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Fifty Shades of May 24, 2018 VGFOA Conference Norfolk, VA CPE Session Rusty Pounds, CFE Manager Risk Assurance Advisory Services SPEAKER Fraud Today Old Wine, New Bottles

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Page 1: Shades of Fraud Today Fraud

Fifty Shades of Fraud May 24, 2018 VGFOA Conference Norfolk, VA CPE Session

Rusty Pounds, CFE

Manager – Risk Assurance

Advisory Services

SPEAKER

Fraud Today Old Wine, New

Bottles

Page 2: Shades of Fraud Today Fraud

Enterprise Risk Management

Control Maturity

Internal Audit

Fraud & Forensics

Process Transformation

Risk Advisory Services

Accounting & Compliance Readiness

Cybersecurity & Privacy

Data Analytics

Page 3: Shades of Fraud Today Fraud

Fraud & Forensics

Risk Advisory Services: Fraud & Forensics

Fraud Risk Training

Internal Review Discovery Services

Fraud Examination Services

Asset recovery

Coordination with law enforcement

Assistance with Civil, Criminal/Disciplinary

Anti-fraud control remediation

Page 4: Shades of Fraud Today Fraud

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Redefining Fraud & Financial Crime

When crimes of passion are removed from the realm of investigations, what is left?

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CRIMES OF PROFIT

Crimes for profit come in all forms, such as

shoplifting, drug dealing, burglary, armed

robbery, embezzlement, false pretense,

public corruption, human trafficking or

murder. The common thread or motivating

factor of such crimes is MONEY (financial

benefit).

Page 6: Shades of Fraud Today Fraud

Federal Sentencing Guidelines

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Career Criminal, Evolved

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RECOVERING FRAUD LOSSES

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ACFE INSIGHTS, May 2017

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ACFE INSIGHTS, May 2017

Whenever austerity measures are put in place, fraudsters come to the fore to prey on the desperate and needy (not to mention the greedy). The U.K., for example, recorded a whopping 25 percent increase in 2016 for reported fraud in general, much of this fueled by banking and online scams.

Most police forces across the Western world have borne the brunt of austerity measures imposed by their governments. The problem is that, as a consequence, they have inadequate resources and frontline policing must take priority. The U.K. has seen its fraud squads dismantled and specialist fraud investigators deployed elsewhere. 1 Why Law Enforcement is Not to Blame for Fraud, by Martin Kenney for ACFE INSIGHTS, Published May 2017

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ACFE INSIGHTS, May 2017

Investigating fraud is a highly specialized discipline, requiring significant training and ongoing courses designed to try to ensure that concerned detectives keep pace with a highly dynamic crime that is constantly evolving. In particular, fraud perpetrated by cyber criminals is extremely difficult to police. Not only does it require an added expertise that only few detectives possess, it also introduces cross-jurisdictional issues typically associated with this form of deception. Law enforcement agencies (and police in particular) are being blamed for failures to investigate fraud. In an ideal world, police forces would be able to open a “new box of detectives” and deploy them as demand requires. Unfortunately, this is not the case. So until there is a reinvestment in the police, fraud will continue to grow and go unpunished. 1 Why Law Enforcement is Not to Blame for Fraud, by Martin Kenney for ACFE INSIGHTS, Published May 2017

Page 12: Shades of Fraud Today Fraud

What is Fraud?

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Fraud is defined by Black’s Law Dictionary as: A knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment. 1

Consequently, fraud includes any intentional or deliberate act to deprive another of property or money by guile, deception, or other unfair means.2

1 Bryan Garner, ed., Black’s Law Dictionary. 8th Ed. (2004), s.v., “fraud.” 2 According to Association of Certified Fraud Examiners (ACFE).

Internal Fraud

External Fraud

Fraud Against individuals

Types of Fraud

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The Fraud Triangle

FRAUD

INCENTIVE Perceived Pressure

Facing Individual

OPPORTUNITY Perceived Opportunity to

Commit Fraud

RATIONALIZATION Person’s Rationalization or integrity

Page 14: Shades of Fraud Today Fraud

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How is Fraud Discovered?

Tip 42%

Management Review 16%

Internal Audit 12%

Accident 6%

Acct Reconciliation 6%

Document Examination

4%

External Audit 3%

Other 9% Tip

Management Review

Internal Audit

Accident

Acct Reconciliation

Document Examination

External Audit

Other

42% Tip

16% Management

12% Internal Audit

70%

Page 15: Shades of Fraud Today Fraud

How is Fraud Discovered?

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Irregularities & Defalcations

A typical organization loses 5% of its revenues to fraud each year

Corruption and billing schemes pose the greatest risks

The industries most victimized:

1. Banking

2. Government & Public Administration

3. Manufacturing

…are just fancy words for lying and stealing

The presence of anti-fraud controls correlates with significant

decreases in the cost and duration of the fraud schemes

Page 17: Shades of Fraud Today Fraud

Key Principles to Manage Fraud

The 5 Key Principles to proactively Manage Fraud Risk1

1. Governance Structure (i.e., Written policies)

2. Fraud risk assessment

3. Prevention controls (e.g., Segregation of Duties)

4. Detection controls ( e.g., Data Analytics)

5. A reporting process, which includes a coordinated approach

to investigation and corrective action.

