "Some industry observers believe there will soon be 10 times more Web servers used for intranets than for the Internet."

 

                                                                    John Naisbitt's Trend Letter,

                                                                               April 11, 1996

 

 

Hyperchange accelerates everything.  Time itself is shrunk.  The greatest problem is that hyperchange leads to hyperobsolescence...everything new becomes obsolete even before its full benefit can be felt.   The best example I know is the fax machine.   I was saving my money to buy one for my home a few years ago when they cost around $700.  I was sure the price would drop as they do on all new electronic products.  Sure enough prices dropped.  Now fax machines go for just over $200.  I've got the money to buy one now.  But a funny thing happened on my way to the fax machine store.  Faxes are obsolete.  Totally and completely obsolete.  Not only the machine, the fax itself. 

 

Why would I today want to spend $200 on a fax machine when I have Internet access and e-mail capability in my office, my home and here in my room at this hotel where we are meeting?  I'm so busy that I rarely have time to answer mail or fax correspondence today, but if you want to communicate with me send me a e-mail and I'll be back to you within 24 hours.  Unfortunately, as the volume of e-mail accelerates it will soon be necessary to have an electronic assistant in the form of a program which assigns priorities to incoming e-mail, perhaps also automatically forwarding some items to others who may have more interest in them.

 

The other case I want to bring to your attention dropped on me like a bomb the other day.  How many of you have heard of an "Intranet?"

 

We have a new one at the World Bank but I did not know it by that name until recently.  An intranet is simply an application identical to the Internet using exactly the same technology, but with access limited only to the individuals within a company...or, soon to come, within a national government.

 

Basically an intranet can be used to post all company manuals, newsletters and other communications and in fact all company files of all kinds.  They are simply converted into internal "Web" pages and posted on the company's internal "Website."  To maintain security the company intranet is not linked to the Internet although some documents may be made available on both.

 

Draft documents can easily be circulated for comment on an intranet.  Different levels of internal security may determine access to segments of it.  Companies such as 3M, MCI, and Visa International are using intranets now for internal company communication across the globe.  Certainly intranets will also be useful to governments, especially because they are cheaper than all other forms of electronic networking.  An intranet avoids the need for special LAN cables because it runs on telephone lines which already exist.

 

But that's not the interesting part to us.  The March, 1996 issue of The Journal of Accountancy predicts that the LAN as we know it may soon be obsolete, and the personal computer as well.  All this means is that all the new and planned national and entity IFMS throughout the hemisphere will be obsolete before they get fully operative.

 

Instead of maintaining software on hard drives or servers software may be shared within the company and across the world using the new JAVA program, an operating system that can handle any application.   As a result cheaper models of computers with little or no memory storage capability may proliferate using services by renting applications from providers and paying only for the time used.  Those who see the hyperinformatics changes coming and adapt to first them will be the leaders in government financial management, as well as most other fields.

 

 

TRENDS MANY FUTURISTS IDENTIFY WHICH WILL AFFECT GOVERNMENT FINANCIAL MANAGERS

 

Based on a review of the forecasts of a number of futurists who have written books and articles recently here are some coming changes at the macro level of society and government that I believe will affect government financial managers across the world as Century 21 begins:

 

            ·           National governments are becoming increasingly ineffective and irrelevant in the global society.  There will probably be a proliferation of smaller national governments as tribalization, ethnic and religious fervor causes fragmentation of nation-states.  Because of the weakness of national governments global/regional organizations will be called on for a greater role in those aspects of governance which demand broad regional collaboration/enforcement, even though these too tend to be weak, hyperbureaucratic, and highly politicized.  Much power, however, will be devolved from the faltering nation-state to the local level where provinces, municipalities, NGOs and even private organizations will play major roles in sharing the burden of governance subject to monitoring by citizens groups.  There will be a great need for highly qualified  professional government financial managers and auditors at these levels who must be totally cyberlingual.   There will be no specialists or experts in information systems or "informatics."  Everyone will be expected to be able to apply information technology as necessary within their field of specialty; however, most financial managers will be generalists in the field of governmental financial management.

