Transcript Basics of Fraud - Northern Arizona University

BASICS OF FRAUD
NORTHERN ARIZONA UNIVERSITY
DECEMBER, 2010
QUOTES FROM THE FIELD
“All the internal auditors I have talked to in large
organizations have told me that employee frauds
increased substantially during the recessionary years
of 2008 and 2009.”
- Tony Bishop, Director
Deloitte Forensic Center
QUOTES FROM THE FIELD
“The percentage of allegations of fraudulent activity
has more than doubled over the past four years.”
-The Network
Corporate Governance and
Compliance Hotline
Benchmarking Report
QUOTES FROM THE FIELD
“Many organizations seem to have moved into
firefighting mode, where people do only what they
consider essential. The risk is skimping on fraud
prevention and detection activities today may create
opportunities for catastrophic frauds tomorrow.”
- Tony Bishop, Director
Deloitte Forensic Center
WHAT WILL WE COVER?
 What is fraud?
 Fraud triangle/diamond
 Who commits fraud?
 Fraud facts
 Types of fraud
 Detection
 Red flags
 How organizations encourages fraud
 Lowering the risk of fraud
 Roles in fraud prevention and detection
 What to do if you suspect fraud
WHAT IS FRAUD?
 The Association of Certified Fraud Examiners
(ACFE) defines the term “occupational fraud” as:
The use of one’s occupation for personal
enrichment through the deliberate misuse or
misapplication of the employing organization’s
resources or assets.
WHAT IS FRAUD?
 What does that really mean?
The intentional and wrongful obtainment of a benefit through:
Theft or embezzlement
 False statements (documents, grants, applications)
 Corruption, kickback, conspiracies, collusion, bribes
 Misappropriation of assets (travel expenses, payroll, equipment)

FRAUD TRIANGLE
PRESSURE
FRAUD TRIANGLE - PRESSURE
 PRESSURE is the motive for committing fraud.
 Lifestyle
 Personal debt (debt, financial losses, gambling, drugs)
 Illness
 Job dissatisfaction
FRAUD TRIANGLE - RATIONALIZATION
 RATIONALIZATION is the justification to make their
actions consistent with their personal code of
conduct.
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



“I’m only borrowing the money – I’ll pay it back.”
“Everyone does it.”
“I’m not hurting anyone.”
“It’s for a good purpose.”
“It’s not that big of a deal.”
“They owe me. I should be paid more.”
FRAUD TRIANGLE - OPPORTUNITY
 OPPORTUNITY is the situation that allows fraud to
occur in the first place.

A lack of or inadequate internal controls
Separation of duties
 Supervision and review
 Management approval
 Technology controls





Inability to judge the quality of the work of others
Form over function
Management ignorance or apathy
Focus on “higher priorities”
FRAUD DIAMOND
FRAUD DIAMOND
 CAPABILITY is the knowledge to commit the fraud.
 Confidence to execute the fraud without getting caught.
 Will know the weaknesses in “the system.”
 Recognizes the opportunity and can turn it into reality.
 Thrill or risk seeking behavior.
WHO COMMITS FRAUD?
 How many employees…
 Will?
 Might?
 Won’t?
WHO COMMITS FRAUD?
WON’T
40%
WILL
30%
MIGHT
30%
Source: EideBailly/ACFE
WHO COMMITS FRAUD?
“The vast majority of people who end up stealing from an
organization had no intention of doing so when they
went to work or began contracting relationships there
but loyalty diminishes in tough times, especially after
widespread layoffs and contracting cutbacks, thereby
creating a ‘high-fraud environment.’”
- James Ratley, President
Assoc. Certified Fraud Examiners
WHO COMMITS FRAUD?
Compared to other property offenders, fraudsters…
 Have better psychological health
 Exhibit more:
Social conformity
Motivation
Optimism
Family harmony
Self Esteem
Social control
Self sufficiency
Kindness
Achievement
Empathy
Source: Fraud Examination by W. Steve Albrecht
WHO COMMITS FRAUD?
 How often? How much?

Male or Female?

Employee, manager or executive?

Age?

Length of service?

Criminal background?

