Fraud Prevention:It is not so Ducky when Fraud Happens!

Fraud Prevention:It is not so Ducky when Fraud Happens!

Steven Bateson2010

Last couple of Presentations I have given you the results of the Survey done by the Association of Certified Fraud Examiners.

And, nothing has changed!!!

Last couple of Presentations I have given you the results of the Survey done by the Association of Certified Fraud Examiners.

And, nothing has changed!!!

Fraud Factors in Economic DownturnFraud Factors in Economic Downturn

Increased and often severe financial needs Decreased loyalty to the company because of

real or potential layoffs. Increased opportunity due to the elimination of

“non-essential” positions such as auditors.

Fraud Magazine November/December 2009

KPMG Fraud Survey 2009 Reports:KPMG Fraud Survey 2009 Reports:

From senior executives 32% expect increase in Fraud activity in their organizations.

65% believe that Fraud poses a significant risk to their industry.

70% were concerned that a Fraud in their company would pose loss of public trust.

And, 66% reported that inadequate internal controls enabled Fraud to go unchecked.

These same Senior Executives offer advice.These same Senior Executives offer advice.

67% say to increase employee communication and Fraud prevention training.

65% suggest increasing technology driven continuous auditing and monitoring.

60% suggest improving Fraud and misconduct assessments in their companies.

FRAUD, WASTE, ABUSEFRAUD, WASTE, ABUSE

FraudFraud

The intentional, wrongful obtaining of either money or some other advantage or benefit from another or an organization.

WasteWaste

Incurring unnecessary costs as a result of inefficient or ineffective practices, systems or controls.

AbuseAbuse

Administrative violations of regulations which impair effective and efficient operations.

Fraud CharacteristicsFraud Characteristics

Fraud TriangleFraud Triangle

Opportunity

MotiveRationalization

MotivesMotives

Vices or addictions Unexpected expenses Resentment against agency or boss Living beyond one’s means

OpportunitiesOpportunities

Familiarity with operations Position of Trust Poor management oversight Weak Internal Controls Collusion

RationalizationRationalization

Owed to me Just borrowing Big organization they won’t miss it Everybody does it I deserve it Overall employee thinks he is honest

Of these which can we control?Of these which can we control?

Opportunity!!

Myths about FraudMyths about Fraud

Most people will not commit Fraud. Fraud is not material. Most Fraud goes undetected. Fraud is well concealed. Auditor can not do any better in detecting Fraud. Prosecuting Fraud perpetrators deters others.

Other Comments on FraudOther Comments on Fraud Management does not think Fraud will happen to

them. Fraud is always first defended as an “accounting

problem”. The perpetrator may admit to what the auditor

already knows. The position and background of the perpetrator

are unpredictable.

Other Comments - ContinuedOther Comments - Continued

Blind Trust is the number one internal control weakness.

Employees may not comply with internal controls.

Management fails to prosecute those suspected of Fraud.

Early audit involvement is needed.

Characteristics of a Fraudster

Characteristics of a Fraudster

Intelligent Non-conformist Egotistical High roller Hard working Stressed Inquisitive Disgruntled

What were the criminal histories of those who were caught in Fraud schemes?

What were the criminal histories of those who were caught in Fraud schemes?

5.7% - Had been charged with a crime but not convicted.

6.8% - Had prior convictions. 87.4% - Had never been charged or convicted.

First offense.

Fraud PreventionFraud Prevention

5 Step Approach to Fraud Detection5 Step Approach to Fraud Detection

Know your exposure risks. Know the symptoms. SOC Be alert to the symptoms. Auditors/employees build processes to look for

symptoms. Follow through on symptoms observed.

To Catch a Thief… Think Like OneTo Catch a Thief… Think Like One

Develop Fraud FitnessDevelop Fraud Fitness Have a fraud risk evaluation Have Internal/surprise Audits Establish a Fraud Hotline Have ongoing fraud education/ethics training Create culture of honesty and ethics in the work place

(Code of Conduct) Tone at the Top Establish an Audit Committee

Fraud Risk AssessmentFraud Risk Assessment Identify potential inherent Fraud risks. Assess the likelihood of the identified risks to

occur. Assess the significance to the organization of

the Fraud risks. Evaluate those people and departments most

likely to commit Fraud and identify the likely methods they may use.

Fraud Risk Assessment – cont’dFraud Risk Assessment – cont’d Identify existing preventive and detective

controls to mitigate Fraud risks. Evaluate identified controls to determine if they

are operating efficiently and effectively. Identify and evaluate residual Fraud risks

resulting from ineffective or non-existent controls.

Respond to residual Fraud risks.

Reduce the Risks of FraudReduce the Risks of Fraud

Establish sound hiring practices Establish the correct internal controls, document

them and enforce them Establish training, policies, and review

processes Create message of deterrence

Hiring the Right PeopleHiring the Right People

Criminal background check Credit history Drug screening Always check references

Best PracticesBest Practices

Set a good example for othersSegregate dutiesRotate dutiesStrong Internal ControlsSurprise audits

More Best PracticesMore Best Practices

Educate employees on fraud preventionEstablish Fraud Policy and publicize it Establish a code of conductEstablish a hot-line

Perception of DetectionPerception of Detection

Surveillance Anonymous tips Surprise audits Prosecution Enforcement of ethics and fraud policies Catch me if you can!

TrainingTrainingManagers need to know the red flagsProduce newsletter, other communicationEducate on the consequences of fraudTake appropriate action against

perpetrators

Suggestions related to behavior red flags

Suggestions related to behavior red flags

Pay attention to sudden dramatic changes in observable spending patterns.

Some types of fraud require active ongoing cover-up activity. Staying late, coming in early, and never take vacation are common in frauds. Identify employees who do not take vacation. Enforce vacations and mandatory rotation of assignments.

Excuses, like “I am working on those at home”, “We haven’t had time to make the deposit.”, or “the bank lost the deposit”, demand immediate follow-up action.

Ten Commandments of Detecting Fraud by Dennis Dycus

Ten Commandments of Detecting Fraud by Dennis Dycus

Assume anyone can commit Fraud under the right circumstances.

Use your knowledge of internal controls to “think dirty” and check out your suspicions.

Remember that all good documentation does not mean something happened, only that someone said it happened.

Ten Commandments – cont’dTen Commandments – cont’d

Pay attention to documents themselves and supporting paper-work, observing the consistency of numbers, dates, dollar amount, tax, type of ink used and general condition of the document.

Consider reasonableness of account balances and accounting entries, especially adjustments.

Ten Commandments – cont’dTen Commandments – cont’d Develop relationships and pay attention to hints or

rumors of wrongdoing. Follow up. Remember that people are often torn between their moral standards and their reluctance to get involved. They seldom tell all they know in the first interview.

Check out hunches; first impressions are often right. Have faith in yourself. Perception increases with experience.

Ten Commandments – cont’dTen Commandments – cont’d

Be nosy; don’t easily accept explanations, especially if you don’t understand them.

Use statistical sampling to force you to look at items you would not generally otherwise examine.

Look for patterns of unusual transactions.

A Note of CautionA Note of Caution

Symptoms of Fraud are valuable tools to management, however, symptoms are sometimes present even though fraud may not be! So avoid jumping to conclusions. Also be aware that management can explain symptoms away,

and say, “Well, chances are these are okay.” The only way to know is to follow through on all symptoms observed.

Courtney ThompsonFraud Awareness for Managers

1999

Examples & SOCExamples & SOC

SOC – Strange, odd or curious

Questions?Questions?