 

            ·           Violent crime and terrorism will increase requiring governments to expend much of their time and resources upon law enforcement and administration of justice, including imprisonment. Electronic surveillance and probation mechanisms will somewhat reduce the demand for prisons.  However, they will also be costly.

 

            ·           Sexual promiscuity, drug usage, impulsive gambling, and general lack of individual self-control will continue to increase causing consequent increased costs to government for treatment of addictions, AIDS, and counseling services.  Health care will be so costly that governments will have to consider limiting it, privatizing it or abandoning it.  Government owned or authorized gambling will begin cost nearly as much as the revenues it produces due to the need for rehabilitation of bankrupt gambling addicts.

 

            ·           Expenditures for care and treatment of the growing number of elderly will continue to rise offset somewhat by an acceptance of some degree of euthanasia in some cultures

 

            ·           Revenue sources will top out and governments will not be able to finance the demands for services causing serious conflicts among elected officials and levels of governance and creating great stress for financial managers.  Citizens will rebel against further tax hikes but will accept charges reasonably related to services received.  Many will flee urban areas for lower taxed rural areas from which they can telecommute.  This will in turn reduce the tax base and cause even greater pressures.  Major controversies will be pushed to the lowest level for solution.  Where solutions ar not found, ungoverned anarchistic geographical areas may develop possibly governed by competing warlords.   This is turn will cause population shifts and new burdens on those areas which have found solutions.

 

The role of the government financial manager is the circumstances jus outlined will be extremely stressful.  There will be major disagreements about how to restrict expenditures.  We've just sen a taste of this in Washington this year as the Republican dominated Congress resisted and restricted spending by a Democratic President.  This will occur on every level of government.  And it will get worse.

 

On the positive side government financial managers can now do what they have longed to do, and at low cost.  They have the technology to establish and maintain on-line data base of all financial information from across a country, to mold it into any format they desire and to furnish to governments timely and useful information updated daily. 

 

Technology is our best friend and our worst enemy.  We must maximize the friendship by using it positively.

 

 

WHAT WILL THE 20th ANNIVERSARY "NEW DEVELOPMENTS" CONFERENCE LOOK LIKE?

 

Mort Dittenhoffer and I have developed a practically a tradition of setting the dates and sitting down to plan the next conference as each conference draws to a close.  I haven't consulted Mort yet but here are my predictions:

 

            ·           The brochure will have those stupid palm trees on it.  I've been trying to get rid of them for the past ten years but they appear every year.   Even chaotic change doesn't affect palm printed trees.

 

            ·           Mort will probably have gained some degree of maturity by the year 2006.  After all he'll be 92 years old.  (By coincidence I'll be 10 years older too, but no more mature...unless genetic engineering has made unforeseen progress in this area.  If necessary, we will both make arrangements for computer-assisted knees, backs and enthusiasm).

 

            ·           Mort will be head of the Board of Regents of the University System of the Participatory Republic of Florida Sur, a new Spanish-speaking nation only recently accepted into the 350 member Organization of American States.  I will have changed jobs five times and my new employer will be a new co-sponsor of the conference, maintaining the only twenty-year tradition left on earth besides our conference itself.

 

            ·           There will only be about 50 persons participating here in Miami.  Of course, there will be around 250,000 participating by interactive videoconferencing across the planet.  They will represent most of the 2,000 nation-states which will then be members of the United Nations Organization.   About one-third of the 250,000 cyberinteractive participant financial managers will be robots including all of those from Japan.

 

            ·           The topics, including silly prefixes, will not resemble what we discuss here this week, all of which will have passed into obsolescence by 18 months from today.  That's why we need conferences annually and soon will need them more often.  In fact, due to the accelerated pace of change the 20th Anniversary Conference will actually be held within the next three years starting simultaneously with the closing session of the 19th Conference.  From then on all conferences will be continuously held in real time on line by videointernet.