Employment background?
WHO COMMITS FRAUD?
80%
70%
67%
60%
50%
40%
33%
30%
20%
10%
0%
MALE
FEMALE
NOTE: Percentages equal at “employee” level but more
predominantly male in “manager” and “owner/exec” levels.
WHO COMMITS FRAUD?
45%
40%
$80K
35%
$200K
30%
25%
20%
15%
$723K
10%
5%
0%
EMPLOYEE
MANAGER
OWNER/EXEC
WHO COMMITS FRAUD?
40%
$124K
35%
$268K
30%
25%
20%
15%
$44K
$359K
10%
$974K
5%
0%
UNDER
30 31 - 40
41 - 50
51 - 60
60+
WHO COMMITS FRAUD?
50%
$114K
45%
40%
35%
30%
25%
$231K
$289K
6 TO 10
10+
20%
15%
10%
$47K
5%
0%
UNDER 1
1 TO 5
WHO COMMITS FRAUD?
100%
90%
86%
80%
70%
60%
50%
40%
30%
20%
8%
10%
6%
0%
NEVER CHARGED
CHARGED WITH NO PRIOR CONVICTION
CONVICTION
WHO COMMITS FRAUD?
90%
82%
80%
70%
60%
50%
40%
30%
20%
10%
8%
10%
PUNISHED BUT NOT
TERMINATED
TERMINATED
0%
NEVER PUNISHED
FACTS ABOUT FRAUD
 Typical organization loses 5% of revenue.
 Median duration is 18 months before detection.
 Asset misappropriation is most common at 90% but
least costly with median loss of 21% of total dollars
lost or $135,000.
 Occupational fraud usually detected by tip.
 Small organizations have a higher rate of
victimization.
FACTS ABOUT FRAUD
 Government/public administration one of the most
commonly victimized sectors.
 Anti-fraud controls reduce the cost and duration of
schemes.
 85% of fraudsters had no previous charge or
conviction for fraud related offense.
 Perpetrators often display warning signs including
living beyond means (43%) and experiencing
financial difficulties (36%).
TYPES OF FRAUD
CORRUPTION
CONFLICT OF
INTEREST
BRIBERY
ILLEGAL
GRATUITIES
ECONOMIC
EXTORTION
ASSET
MISAPPROPRIATION
FRAUDULENT
STATEMENTS
CASH
FINANCIAL
INVENTORY &
OTHER ASSETS
NONFINANCIAL
ASSET MISAPPROPRIATION
CASH
LARCENY
SKIMMING
Cash on
hand
Sales
AR
From
deposit
Unrecorded
Writeoffs
Other
Understated
Lapping
FRAUDULENT
DISBURSEMENTS
Unconceal
Refunds
& other
ASSET MISAPPROPRIATION
FRAUDULENT
DISBURSEMENTS
Billing
Payroll
Expense
Reimb
Check
Tampering
Cash
Register
shell
company
ghost
employees
mischaracterized
forged
maker
false voids
vendor
commissions
overstated
forged
endorser
false
refunds
personal
purchases
workers
comp
fictitious
altered
payee
falsified
wages
multiple
reimb
concealed
checks
authorized
maker
ASSET MISAPPROPRIATION
INVENTORY &
OTHER ASSETS
MISUSE
LARCENY
requisition
& transfers
false sales
& shipping
purchasing
& receiving
unconceal
HOW IS FRAUD DETECTED
0%
IT CONTROLS
CONFESSION
POLICE
MONITORING
EXTERNAL AUDIT
DOCUMENT EXAMINIATION
ACCOUNT RECONCILIATION
BY ACCIDENT
INTERNAL AUDIT
MANAGEMENT REVIEW
TIP
10%
20%
30%
40%
50%
HOW IS FRAUD DETECTED
FRAUDSTER ACQUAINTANCE
2%
COMPETITOR
3%
SHAREHOLDER / OWNER
4%
VENDOR
12%
ANONYMOUS
13%
CUSTOMERS
18%
EMPLOYEES
50%
0%
10%
20%
30%
40%
50%
60%
RED FLAGS OF FRAUD - EMPLOYEE
 Lifestyle changes: expensive car, jewelry, home,