1 Managing the Business - Risk of Fraud: A Practical Guide Joint Study conducted by The Institute of Internal Auditors, the

American Institute of CPAs and the Association of Certified Fraud Examiners. Published July 2008

According to the ACFE 2016 Global Fraud Study, Report to the Nations on Occupational Fraud and Abuse.

https://s3-us-west-2.amazonaws.com/acfepublic/2016-report-to-the-nations.pdf

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5 Key Principles to Manage Fraud

1. Governance

Written policies

2. Fraud risk

assessment

3. Prevention

controls

4. Detection controls

5. Reporting process,

coordinated approach to investigation / corrective

action

Managing the Business - Risk of Fraud: A Practical Guide Joint Study conducted by The Institute of Internal Auditors, the American Institute of CPAs and the Association of Certified Fraud Examiners. Published July 2008

If you could only accomplish 1 principle, which is most impactful?

2. Fraud Risk

Assessment

Page 19: Shades of Fraud Today Fraud

Common Types of Internal Fraud

Corruption • Refers to schemes in which

fraudsters use their influence in business transactions in a way that violates their duty to their employers in order to obtain a benefit for themselves

Asset Misappropriations

• Asset misappropriation schemes are frauds in which the perpetrator steals or misuses an organization’s resources

Financial Statement Fraud

• Involves the intentional misstatement or omission of material information from the organization’s financial reports these are the cases of “cooking the books or figures”

• Involves the reporting of fictitious revenues or the concealment of expenses or liabilities in order to make an organization appear more profitable than it really is.

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2016 ACFE Report to the Nations

Page 21: Shades of Fraud Today Fraud

Conflicts of interest:

Purchasing schemes

Sales schemes

Billing Schemes

Shell companies

Non-accomplice vendors

Purchasing schemes

Corruption & Billing Schemes

Page 22: Shades of Fraud Today Fraud

a. 6 months

b. 12 months

c. 18 months

d. 24 months

How long does the

average fraud go on

before it is

uncovered?

Quiz Question:

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Materiality?

Does your Org expect the audit

firms to catch fraud?

Does the board of directors expect auditors to catch

fraud?

The amount of the fraud can be

relatively small but…

Page 25: Shades of Fraud Today Fraud

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The “Fajita Bandit”, Audits & Materiality

Page 26: Shades of Fraud Today Fraud

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The “Fajita Bandit” Case

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The Fraud Triangle

FRAUD

INCENTIVE Perceived Pressure

Facing Individual

OPPORTUNITY Perceived Opportunity to

Commit Fraud

RATIONALIZATION Person’s Rationalization or integrity

Page 28: Shades of Fraud Today Fraud

Attacked from the Top: Chief Executive Officer

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Dana Cope - SEANC

CEO for State Employees Association of NC (SEANC)

Cope was CEO for 15 years

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Dana Cope - SEANC

Tip from former Treasurer

Treasurer went to media first

N&O published a story on Sunday

Monday, Wake County DA announced that she had requested an SBI investigation

Wednesday, Cope resigned

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Dana Cope - SEANC

SEANC Counsel, the CFO and the Board never questioned Cope formally regarding the allegations

The weekend that the story broke, the Counsel, CFO and a quickly empaneled “Ethics Committee” determined that Cope had done nothing wrong and put its findings on the website after 2 days of looking at credit card receipts and internal documents

The Board allowed Cope to resign with a $200,000 severance package

He created documents to cover his tracks during the days leading up to his resignation.

Page 32: Shades of Fraud Today Fraud

$77,000: landscaping at his residence

$4,565: trip to Bermuda

$5,700: shutters/shades

$3,000: iron fence

$3,200: pool / patio furniture

$3,613: audio system / DJ mixer

$2,200: a sofa

$1,400: garage shelving

$618: massages at the Umstead Hotel

“He did nothing wrong…”

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Dana Cope - SEANC

Questionable Credit Card Charges: $457,500

Included: Plastic surgery, vacations, hotels, clothing, jewelry and home renovations

Fraudulent Check Purchases: $113,346

Included: Flying lessons, vacations and landscaping

Page 34: Shades of Fraud Today Fraud

Cope was charged with 2 Class C Felony charges > $100,000

He pled guilty

He paid $165,000 in restitution at the time of the guilty plea

Ordered to pay $510,500 in restitution

He received active jail time: 50-82 months (4-7 years)

CFO resigned

In-house counsel resigned

Impact:

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What was the reputational damage to the organization?

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Data Analytics

Looking at large volumes of data quickly to determine patterns and outliers

Data Analytics serves as a pointer, identifying individuals, accounts, transactions and other places to look to get behind the numbers (Bus #235)

Running analyses such as:

Benford’s Analysis

Linear Regression

Missing Data & Duplicate Data

Classification & Stratification

Identification of Error Conditions

Page 36: Shades of Fraud Today Fraud

Wake County School Board Multi-million dollar scheme

Kickbacks Fake orders for auto parts

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Linear Regression WCPSS

0

1

2

3

4

5

6

7

8

0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000

Maintenance Costs ($M)

Number of buses in service

Annual School Bus Maintenance ($Million)

Annual Maint ($Million) Linear (Annual Maint ($Million))

Transportation costs including fraud

Amount excluding fraud

Annual fraud amount

Page 38: Shades of Fraud Today Fraud

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Wake County Investigation Results

Estimated loss of approximately $5 million

On some days, receiving over 200 invoices from the same vendor

Clustering of invoice amount just under approval limit for purchase orders

Corruption

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Questions?

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Contacts: How Can We Help?

Scott M. McKay, CPA, CFE, CIA, CCSA Partner I Risk Advisory Services P 919.782.1040 D 919.825.4277 C 919.985.6801 [email protected]

Rusty Pounds, CFE Manager I Risk Advisory Services P 919.782.1040 D 919.782.4233 [email protected]