 

            ·           The language used will also be quite different (see the Glossary of Cyberterminology annexed to my formal paper) because of the changes imposed by technophonics which will result in every third word uttered incorporating the technoprefix of the day.  Those we now use such as "cyber-,"  "hyper-," and "digi-," will be long forgotten.  Perhaps a common prefix symbol such as *. (pronounced "hic") may be used for all prefixes greatly simplifying their use.  This will not make any difference anyway since digital voice conversion/interpretation will have made written words obsolete. (I wonder how Mort will get the palm tree on the electronic invitation).

 

            ·           The worldwide conference will be thought-transfer enhanced since those remaining human government financial managers will be severely hearing impaired like most of the world's citizens as a result of having heard too much loud popular music.

 

            ·           Mort will make the conference keynote address in Spanish while I interpret it in American Sign Language.  We will celebrate Mort's 100th birthday at the banquet on the fourth day of the Conference.  Sorry, Mort but it's that accelerated time compression again.

 

            ·           There will be no speakers.  Every participant will just think about what they would like to say about each session's topic and the Internet's cyberfacilitator, officially known as the Globally Organized Disseminator, but usually referred to by its acronym, will instantaneously transfer to each participant's mind the appropriate conclusions and recommendations.

  

CONCLUSION

  

Some final serious words.

 

Cyberaccountability in government will be accomplished despite hyperchange.

It will be accomplished by gaining expertise in the use of informatics and other new technologies to achieve it.

 

It will be accomplished by highly qualified professional government financial managers who constantly renew their knowledge through continuous self-education.

 

It will be accomplished because financial managers will find ways to guide and influence even the most chaotic change.

 

It will be accomplished because citizens will demand and get cyberintegrity in all information systems.

 

It will be accomplished because civililized governance requires it.

 

It will be accomplished because you, each of you, and others like you across the globe, will accomplish it.

 

 

 

 

 

THREE PARTING SHOTS

 

                                                            "Technology is like a steam roller.  If you are not on the steamroller, then you are destined to become part of the road."

 

                                                                                           Anonymous

 

"Nothing is constant but change!  All

existence is a perpetual flux of

"being and becoming"

 

                        Ernst Heinrich Haeckel (1834-1919)

                        German Biologist 

 

 

                                    The Hyperchange                                                    Victim's Prayer

 

                                     God give us the grace to accept with serenity the change that technology brings, the foresight to prepare for it in advance, the courage to manage it if we can, and the wisdom to accept it whether we like it or not.

Top US Corruption Investigator Jack Blum Honored
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Jim Wesberry presents award at Tufts University Seminar in Boston

FORENSIC AUDITING

21st Century Challenge to Supreme Audit Institutions

A presentation by

James P. Wesberry, Jr., CPA

Principal Adviser on Accounting & Auditing for Latin America and the Caribbean, The

              World Bank                                  

                                                             at the 4th Triennial Congress of the Caribbean Organization of Supreme Audit Institutions                                                      (CAROSAI)

                                                 Georgetown, Guyana

                                                    March 18, 1997

                        "More cases of insolvency are to be attributed to Frauds than shrewd business men are aware of, and though the advice is almost universally unpopular, it is urged on merchants to overcome their disinclination for this species of labor, and give a little time to a thorough investigation of their accounts....Newspapers daily chronicle the detection of new cases of embezzlement, and still our merchants shut their eyes and believe all servants dishonest but their own.  While they admit the shrewdness of their accountants in other matters, they blindly imagine them too trustworthy, or too fearful of consequences to deceive them in regard to the manipulation of their finances; yet in case of the death of an old favorite bookkeeper, or even of a partner, who has had the management of the cash, how often do we find that their apparently beautifully balanced accounts are teeming with a succession of fraudulent entries that had been continued through years."

                                                                                    H. J. Mettenheimer, AUDITOR's GUIDE, Being a Complete Exposition of Bookkeeper's Frauds, 1869 (The United States of America's first known book on auditing).

In the Beginning...

In its beginnings auditing was intended to detect and expose fraud, embezzlement and corruption in accounting records.  It was developed to serve the interests of absentee owners/investors who needed assurance they were not being robbed by their own employees.  During the 19th Century many auditors, in fact, are reported to have carried arms.  But the auditing profession's objectives evolved quickly to focus upon the certification of accounts and financial statements.  Fraud detection was a risky business.

