Keep Procure-to-Pay (P2P) Fraud at Bay with Fraud Detection Tools & Techniques

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1 Keep Procure-to-Pay (P2P) Fraud at Bay with Fraud Detection Tools & Techniques Chris Doxey, CAPP, CCSA, CICA, CPC President, Doxey, Inc

2 2 May 7-9, 2017 Chris Doxey, CAPP, CCSA, CICA, CPC Chris spent most of her career implementing top gun leadership teams and processes in her quest to fight fraud and implement internal controls at Digital Equipment Corporation, Compaq Computer Corporation, and Hewlett Packard. She held senior finance and accounting positions which allowed her to develop and implement standards of internal control for all aspects of financial operations focusing on the procure to pay (P2P) process. She was recruited to assist WorldCom (MCI) with the implementation of internal controls, policies, and corporate governance in Chris uses her background and passion as a management consultant and helps her clients implement internal controls and leading practices across all financial operations.

3 Agenda Introductions About P2P Fraud and the Psychology of Fraud Your Anti-Fraud Toolkit for the P2P Process The Types of Controls and the Three Critical Corporate Controls The Standards of Internal Control for the P2P Process The Top Twenty Controls for AP What Went Wrong: Case Study Analysis Q&A

4 About P2P and the Psychology of Fraud 4

5 The Business Processes with Biggest Fraud Challenges Source: 2014 Aberdeen Survey

6 The Procure to Pay (P2P) Process Flow

7 Why does so much fraud occur in the P2P process?

8 Examples of PTP Internal Control Weaknesses Source: 2014 Aberdeen Survey

9 Types of P2P Fraud Collusion Between Procurement and Suppliers Embezzlement Check Fraud Diverting ACH Payments Intended for Suppliers Transactional Fraud Phony Suppliers Employees Posing as Suppliers Fraudulent and Scam Suppliers Suppliers on Government and Criminal Watch Lists

10 The Fraud Triangle May 7-9, 2017

11 The Fraud Triangle - Opportunity OPPORTUNITY Internal controls are weak or lacking including: o Approvals o Access Controls o Reviews Insufficient segregation of duties or lack of job rotations

12 The Fraud Triangle - Need Financial pressures Debt Loss of Income Need to maintain social status

13 The Fraud Triangle - Justification Get even mentality Overlooked for a promotion Reduction in benefits Funds are borrowed and will be paid back Employee favoritism and other poor management practices

14 The Fraud Diamond Incentive Opportunity Rationalization Capability Note: The fraud diamond was introduced by David T. Wolfe and Dana R. Hermanson in 2004.

15 Your Anti-Fraud Toolkit for the P2P Process 17

16 The Types of Controls and Three Critical Corporate Controls 18

17 The Standard Types of Internal Controls Control Activity Type Examples 1. Preventative 2. Detective 3. Manual 4. Systematic Control mechanism that prevents control issues or problems from occurring. (e.g., house lock) Manual reconciliations, review of authorized signatures, credit checks and approvals that are performed after the fact. Any manual control activity that may include the detective controls noted above. Examples are manual reconciliations or a manual review of authorizations. Three way match of invoices for payment, batch control totals, field level edits/validations

18 The Three Critical Corporate Controls The three most critical internal controls for any company can be established by corporate policies should be "operationalized" into your company's business processes and monitored by the applicable internal control programs. These controls are: 1. Segregation of Duties 2. Delegation of Authority 3. System Access

19 1) Segregation of Duties The Segregation of Duties (SoD) control is most of the most important controls that your company can have. Adequate segregation of duties reduces the likelihood that errors (intentional or unintentional) will remain undetected by providing for separate processing by different individuals at various stages of a transaction and for independent reviews of the work performed. The SoD control provides four primary benefits: 1) The risk of a deliberate fraud is mitigated as the collusion of two or more persons would be required in order to circumvent controls 2) The risk of legitimate errors is mitigated as the likelihood of detection is increased. 3) The cost of corrective actions is mitigated as errors are generally detected relatively earlier in their lifecycle. 4) The organization s reputation for integrity and quality is enhanced through a system of checks and balances.

20 1) Segregation of Duties (Cont.) Best Practice: One of the most common "root causes" of fraud is the lack of SoD controls, weak SoD controls, inappropriate compensating controls, or failure to update SoD controls when responsibilities change. As a best practice, many organizations review their SoD controls on a quarterly basis as part of their control self-assessment (CSA) process. As a result of this review, the applicable SoD controls are updated in a timely manner

21 2) Delegation of Authority Delegation of Authority (DoA): The purpose of the DoA is to ensure the efficient operation of the company while maintaining fiscal integrity and adherence to policy. Accountability for the overall management of the property, assets, financial, and human resources of the company rests with the Chief Executive Officer (CEO). In many cases the "governance" of the DoA is the responsibility of the controller. Individuals that have been assigned authority under the terms of the DoA must safeguard company resources by establishing and maintaining internal controls that deter and detect any potential misuse of resources. Best Practice: Many companies assign levels of authority to the job grades or levels within the organization and apply workflow to streamline the approval process. If an individual is promoted or moves to another department, his or her level of authority is automatically updated in the employee master file.

22 3) Systems Access System Access: The principle of segregation of duties in an information system environment is also critical as it ensures the separation of different functions such as transaction entry, on-line approval of the transactions, master file initiation, master file maintenance, system access rights, and the review of transactions. In the context of application and access level controls, this means that one individual should not have access rights which permit them to enter, approve and review transactions. Assigning different security profiles to various individuals supports the principle of segregation of duties. As an example, operational or process segregation of duties within an accounts payable department will determine the system access rights that should be granted for each associate based on roles and responsibilities.

