Fraud Awareness Jennifer Murtha Clara Ewing

Transcription

1 Fraud Awareness Jennifer Murtha Clara Ewing

2 The Monkey Business Illusion 2

3 Fraud Defined The term fraud is defined in Black's Law Dictionary (Sixth Edition, 1990) as: An intentional perversion of truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right. A false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations, or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury. A generic term, embracing all multifarious 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 truth, and includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated. 3

4 The Fraud Triangle Unrealistic deadlines Unrealistic performance goals Personal vices Inadequate or no: Supervision & review Segregation of duties Management approval System controls a.k.a. Rationalization reconciling behavior with commonly accepted notions of decency & trust. 4

5 The Fraud Diamond Pressure Unrealistic deadlines Unrealistic performance goals Personal vices Inadequate or no: Supervision & review Segregation of duties Management approval System controls Convinced self that fraudulent behavior is worth the risk. Necessary traits and ABILITIES to be right person to pull it off Recognized this particular fraud opportunity and can turn it into reality.

6 The Nature of the Industry Fraud can be explained by three factors: - A supply of motivated offenders - The availability of suitable targets - The absence of capable guardians or a control system to mind the store The opportunity to commit & conceal fraud is the only element over which you (the principal) have significant control. What are some of the warning signs? What can we do about it? Source: Red Flags for Fraud by Mark P. Pattison, Deputy Comptroller, State of New York 6

7 No free lunch... According to various fraud surveys, non-sec companies continue to be disproportionately impacted by fraud & misconduct within their organization Business fraud and abuse in the U.S. cost about $900 billion a year - Educational organizations lose an average of $71,000 per fraud scheme - Average organization loses 5% of revenue - 42% recover nothing after fraud is discovered Street crime only costs the U.S. $4 billion annually 7

8 Just the Facts Fraud schemes frequently continue for years before they are detected The typical fraud in the ACFE study lasted 2 years from the time it began until it was discovered Frauds are much more likely to be detected by a tip than by audits, controls or any other means Lack of adequate internal controls was most commonly cited as the factor that allowed fraud to occur Occupational fraudsters are generally first-time offenders 8 Source: Association of Certified Fraud Examiners, Report to the Nation on Occupational Fraud & Abuse

9 Type of Detection How is Fraud Detected? Detection of Fraud Notified by Police External Audit 3.2% 5.1% 9.1% 9.6% Internal Controls Internal Audit By Accident 23.3% 19.7% 19.4% 26.8% 20.0% 16.6% All Cases Government Tip 46.2% 50.3% 0% 10% 20% 30% 40% 50% 60% Percent of Cases Source: Association of Certified Fraud Examiners, Report to the Nation on Occupational Fraud & Abuse 9

10 What are the Fraud Schemes? Scheme Cases Corruption 23.7% Billing 33.9% Skimming 16.9% Non-cash 16.9% Check Tampering 11.9% Expense Reimbursement 23.7% Cash on Hand 6.8% Fraudulent Statements 5.1% Cash Larceny 15.3% Payroll 16.9% 10 Source: Association of Certified Fraud Examiners, Report to the Nation on Occupational Fraud & Abuse

11 What s the cost? Economic costs: - Tangible & measurable - Insurable in some cases - Provides basis for prosecution and/or litigation Political costs: - Loss of integrity - Diminished public confidence - Can t be measured, difficult to recover - Employee Morale.. 11

12 Profile of a fraud perpetrator Male, but increasing percentage of females Intelligent and in management. Married and under some type of significant stress. Risk takers and not afraid to fail. Rule breakers. Long-time employees, hard working Source: Fraud Perpetrator Profile: A Short Story by Nick Brignola, CFE 12

13 Profile of a fraud perpetrator Famous last words: It won t happen here. We re careful who we hire. Source: Association of Certified Fraud Examiners, Report to the Nation on Occupational Fraud & Abuse 13