Twenty-three years after publication of Mettenheimer's small Auditor's Guide audit objectives began to change as George Soule's Manual of Auditing, the second oldest known American book on auditing, states that "...the Auditor must not certify Statements of Account as correct, of his own knowledge, until he has investigated them from the source to the final exhibit."

Not much more time passed until auditors found that even "certifying" was risky and began to emit "opinions" on the "fairness" of presentation and the auditor's "certificate" was abandoned in favor of language less vulnerable to getting the auditor into trouble.

But in the late 20th Century auditors began getting into another kind of trouble.  Stockholders, creditors and others began to sue auditors alleging they had been misled after "fairly presented" financial statements were found with fraudulent content.  Despite the auditors' contention that they were not responsible for detecting fraud, many juries and courts began to suggest that in fact they did.

Thus as we approach the 21st Century, auditors are again becoming more and more interested once again in the detection of fraud...and a new adjective is being used to describe their work. 

"Forensic" accounting and "forensic" auditing are now frequently mentioned as fields of expertise offered by auditing firms.  And these "new" specialties are much more common that one like myself who has practiced accountancy during the mid and latter parts of the 20th Century, seeing financial audits lose popularity to operational or performance audits, might have thought.

In preparing this paper, I did a search of the InterNet on the two terms.  I found 4,726 matches for "forensic accounting" and 1,212 matches for "forensic auditing."   Most of these are not references to articles in professional journals but rather citations of talents offered on Home Pages of accounting/auditing firms offering their services to the public.  Forensic accounting/auditing is now a commonly offered service of many accounting firms in the United States and Canada and many other industrialized countries.

I have concluded that "forensic" accounting or auditing or just plain fraud or investigative auditing (terms now used interchangeably) basically refers to the kind of auditing 19th Century auditors used to do and stopped doing because it was too risky.  Now due to the clamor from a public which seems to have always felt that auditors should have been protecting them against fraud and the very large judgements against auditing firms perceived by juries not to have been doing so, it has become risky for auditors not to do this kind of work.  But, careful as always, auditors are now diligently differentiating between financial statement (and other assurance service) audits and forensic (or fraud detection/substantiation) audits.

What is Forensic Accounting/Auditing?

Here's what one firm says about forensic accounting on the InterNet:

            "The synthesis of accounting, auditing and investigative skills yields the specialty known as forensic accounting.

            `Forensic,' according to the Webster's Dictionary means, `Belonging to, used in or suitable to courts of judicature or to public discussion and debate'

            `Forensic Accounting' provides an accounting analysis that is suitable to the court which will form the basis for discussion, debate and ultimately dispute resolution.  It is often referred to as `Investigative Accounting' and is often associated with investigations of criminal matters.  A typical forensic accounting assignment would be the investigation of employee theft. (emphasis added).

                                                (see - http://www.forensicaccounting.com)

Forensic accounting (or auditing as some call it) is growing rapidly as a service offered by Chartered or Certified Public Accountants.  Some firms specialize exclusively in this area.  In addition, the fastest growing new professional organization in the United States of America is the Association of Certified Fraud Examiners (ACFE).  Started less than ten years ago ACFE is now nearly as big as the Institute of Internal Auditors and is now expanding internationally, having just announced the opening of a European Regional Office in the Netherlands which seems to be a center of growing interest in fraud examination and forensic accounting.  The CFE credential based upon a standardized computerized test is now available worldwide.  It is not limited to accountants and CFE's include many types of specialized investigators as well as forensic accountants.