clothes
Significant personal debt and credit problems
Behavioral changes: physical appearance,
absenteeism, creative “explanations”, inconsistent or
illogical behavior, forgetfulness.
Refusal to take sick or vacation leave.
Tips or complains from employees.
Overworked employee who will not let others help.
RED FLAGS OF FRAUD - MANAGEMENT
 Reluctance to provide information to auditors
 Weakness in internal control environment
 Decentralization without monitoring
 High employee turnover
 Other priorities
RED FLAGS OF FRAUD - TRANSACTIONS
 Odd timing – days of week, month, year, season
 Frequency – too many, too few
 Amount – too high, too low, too alike, too different
 Use of common names and street addresses
 Excess number of exceptions
RED FLAGS OF FRAUD - DOCUMENTS
 Source / backup documents cannot be located
 Unexplained items on reconciliations
 Only photocopied document is available
 Alterations on documents
 Questionable handwriting on documents
WENDY’S TOP TEN
 “Can’t find” documentation
 Excessive missing documentation
 Form over function
 Management override of control
 “The rules don’t apply to me” attitude
 Lacking of segregation of duties
 Protecting an employee by bending the rules
 Secretive employees
 Turnover
 “Clustered” approvals
RISKY TRANSACTIONS
 PCard personal purchases
 PCard/travel double dip
 Cash receipting/depositing process
 Computer purchases
 Accounts receivable
HOW ORGANIZATIONS ENCOURAGE FRAUD
 Hiding incidents of fraud
 Poor hiring choices
 Not listening to employees concerns
 Treatment of whistleblowers
 Weak enforcement policy
 Hoping for resignation
 Management override of controls
 Over-reliance on audits
HOW ORGANIZATIONS ENCOURAGE FRAUD
 Responsibility, accountability and authority not
established or documented
 Goals and objectives neither established or
monitored for success
 Lack of proper policies or procedures




Low priority for internal controls
Lack of separation of duties
Inadequate documentation
Form over function for controls
CREATING A LOW FRAUD ENVIRONMENT
 Setting the tone
 Proper separation of duties
 Physical safeguards over assets
 Proper documentation
 Proper approvals
 Adequate supervision
 Physical inventories
 Reconciliations
 Honest, knowledgeable employees
ROLES IN FRAUD PREVENTION AND DETECTION
It is management’s responsibility to institute, establish,
and monitor controls and uncover fraudsters.
 ABOR 6-711 “Internal Control Responsibilities”
 President
 Chief financial or business officer
 Provosts, vice presidents, deans and other management
 Chief audit executive
 All employee
ROLES IN FRAUD PREVENTION AND DETECTION
 Management
 Sets the tone
 Takes responsibility to institute proper controls
 Segregates task responsibilities appropriately
 Grants employees access only to appropriate resources
 Is engaged and interested
 Business role in department
 Distributes policies and ensures understanding
 Compares actual to budget or other system of record
 Raises questions and concerns
 Performs reconciliations in a timely manner
ROLES IN FRAUD PREVENTION AND DETECTION
 Initiator
 Understands policy
 Gathers required documentation
 Provides adequate business purpose
 Preparer
 Reviews and verifies that all documentation is complete and
attached
 Reviews transaction for reasonableness
 Reviews transaction for compliance with policy
ROLES IN FRAUD PREVENTION AND DETECTION
 Approver
 Understands policy
 Reviews transactions for compliance with policy, proper
business purpose, timeliness, adequate documentation, etc.
 Rejects transactions that are not sufficiently supported
 Raises questions and concerns
ROLES IN FRAUD PREVENTION AND DETECTION
 Comptroller’s Office
 Educate the university community
 Answer questions and address concerns
 Monitor transactions for compliance and fraud
 Suggest improvements to processes and controls
 Internal Audit
 Perform internal audits on a risk basis
 Suggest improvements to processes and controls
 Provide reasonable assurance that controls are working as
intended
WHAT TO DO IF YOU SUSPECT FRAUD
 Report the concern to
 Your supervisor
 Financial Controls
 Internal Audit
 NAUPD online reports (anonymous)
THANK YOU!
 [email protected]
 Sources
 EideBailly
 Association of Certified Fraud Examiners
 State University of New York at New Paltz
 Texas Tech University System
 The Institute of Internal Auditors