14 Profile of a fraud perpetrator Famous last words: NO WAY it was Mike. He s over 60 now. Source: Association of Certified Fraud Examiners, Report to the Nation on Occupational Fraud & Abuse 14

15 Profile of a fraud perpetrator Source: Association of Certified Fraud Examiners, Report to the Nation on Occupational Fraud & Abuse 15

16 Profile of a fraud perpetrator Famous last words: Sandra wouldn t have done that. She s a mom. $110, Source: Association of Certified Fraud Examiners, Report to the Nation on Occupational Fraud & Abuse 16

17 Profile of an organization at risk Less than 100 employees. Management ignores irregularities. High turnover with low morale. Staff lacks training. Source: Fraud Perpetrator Profile: A Short Story by Nick Brignola, CFE 17

18 The Typical Environment in which Fraud Occurs Trust is placed in employees Employees have detailed knowledge of the accounting systems and their weaknesses Management domination subverts normal internal controls Management adds pressure to make the numbers Expected moral behavior is not communicated to employees Unduly liberal accounting practices 18

19 The Typical Environment in which Fraud Occurs Ineffective or nonexistent internal auditing staff. Lack of effective internal controls. Poor accounting records. Related party transactions. Incomplete and out of date procedural documentation. Management sets a bad example. 19

20 The Fraud Diamond Pressure Unrealistic deadlines Unrealistic performance goals Personal vices Inadequate or no: Supervision & review Segregation of duties Management approval System controls Convinced self that fraudulent behavior is worth the risk. Necessary traits and ABILITIES to be right person to pull it off Recognized this particular fraud opportunity and can turn it into reality.

21 Who knew who they were? There was no place for me to voice my concerns, either to the internal audit function or the audit committee. Remember, I was not in the accounting department. But even if I were, I think I would have known it would have been fruitless, because I would have had access to junior auditors who were simply not in the position to raise the flags that would have hurt their senior auditors and account executives. - Sherron Watkins Enron Corporation 21

22 What can Management do? Corporate Culture Tone at the Top Tone at the top describes the ethical environment created in a company by leadership. Tone does trickle-down to employees. Four steps to creating the right tone: 1. Lead by example 2. Communicate & Train Employees 3. Institute an effective Whistleblower program 4. Reward ethical behavior Minimize Opportunity Strong Internal Controls 22

23 The Fraud Diamond Pressure Unrealistic deadlines Unrealistic performance goals Personal vices Inadequate or no: Supervision & review Segregation of duties Management approval System controls Convinced self that fraudulent behavior is worth the risk. Necessary traits and ABILITIES to be right person to pull it off Recognized this particular fraud opportunity and can turn it into reality.

24 Best Practices - Hotlines help... Fraud losses are reduced by 58% when an effective hotline is in place 47% of hotline calls happen overnight or on weekends Communications that publicize the existence of the hotline should used as an opportunity to promote ethical behavior as well Components of communication strategy: - Message - Reach - Frequency An engaging message needs to reach the right person at the right time in order to influence that person to take action. Source: Fighting Fraud with Words: Whistleblower Communication March 2006, ALGA 24

25 When a Fraud is Discovered Investigate all frauds a. Internal and external audit b. Forensic accountants 2. Retain legal counsel a) Advise the company on appropriate actions b) Coordinate with law enforcement and regulators, if necessary c) Engage forensic accountants 3. Have a plan of action a) Understand committee s level of involvement b) Establish expectations of management c) Decide how investigation results should be disclosed 4. Consider corrective actions a) Evaluation of control breakdowns and necessary remediation b) Identification of similar opportunities for fraud to occur (be proactive) 25

26 Summary Fraud happens throughout our organizations regardless of industry, size and culture Greater the skill and education greater the losses Management must be proactively engaged in fraud preventive and detective controls Ethics programs are a key component in an effective internal controls If the workforce and vendors know they are being monitored the occurrence of fraud is generally lower 26

27 Don t let it happen to you.. 27