According to the January/February 1997 White Paper, the journal of the ACFE, interest began in the Netherlands in the 1980's as registered accountants were used more and more to support official agencies fighting crime and fraud.   They participated in complex cases and appeared as expert witnesses.  The courts attached great value to the findings and the opinion of the National Criminal Intelligence Service (CRI) accountants.  Eventually it "became clear that registered accountants, with extra training in criminal law and procedure and a rapid introduction to practical examples, were able to obtain  evidence from complex or incomplete accounting records enabling public prosecutors to bring successful charges.  According to Arthur de Groot, author of the article and a specialist in forensic accountancy with Moret Ernst & Young in Utrecht, the Netherlands, "The `core business' of the forensic accountant or fraud examiner was gathering and interpreting evidence."  The term forensic accounting was not used in the Netherlands until the late 1980's when it was finally "adopted from the English-speaking world, especially the U.S. and Canada."

Basically, while forensic accounting/auditing is such a new term that there is no generally accepted definition of it yet available, almost all authorities who have published works or spoken on the subject agree that then key to this new branch of the accountancy profession lies in its specialized attention to the gathering of evidence according to the rules of jurisprudence for probable use in court proceedings.

The forensic accountant/auditors must gather more evidence, analyze it more carefully and weigh it more judiciously that the financial accountant/auditor.  He/she must be an expert in criminal law, especially as regards the acceptability and admissibility of evidence in judicial proceedings.

"Most business people (in the Netherlands) now know that these professionals not only conduct financial investigations for the police and the courts, but their work has become a part of the standard package of services offered by major accounting firms," de Groot concludes.  The situation in the Netherlands is typical of the growth of forensic accounting/auditing during the past decade.

Canada, which seems always to be on the cutting edge of anything related to auditing, has provided much leadership in forensic accounting/auditing.  The December, 1996 CGA Magazine Online states that in Canada "Forensic accountants used to be hired after the fact, once a problem had emerged.  Now they are brought in sooner, usually at the same time as the lawyers.  This is mainly because forensic accountants are able to identify, assess, and quantify risk rather than follow a prescribed checklist."  One early and very prolific forensic accountancy writer/practitioner, Canadian Chartered Accountant Robert J Lindquist, has actually relocated to Washington and is now with Price Waterhouse where he serves as the firm's guru of forensic accounting services.  All other major auditing firms have now set up similar forensic accountancy specialist units.

According to the many private firms which now hold themselves out to practice forensic accounting publicly for clients they use a combination of accounting, auditing and investigative skills when conducting an investigation.  They must be able to respond immediately and communicate financial information clearly and concisely in a courtroom setting.  Forensic accountants/auditors are prepared to look beyond the numbers and deal with the business realities in the situations they are called upon to review.

Here is the best definition I have found taken from The Accountant's Handbook of Fraud and Commercial Crime by Bologna, Lindquist and Wells published in 1993:

            "Forensic and investigative accounting is the application of financial skills and an investigative mentality to unresolved issues, conducted within the contaxt of rules of evidence.  As a discipline, it encompasses financial expertise, fraud knowledge, and a strong knowledge and understanding of business reality and the workings of the legal system.  Its development has been primarily achieved through on-the-job training, as well as experience with investigating officers and legal counsel."

This definition could be applied to forensic accounting/auditing in the public sector by simply changing only one word in the phrase "understanding of business reality" to "understanding of government reality".

There does not seem as of yet to be any clear differentiation between a forensic accountant and a forensic auditor.  The terms are used interchangeably, but forensic accountant and forensic accounting seem to be the preferred terms.  This may be because this identifies the accountancy profession more clearly as the source of the particular financial expertise.

New Independent Audit Guidance - Statement on Accounting Standards   (SAS) 82

The American Institute of CPA's just last month issued SAS 82 for the first time dealing with the word "Fraud" and replacing SAS 54 "Errors and Irregularities" issued only in 1988.  This highlights the rapidly changing status of the accountancy profession's recognition of its responsibilities in this area in performing financial audits.  Some of SAS 82's changes include the following:

                        $          auditors are required to document in their working papers how they considered the risk of material misstatement due to fraud.

                        $          auditors are provided for the first time official guidance from the AICPA about fraud and how to detect it.

                        $          auditors are required to inquire of management regarding the risk of material misstatement due to fraud.

                        $          auditors are clearly charged to exercise more professional skepticism on audits, thereby hopefully detecting more frauds.

