2009 ACBO Annual Conference

Transcription

1 Developing an Effective Anti Fraud Program 2009 ACBO Annual Conference October 26,

2 Presenters Linda Saddlemire Carroll King Ernie Cooper VLS Fraud Solutions Team Members 2

3 Carroll King Tapestry Album 1971, 1999, 2006 I Feel the Earth Move, but You ve Got a Friend, but Will You Love Me Tomorrow, but It s Too Late. CIA, CFE, EA, MBA and stuff 3

4 Agenda & Goals Part I Understanding Fraud & the Fraud Triangle Economic Recession Impact Article Types of Fraud in Schools Part tii Six Essentials of an Anti fraud Program 4

5 LOS ANGELES FBI Bank Robberies TYLER, TEXAS FBI Organized Crime Mafia SAN FRANCISCO FBI Financial Institution Failures SAN JUAN PUERTO RICO FBI Government Fraud LOS ANGELES FBI Corporate Fraud 5

6 At VLS, Our Experience Fraud can occur in any organization Fraud can be committed by anyone No fool proof method to prevent fraud Once fraudster starts, very hard to stop Become a skeptic not a cynic 6

7 Part I Understanding Fraud Economic Recession Impact Article Fraud in Schools 7

8 Objective To Understand Fraud 1. What is Fraud? 2. What is the Fraud Triangle? 3. Who Commits Fraud? 4. Why is this Important to You? 8

9 What is Fraud? Black s Law Dictionary: Embracing all various means which human ingenuity can devise, and which are resorted to by one individual to get advantage over another by false suggestions or by suppression of the truth and includes all surprise, trickery, cunning, dissembling, and any unfair way by which another is cheated. 9

10 What 3 Factors Present in a Fraud? Pressures FRAUD TRIANGLE Opportunities Rationalization 10

11 Pressures Serious financial problem that requires immediate attention and cannot be resolved by ordinary financial resources Being unable to pay one s debts due to out of ordinary circumstances Medical/health, divorce, loss of job, gambling, chemical dependency, extra marital affair, other vices, personal financial failures, bad investments, significant changes in family situation Living beyond your means Excessive lifestyle children in college, children in many activities, failure of ex to pay support, trying to keep up with the Jones Pressure from spouse to improve lifestyle Organizational Pressures Other Pressures 111.2

12 Opportunity Become aware that financial problem can be solved by stealing from organization or falsifying organizations records Lack of segregation of duties and dual custody Other cash receipts, cash disbursements, bank deposits, district credit card abuse, payroll, purchases Missing internal controls Failure to inform employees of the rules Rapid turnover of employees in key positions Constant crisis Failure to uniformly enforce policy 12

13 Rationalization Mindset and thinking that what you are doing is justified It is just temporary and will replace Management does not care No one else is hurt I deserve it Management expects this For the good of the company Small amount and will not be missed 13

14 Who Commits Fraud? 14

15 Who Commits Fraud? Any Human Being Typical White-Collar Criminal Median age is 42 61% male, 39% female An appearance of a stable family situation Above-average (postgraduate) education Less likely to have criminal record Good psychological health Position of trust Detailed knowledge of accounting systems and their weaknesses Some accounting experience 15

16 Economic Recession Impact See handout Occupational Fraud 1. Has Fraud increased? 2. Has there ee been more oepe pressure ueo on individuals? i i 3. Who is the biggest threat for Fraud? 4. Will Fraud continue to grow? 5. Should you worry about your employees? 6. What should we expect in the future? 7. What are companies doing about prevention? 8. How solid are your internal controls? 16

17 Fraud in Schools 17

18 Headlines 18

19 Headlines 19

20 Headlines 20

21 Headlines 21

22 Types of Fraud in Education 2006 ACFE Commonly Reported Asset Misappropriation Schemes: Education 12% 10% Billing 14% 8% 1% 1% Non-Cash Expense Reimbursements Skimming Payroll 14% 25% Cash Larceny Check Tampering Wire Transfers 15% Register Disbursements See handout 22

23 VLS Case History in Education VLS Cases % 9% Billing 12% 41% Skimming Payroll Expense 33% non-cash Average loss $97k, low $2K high $1mil 23

24 Areas of Fraud in Schools Attendance overstating Cash Handling Skimming and Larceny Payments illegal purchases, overpayments, kickbacks Payroll phony employees, false OT Auxiliary Organizations : ASBs, Bookstores, Booster Organizations, Foundations Food ds Service operations 24

25 Part II Six Essentials to Building an Anti Fraud Program 25

26 SAS 99 Consideration of Fraud in a Financial i Statement Audit Requires many new procedures for auditors: brainstorm, inquiries, skepticism Requires auditor to review organizations Anti Fraud Program 26

27 Six Essentials to Anti Fraud Program I. Creating a culture of honesty and integrity II. Establishing & monitoring internal controls III. Proper oversight IV. Operating an anonymous hotline V. Fraud awareness training VI. Proactive fraud policies and internal audit practices 27

28 I. Creating a Culture of Honesty and Integrity 28

29 Create Culture of Honesty and High hehi Ethics Setting tone at the top Creating a Positive work environment Hiring and promotion Confirmation Discipline 29

