Originally published in the Australian Financial Review, 11 June 2014
Revelations of Australia’s biggest-ever insider trading case highlight that despite technology making it easy to commit and expose fraud, the time-honoured tradition of professional scepticism is still as relevant and crucial as ever.
It is alleged a bank employee and his friend at the Bureau of Statistics used unreleased economic data to predict fluctuations in the Australian dollar and reap $7 million on currency markets.
While the Australian Federal Police used social media - LinkedIn and Facebook - to reveal crucial links between the two friends these revelations may not have surfaced were it not for a far less dramatic event: Owen Kerr, a foreign exchange broker who originally discovered anomalies that triggered the investigation.
Kerr was alert and confident enough to raise the alarm.
The audit profession refers to this character trait as “professional scepticism”. It is becoming more vital in the fast moving world of online trading.
Advances in technology and the use of social media is expected to lead to an increase in fraud involving collusion, particularly between employees and external parties, according to a KPMG Fraud, Bribery and Corruption survey.
Conducted in Australia and New Zealand, the survey found $373 million was stolen from respondents over a two-year period, with an average fraud loss of more than $3 million.
Professional scepticism is an important combatant in this war.
CPA Australia has initiated a wide-ranging conversation on professional scepticism in its many guises as it relates to the full gamut of professional and governance roles – particularly for auditors.
Involving psychologists and behavioural scientists, this initiative is looking for new ways to drive better understanding of these essential traits.
The response to fraud and other subversive market risks has often been to regulate a wider population for the sins of outliers. The critical traits illustrated in the NAB-ABS saga are inherently learnt through observing and interacting with colleagues, mentors and role models – you can’t regulate for them.
One of the seemingly counterintuitive insights coming from CPA Australia panel discussions on professional scepticism is that overly prescriptive or narrowly focused regulation can stand in the way of this important trait and distract from the alertness and open-minded attention required.
A further challenge is how young professionals are absorbing these qualities in a world where email communication has replaced real conversation.
Importance of face time with mentors and leaders was another central focus of CPA panel discussions.
Albert Einstein once quipped that “it has become appallingly obvious that our technology has exceeded our humanity”. The reality is neither technology nor regulating for outliers can adequately address the increasing risks and challenges arising in the markets and businesses today.
It is essential that the right environment is set for the honest, broader majority to play its role in fairer and more effective markets.
Technology makes it easier to commit fraud as well as to expose it. Regulators have to be as agile and technologically adept as the perpetrators, and a good dose of professional scepticism is critical to smelling a rat.