SAS 82 is a further, but hesitant, step in the right direction for the profession.  Many CPA's/CFE's feel that it will be necessary to go much further soon by promulgating even stronger measures in this area in order to fully meet the public's expectations of fraud detection by independent auditors.

Are there Forensic Accountants/Auditors in the Public Sector?

In the United States, according to William P. Thornhill in Forensic Accounting: How to Investigate Financial Fraud, published in 1995, "...there are few public accountants, internal auditors, or accountants in the private sector who have been trained in or are experienced in the discipline of forensic accounting.  At the p[resent time, the largest body of trained and experienced forensic accountants come from U.S. governmental audit and investigatory agencies, such as the Internal revenue Service (IRS); Federal Bureau of Investigation (FBI); General Accounting Office (GAO), the audit arm of the Congress;  Securities and Exchange commission (SEC); and the U. S Department of Defense (DOD)."  I suspect that so far many of those Thornhill describes as forensic accountants actually consider themselves to be such.  The staffs of the U.S. agencies Inspectors general should also me mentioned among these.  Thornhill points out that state and local level police authorities in the U. S. as yet have few such resources available to them.

The answer therefore is that in many of the industrialized countries at least, there are probably many more forensic accountants/auditors in the public sector than in the private sector.  For developing countries, where there is an almost uniform scarcity of professional accountants across the world, it is less likely that many forensic accountants/auditors are available. 

Should Supreme Audit Institutions Develop Forensic Audit Capabilities/Staffing?

This is a question which should spark some debate.  Some leaders in the SAI community feel that SAI's should not get involved in forensic accounting/auditing.  They feel that other agencies which specialize in criminal investigation should develop their own forensic accounting/audit staff leaving the SAI free to perform financial and performance or comprehensive audits.  Some feel strongly that the SAI should maintain a more positive approach in seeking to improve government and that forensic auditing might not only distract limited resources from more useful type audits , but also through increased media attention might create an image of the SAI as a "policing" institution, rather than one which helps government managers achieve their goals more efficiently, economically and effectively.

A very strong argument can be made that the SAI's entry into the forensic auditing jungle will eventually cause it to lose sight of its other more positive audit functions, including even financial audits.  This has been my own point of view until recent years.  I well remember the old GAO Comprehensive Audit Manual's warning that once the GAO auditor found strong indications of fraud or other criminal act, the FBI or other investigatory agency was to be brought in.  Thereafter, GAO auditors were to assist in any way, but to refrain from taking a lead role in the investigation.  Fortunately GAO was further removed from the forensic auditing field by the Inspector General Act of 1977 and other follow on legislation while has charged the IG's now in most all U.S. Federal agencies with regular internal audit functions and criminal investigatory duties.  GAO originally opposed this liaison and lobbied for the IG's to be called Auditors General but Congress in 1977 was more interested in the investigatory function.  It still is today.

Most of the IG's in the U.S. Federal government today have a criminal investigatory background, rather than an auditing background, thus adding evidence to the theory that "the forensic audit function tends to drive out all other audit functions in a government audit agency" eventually resulting in the direction of most, if not all, audit resources into the attractive and fertile areas of fraud detection/substantiation.  It is this theory that sustains those who feel that the SAI should not perform forensic audits.  This is a valid fear based upon what has happened in several countries and among the U.S. Inspectors General.

In the U.S. the Office of Special Investigations (OSI) at GAO now handles high level criminal investigations, normally based upon Congressional requests so important or so sensitive that they cannot be handled by other agencies.  GAO did not seek to establish this function, but in fact resisted it.  However, the U.S. Congress felt that a forensic auditing/investigatory function was needed at the SAI level and basically ordered GAO to set it up.  Its primarily investigatory staff is composed of ex-FBI agents and persons with similar backgrounds who are supplemented by forensic accountants from GAO's audit staff as needed.

We at the World Bank have recently had a number of requests from SAI's to assist them in developing a forensic audit capability.  For example, only three weeks ago we added forensic audit training and technical assistance to the proposed third phase of our ongoing efforts to strengthen the institutional capacity of the Bolivian Comptroller General's Office, now one of the strongest SAI's in South America.  We also have had, among others, your own request to speak at this important Congress of Caribbean Auditors General on the subject.

