How to Prevent Financial Crimes with Internal Controls in Jamaica

Financial crimes have become increasingly common in Jamaica, even among companies with robust internal controls and established policies. In this article, we’ll explore the importance of internal controls in preventing fraud and other financial crimes.

The Importance of Internal Controls

Historically, literature on accounting, auditing, and corporate governance has emphasized the significance of internal controls in deterring and preventing fraud and other white-collar crimes. However, many organizations in Jamaica still operate without essential tools like a fraud policy, whistle-blowing policy, and fraud risk assessments.

The COSO Framework

The most widely recognized framework for internal controls is the Internal Control – Integrated Framework (COSO), established by the Committee of Sponsoring Organizations of the Treadway Commission in 1992. This framework defines internal control as a process designed to provide reasonable assurance regarding the achievement of objectives in categories such as:

• Effectiveness/efficiency of operations
• Reliability of financial reporting
• Compliance with applicable laws and regulations

Management Override

Even well-designed controls can be circumvented by collusion or management override. Collusion is often a feature of management override, involving a secret agreement between two or more individuals intent on defrauding a third party and orchestrating a deceptive appearance of the transaction.

• Reasons for management override:
  • Incentives or pressures for personal gain
  • To meet expectations or targets
  • To avoid tax
• Forms of management override:
  • Back-dating financial documents
  • Adjusting entries during the financial close process
  • Improperly reclassifying information

International Case Studies

International Standards on Auditing (ISAs) acknowledge the ability of management and/or those charged with governance to manipulate accounting records and prepare fraudulent financial statements by overriding controls. There are numerous international case studies that provide examples of management overrides, including:

• Worldcom
• Enron
• Computer Associates
• Barings Bank
• Cendant
• Bear Stearns
• AIG
• Comptronix

Lessons from the Caribbean

In the Caribbean, we would do well to learn from the experiences of:

• Stanford Financial Group
• British American Insurance Company
• Colonial Life Insurance Company Limited (CLICO)
• The Jamaican financial meltdown of 1996
  • Collapse caused by inadequate legislation, liquidity challenges, market decline in prices of services, and questionable corporate governance indiscretions

Best Practices

To prevent financial crimes, Jamaican organizations should:

• Maintain an appropriate level of professional skepticism on their financial statements, particularly with regard to procurement processes and large or unusual transactions
• Prioritize fraud prevention and detection by implementing a fraud policy, whistle-blowing policy, and conducting regular fraud risk assessments

Conclusion

As a forensic accountant who has seen firsthand the devastating consequences of management override, I urge Jamaican organizations to take proactive steps to prevent financial crimes and protect their reputation and assets.

By implementing robust internal controls, prioritizing fraud prevention and detection, and maintaining an appropriate level of professional skepticism, Jamaican organizations can reduce the risk of financial crimes and ensure the integrity of their operations.