30 Setting Tone at the Top Ethical example set by top management and supervisors Articulate value and ethics system in Code of Conduct Management must communicate ethical behavior at all times Management must Walk the Talk 30

31 Creating a Positive Work ke Environment Wrongdoing and fraud occur less frequently when employees have positive feelings about their organization than when they feel abused, threatened or ignored A Comparison of the Environments and Culture of Organizations with High and Low Fraud Potential (See Handout Page ) 31

32 Confirmation Clearly articulate that all employees will be held accountable to act within the Code of Conduct Sign Code of Conduct at least annually for top management and positions more exposed to fraud Can t hide 32

33 Discipline Clearly articulate expectations about the consequences of committing fraud Incident will be thoroughly investigated Consistent action taken against fraudsters, including referral to law enforcement Control weakness fixed Communicated and train 33

34 II. Establishing & Monitoring Internal Controls 34

35 Responsibility for Internal Control Who is responsible for I/C? Board, Senior Management, Supervision, Employees 35

36 DEFINITION OF INTERNAL CONTROLS Comprises the plan of organization and all of the coordinate methods and measures es in an organization to safeguard its assets, check the accuracy acy and reliability eia iiyo of is its accounting data, promote operational efficiency, ie and encourage adherence e e to prescribed managerial policies. Statement on Auditing Standards No. 1 36

37 Objectives So what are the management objectives of Internal Control? 37

38 Objectives of Internal Control SCARE Off Crooks!!! And help us Safeguard Assets Comply with policies and procedures Accomplish goals and objectives Reliability and accuracy of accounting data Effective and economical operations 38

39 What are Five Types of Internal lc Controls? Preventative Controls Parallel Controls Administrative Controls Detective Controls Accounting Controls 39

40 Separation of Duties Should Separate 3 functions: Authorization (management who approves expend.) Recording (a ecording (accounting who enters debit and credit) Custody (who has access to warehouse, cash) 40

41 Benefits of Separation of Duties Deliberate misstatement is made more difficult because it would require collusion of 2 or more people By acting in a coordinated manner, it is more likely that innocent errors will be found 41

42 III.Proper Oversight 42

43 Developing an Effective Oversight Process to Prevent, Detect and Detour Fraud Legal Counsel Management Internal Auditors Antifraud Procedures Audit Committee (or Board if no Audit Committee) External Auditors Hotline Certified Fraud Examiners/Investigators t

44 Board of Directors and Audit Committee Board/Audit Committee If no Audit Committee, the Board should follow these guidelines. Audit ditc Committee Job Evaluate Management s: ID of fraud risks, Implementation of antifraud measures to protect students, parents, teachers, and the community, Creation of appropriate Tone Assist Management with Zero Tolerance for Fraud 44

45 Audit Committee Duties Assist Board with oversight of financial reporting Financially literate Potential Management override Meet with External Auditor and Internal Auditor Compare actual to forecasted Investigate ALL dubious items Consider meeting with lower levels of mgmt Encourage mgmt to have anonymous reporting mechanism 45

46 Management Responsibility Overseeing the activities of employees Implementing and monitoring controls and processes Improving the public s understanding of the control process MD&A 46

47 Internal Auditor Effective Internal Audit Team is a must Extremely helpful in identifying risk of fraud Should have sufficient knowledge to identify the indicators of fraud but typically does not possess the expertise to detect and investigate 47

48 External Auditors Can assistant management and board audit committees by providing an assessment of the organization s process for identifying, assessing, and responding to the risks of fraud Is it the external auditor s responsibility to find all fraud within the organization? NO! 48

49 Certified Fraud Examiners Designated as experts in the field of fraud by the Association of Certified Fraud Examiners (ACFE) Assist audit committee in oversight as part of internal audit team or hired independently Assist in prevention, detection, dt ti investigation of fraud 49

50 IV. Operating an Anonymous Hotline 50

51 Initial Detection 80% 51

52 Provide Anonymous Reporting Mechanisms Fax Number Open-Door Policy Website Regular Mail Suggestion Box Hotline

53 Essentials of Hotline If you don t have one: Ask yourself: Why not? Establish planning group Determine if internal or external Determine who should own hotline Communicate existence and mechanics of hotline Follow-up on tips Continue to communicate 53

54 V. Fraud da Awareness Training 54

55 Fraud Training 9mos. $100,000 55

56 Provide Ethics and Fraud Awareness Training i Begin at Hiring Ongoing Comprehensive Committed All Levels & Areas (supervisors) Real life fraud examples in education Red Flags 56

57 VI. Proactive Fraud Policy 57

58 Policy Hiring & Personnel Background checks Policy on dismissal for fraudulent acts Policy on reporting frauds Fair compensation Exit interviews Proper supervision Practices 58

59 Policy Internal Audits 6 mos. $98,000 59

60 Policy Conduct Proactive Fraud Auditing & Investigations Create awareness that actions are subject to review at any time Surprise audits and checks Build internal audit programs to proactively look for fraud red flags 60

61 Common areas for internal audit Payroll Inventory Purchasing Cash Receipts Accounts Payable Attendance Journal entries Information Technology ASB s Food Service Auxiliary Organizations Construction Projects 61

62 Conclusion Questions???????? Please fill out evaluation, We value your feedback! 62