Why the sudden interest of SAI's in forensic auditing?  My first preview of this coming phenomenon came one January a few years ago when while working for USAID I was suddenly sent to Panama at the request of that country's Comptroller General to help develop a means of strengthening its SAI in the wake of the involuntary departure of General Noriega.  The SAI itself, as well as the entire government has been corrupted.  Panama had become example number one of Kleptocracy in action.

The resultant USAID project in Panama, not only created an Integrated Financial Management System and a System of Comprehensive Audit but also an office of Ethics within the Panamanian SAI which administers and provides training in the Code of Ethics in the Public Service promulgated by the President of Panama.  The SAI component provided training in fraud auditing for selected staff auditors of the SAI, as well as overview training in fraud awareness for all SAI and internal auditors.  This was not referred to as forensic auditing at the time because the term was not then widely used.  So far as I know the Bolivia project I previously mentioned is the first World Bank project to use this term.  We have other requests in this area and where we can fulfill them we hope to do so, within the limits of the scarcity of real experts in the forensic auditing field available for international consulting and training.

Why SAI's May Have No Other Choice

The accountancy profession has not moved on its own volition to place more emphasis upon fraud detection in financial audit work and to offer forensic accounting/auditing services.  It has been forced to do so by the ever increasing numbers of scandals in industrialized countries which have rocked capital markets, depleted government guarantee coffers and nearly bankrupted all the Big-Six auditing firms through verdicts and judgements holding them accountable for failing to detect frauds and other irregularities in spite of professional pronouncements that they were not so responsible.

In like manner, the SAI community across the world is witnessing increases in government and government/business corruption growing in geometrical proportions.  There is an undeniable plague of corruption cursing the governments of every country on earth at this moment.  There is likewise a growing cry of "enough" from citizens across Planet Earth who are reacting with rage to eject corrupt officials from office, even when this involves stretching Constitutional principles to the breaking point as evidenced by the Fujigolpe in Peru in 1992 when a corrupt Congress was turned out and the reverse Fujigolpe of last month in Ecuador when a corrupt President was forced out by the people, even though he was only in his first year of an elected four year term.  From Pakistan to Italy to Brazil to Japan to Spain to Venezuela to India to Portugal to Honduras to the U.S. states of Alabama, Oklahoma, Rhode Island and New Mexico the public is bodily throwing out corrupt public officials and simultaneously demanding honesty in government.

In many countries only the SAI is in a position to do the necessary investigative auditing work to prove the cases in court against corrupt public officials.  In those countries where the SAI is impotent (and there are many) and where the prosecutorial and judicial functions are at best ineffective and at worst totally corrupt, who is to satisfy the citizens demand for leadership in the fight against corruption, if not the SAI?

In those countries where democracy actually works and Congresses reflect the growing outrage of the citizenry with corruption, are those Congresses going to allow the SAI to avoid entering the anti-corruption battle?

I changed my own mind on this issue a few years ago in Panama when the Comptroller General there told me that the judiciary could not be trusted to pursue the Kleptocratic money trails of General Noriega, that the public prosecutor could not do the necessary work to pursue the millions of dollars taken abroad by the fleeing officials and that only the SAI stood any chance of recovering the plundered public treasury.  A special investigatory unit was set up in the Panamanian SAI at that time to pursue and recover the Noriega millions across the world.  This was not a normal SAI function, but if the SAI had not done it and done it then.  Panama would now be even poorer than is.

Now Ecuador faces exactly the same situation having suffered double scandals in the past two administrations.   First the Vice President fled to exile to escape criminal charges for misuse of reserved funds, then the Comptroller General was impeached and removed from office for allegedly covering up these transactions.  In the new government which took office last August the President, also now in exile, stands accused of diverting many more millions into foreign and family accounts, the former Comptroller General is to appear before the new anti-corruption commission this week and the Deputy Comptroller General of the ousted regime is now sought for arrest because he burned all the records of the reserved accounts. 