23 3) Systems Access (Cont.) Best Practice: System access rights are reviewed on a periodic basis (usually monthly or quarterly) to ensure that system access capabilities are appropriate for current staff members and reflect any changes in responsibilities or movements to other departments.

24 How many review their system access controls on a regular basis?

25 Standards of Internal Control for the Procure to Pay (P2P) Process 27

26 The Procure to Pay (P2P) Process Flow

27 About Standards of Internal Control

28 What is the Purpose of May 7-9, 2017 Standards of Internal Control? Determine the risk that is being mitigated; Define the set of internal controls to properly address the risk; Are updated when: There is a change to a P2P process, or system environment; A fraud has been perpetrated; The cost of the control is not in line with the benefit to the organization; or when A business process has recently been automated

29 Have you ever had a fraud in your P2P process?

30 Standards of Internal Control for the P2P Process 1) Supplier Selection and Management 2) Purchasing and Ordering 3) Disbursements 4) P-Card

31 Example: Standard of Internal Control and Risks Mitigated May 7-9, 2017 Control Documented Supplier Selection. There must be a formal, documented supplier selection, qualification, and evaluation process used based on criteria established by the team and approved by purchasing management/client sponsor(s). Risks Mitigated : A-1, A-2, A-3, A-4, A-6 Risks Mitigated A-1 A purchase may be made from unapproved supplier. A-2 Export control violations, related party transactions, or conflict of interest situations may occur. The potential for errors and irregularities is substantially increased. A-3 Goods or services purchased may not meet quality standards. Unauthorized prices or terms may be accepted. A-4 Company will not have sufficient information to conduct meaningful negotiations and utilize its full purchasing power. A-6 Goods and services may be received early or late resulting in business interruption or excessive levels of inventory.

32 The Top 20 Controls for AP 34

33 20 Top Accounts Payable Controls Corporate Level Controls 1. Adherence to the Company s Tone at the Top 2. Adherence to Company Code of Conduct and Ethics Training 3. Performance of Employee Background Checks 4. Performance of Delegation of Authority (DoA) Controls 5. Assurance of Segregation of Duties (SoD) Controls 6. Implementation of System Access (SA) Controls 7. Assurance of Record to Report (R2R) Controls 8. Implementation of Account Reconciliation Controls

34 20 Top Accounts Payable Controls (Cont.) Managing the Supplier Master 9. Obtain Supporting Tax Documents 10. Validate Tax Documents with Applicable Authorities 11. Perform Compliance Screening (Onboarding and Throughout the Life of the Supplier) 12. Validate the Supplier (Websites, Scam Suppliers, Phone Numbers, and Address) 13. Perform Supplier and Employee Master File Matching Process (Annually)

35 20 Top Accounts Payable Controls (Cont.) Invoice Processing and Disbursements 14. Implementation of a Large Dollar Disbursement Review Process 15. Implementation of Positive Pay, Positive Payee, and Electronic Payment Controls 16. Ensure Segregation of Duties (SoD) Controls for Supplier Master and Invoice Processing 17. Implement and Review AP Operational Metrics

36 20 Top Accounts Payable Controls (Cont.) P-Card and T&E Controls 18. Implementation of a P-Card and T&E Policy and Training Program 19. Implementation of Cardholder Agreements for all Corporate Credit Cards HR Controls 20. Implementation of a Job Rotation Program (If Feasible)

37 12 Warning Signs of Accounts Payable Fraud 1. Invoices from various suppliers on similar invoice templates 2. Suppliers with incorrect TIN and VAT numbers 3. Transactions which are out of the ordinary 4. Excessive voids or credits 5. Large number of invoices, especially to a particular supplier, just beneath the approvals threshold 6. Few, or unclear reasons for a particular service 7. Suppliers with PO Box addresses, and residential addresses 8. Erratic employee behavior - always in early or late 9. Sudden, or unexplained employee departure 10.An increase in duplicate payments 11.Excessive amounts of rounded up, or down invoice amounts 12.Above average payments to a supplier or invoice payment spikes Source:

38 What Went Wrong? Case Study Analysis 40

39 What Can Go Wrong? May 7-9, 2017

40 Foster Law Offices Kimberly Kurka, a 35-year-old employee of Foster Law Offices, has been accused of stealing $141,000 from her employer over a two-year period. During her employment, her duties included managing payroll, accounts receivable, accounts payable and business related to the trust and operating accounts. She also had access and passwords to the businesses online accounts. Police reported that a forensic fraud examination of the law office s accounting records showed that Kurka was misappropriating funds as early as 2008 and continuing through The fraud was conducted through checks, money transfers between accounts, credit cards and cash payments from clients. According to the Iowa City Press-Citizen, Kurka allegedly wrote herself additional paychecks, inflated her payroll, converted credit card access checks to funds for the operating account and stole cash payments from clients. Kurka has been arrested and faces one count of first-degree theft, a Class C felony. Source:

41 Foster Law Offices (Cont.) The Major Issues The following major control infrastructure items were lacking: Business Ethics Timely Bank Account Reconciliations Journal Entry Controls Disbursement Controls Critical Corporate Controls Multiple Segregation of Duties Issues and Conflicts Systems Access No Compensating Controls!

42 What to do if you suspect a fraud.. 1. Make sure you have all the facts! 2. Do not take action yourself 3. Call your Ethics Hotline 4. If appropriate, speak with your manager and/or the next highest level of authority 5. Involve Internal Audit and/or Corporate Security 6. Do not tell anyone else about your suspicions 7. Never confront the employee

43 Wrap-Up and Q&A 45

44 My Contact Information Is: Chris Doxey, CAPP, CCSA, CICA, CPC President, Doxey, Inc

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