In a world which is being devastated by collapsing morals of every kind it appears likely to me that there will be no other alternative to SAI's than to man the front lines in the battle against corruption by rapidly developing a special group of forensic auditors capable of performing independent investigatory audits wherever corruption is alleged.

Each country and each SAI must make its own decision in this crucial and controversial area.  Organizations such as CAROSAI and INTOSAI can but serve as fora for discussion and sharing of experiences.

Whether or not the SAI is to enter the jungle of forensic auditing is a national decision, but one which all countries will face before the turn of the Century.

I am not happy about it, but I predict that most, if not all SAI's will be dedicating the majority of their audit efforts to forensic auditing during the early years of Century 21.

Accountability

I am enormously pleased to be able to for the first time participate with you in a CAROSAI Congress.  Only God knows whether I will be able to attend another one in the new Century.  So I want to impose a bit more on your patience to leave you with two personal thoughts which I have gleaned over the years and then conclude with two inspirational points.

First, with regard to performance measurement and auditing, I have observed that it is highly unlikely that persons who are unable to be accountable for money, the most easily measurable of all assets, will be able to be accountable for performance measurement.  Therefore financial accountability is a prerequisite to performance accountability and that order should be followed.

Secondly, I have observed that those persons who do not recognize their own accountability to a higher being or power, are highly unlikely to have the capability of being accountable for money or other resources.

To achieve accountability in government or in business we must first get our own personal accountability relationships straightened out.  We can only do that through finding and continually strengthening our own faith and trust in the Supreme Being.

Because of this Congress' emphasis in its theme upon accountability I must share with you the best definition of accountability I have ever heard or read.  It was written by the black Chief of Police of the City of Charleston, South Carolina with the unlikely name of Rueben M. Greenberg who practices the Jewish religion and has become a legend in law enforcement:

            "Accountability isn't hard to define.  It's the concept that every individual is responsible for his or her actions, is liable for their consequences, and must answer to someone if these actions harm others...Of the many shining values that hold together the fabric of civilization - honesty, kindness, truthfulness, generosity, decency - I truly think that accountability may be the greatest of them all.  Without it there can be no respect, no trust, no law --- ultimately, no society.

            "My job as a police officer is to impose accountability on people who refuse, or have never learned to impose it on themselves...We try to enforce external controls by enforcing the law...But as every cop knows, external controls on people's behavior are less effective than internal controls, such as guilt, shame, embarrassment, fear of punishment, and reluctance to face public condemnation or ostracism.

            "The sense of guilt or remorse once associated with the commission of a felony has vanished...If we exempt...(the criminal)..., even partly, from accountability, we become a society of endless excuses, where no one is prepared to accept responsibility for anything."

My farewell which I hope you will try to remember and share with others is a code of ethics which has endured for over 3,000 years:

            Walk with integrity

             Do what is right

             Speak the truth from your heart

            Do not slander others

            Do your neighbor no wrong

            Do not spread rumors

            Keep your word...even when it hurts

            Lend money without usury

            Do not accept a bribe

            Despise a vile man

            Honor those who revere God

                                                                                by David,  King of Israel and Judah

                                                                                (adapted from Psalm 15)

Whenever you find you are on the side of the majority, it is time to pause and reflect

                     --- Mark Twain

We have never observed a great civilization with a population as old as the United States will have in the twenty-first century; we have never observed a great civilization that is as secular as we are apparently going to become; and we have had only half a century of experience with advanced welfare states...Charles Murray

Kella
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This is a personal website containing personal information and some news and  personal opinions on certain issues affecting democratic governance of interest to me and my friends, associates and seminar participants. The financial information, charts, etc., consist of items I find interesting. Draw your own conclusions from it.
Copyright Notice: In accordance with Title 17 U. S. C. Section 107, any copyrighted work on this website is distributed under fair use without profit or payment to those who have expressed an interest in receiving the included information for nonprofit research and educational purposes only. Ref.: http://www4.law.cornell.edu/uscode/17/107.html