Transcript PowerPoint Template

Compliance Management and Fraud
Prevention in Sponsored Research
Baker Tilly refers to Baker Tilly Virchow Krause, LLP,
an independently owned and managed member of Baker Tilly International.
Introductions
Raina Rose Tagle
Adrienne Larmett
Partner and National
Practice Leader,
Senior Consultant,
Baker Tilly
Higher Education
Baker Tilly
Higher Education
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Agenda
• Objectives
o Understand fraud as defined by the False Claims
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o
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Act (FCA)
Define warning signs and red flags
Learn from examples of fraud and noncompliance
Appreciate the impact of fraud
Detect, investigate, and monitor fraud
Adopt standards and procedures for fraud and
compliance policy creation and enforcement
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Background
Fraud occurs in all industries, and universities and
research institutions are no exception. In addition,
economic downturns raise the potential for fraud.
Combine these with the facts that research activity
brings an ever-expanding, complex set of regulatory
requirements and sponsor expectations, that research
institutions are facing a higher level of scrutiny than
ever before, and recent examples of fraud and misuse
demonstrate the concerns for research institutions. It
becomes clear that every employee needs to
understand the basics of why fraud occurs and how
s/he can help prevent or detect it.
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Key Construction Activities
Understanding Fraud
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Understanding Fraud
The Federal False Claims Act (FCA) defines fraud as:
• Knowingly presenting or causing to be presented to the
federal government (or agent or employee of the federal
government) a false or fraudulent claim for payment or
approval;
• Knowingly making, using or causing to be made or used, a
false record or statement to have a false or fraudulent claim
paid or approved by the federal government; and
• Conspiring to defraud the federal government by having a
false claim allowed or paid.
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Understanding Fraud (Cont.)
In its 2012 Report to the Nation on Occupational Fraud and
Abuse, the Association of Certified Fraud Examiners
(ACFE) ranked higher education as the fifth most likely
industry to experience employee fraud (of 23). 1
1The
Association of Certified Fraud Examiners (ACFE), 2012 Report to the Nation on
Occupational Fraud and Abuse
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Understanding Fraud (Cont.)
How can it impact your institution?
The term “fraud” can refer to any false representation of a matter of fact. In the
research world, this can take many forms, both financial and nonfinancial.
Common types of fraud in research administration and examples of each include:
Types of Fraud
Examples
Inappropriate conflicts of interest
Hiring a brother as a subcontractor against policy and/or without proper
disclosure
Theft
Permanently “borrowing” a laptop from a lab
Embezzlement
Using research money to fund personal purchases
Improper use of federal funds
Using money from one project to fund another project that has gone over
budget
Improper effort reporting
Claiming a researcher spent 50% of their effort on a well-funded project,
while in reality they spent much of their time working on other activities
Falsification of research
Recording incorrect data to make the research fit the thesis
Fraud in research can result in decreased federal funding, lengthy litigation, and
ruined reputations and credibility. Learning how recognize and act upon fraud can
help mitigate risk to your institution.
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Understanding Fraud (Cont.)
Three elements of fraud have to be present in order for the
perpetrator to be successful. Organizations should understand
that while they have little control over the pressure a perpetrator
may feel or their ability to rationalize their actions, management
can mitigate fraud by minimizing the opportunity for it to occur.
• Financial need
• Addictive behavior
• Pressure of non performance
• Access to sensitive
information
• Confidence of not getting
caught
• Sense of revenge or
disloyalty towards the
organization or colleagues
• Everybody else is doing it
and nobody gets caught
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Understanding Fraud (Cont.)
Economic downturns increase
our risk of fraud. Decreases in
pay, reductions in employee
headcount and internal controls,
as well as diminished morale,
are just a few factors that can
open the door to fraud in a down
market.
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Key Construction Activities
Warning Signs and Red Flags
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Warning Signs and Red Flags
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Warning Signs and Red Flags (Cont.)
Unusual Behavior
• Refusing to take vacation
• Irritability or defensiveness
• Complaining about the institution (e.g.,
inadequate pay, organizational
pressure to obtain funding) to a
greater extent than typical
• Control issues or an unwillingness to
share duties or information
Uncommon Relationships
• Close or personal association with a
vendor or subcontractor
• Unusually close or personal
relationship with an employee
• Close relationship with a private
funding group
• Undisclosed conflicts of interest
Motivating Factors for Fraud
• High personal debt
• Divorce or family problems
Lifestyle Changes
• Change in schedule (e.g., arriving early
and leaving late when the individual
previously worked a steady eight-hour
day)
• Sudden alteration of or maintaining a
standard of living that does not match the
individual’s position (e.g., simultaneous
purchases of expensive items)
Employee complaints
• Bullying behavior by a principal
investigator
• Claims of unfair pay or uncompensated
overtime
• Accusations of favoritism
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Warning Signs and Red Flags (Cont.)
Irregular or Inaccurate Documentation
The most concrete set of signs involves the documentation that you likely
review in the course of your work. The following are specific areas where fraud
frequently occurs, and some signals that may warn you to dig deeper:
Subcontracts, Independent Contractors, and Consultants
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Executed agreements without workplans, budgets, or budget justifications
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Large payment amounts to individuals, with or without a contract
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Questionable methods of payment (e.g., wiring payments, unusual billing
addresses)
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Familial ties or other potential conflicts of interest (e.g., a researcher who
subcontracts work to a biotech company he happens to invest in or own)
Procurement Cards, Procurement, and Purchasing
•
Purchases of a personal nature
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Changes in spending patterns
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Lack of segregation of duties (e.g., a procurement cardholder is also the
reviewer and approver of expenses)
•
Lack of documentation or business support for purchases (e.g., missing
receipts, copied or scanned documents, handwritten receipts)
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Warning Signs and Red Flags (Cont.)
Research Subject Payments (e.g., Petty Cash, Gift Cards)
• Poor documentation of research subject payments (e.g., questionable or missing
receipts from subjects, payments made to individuals not otherwise documented as part
of the research)
• Subjects paid in cash when standard institutional practice is to pay with gift cards or vice
versa
• Large amount of cash on hand with weak physical safeguards
• Petty cash box that does not match log of receipts, or that requires replenishment more
frequently than normal
Travel Advances, Travel, and Expense Reimbursements
• Unauthorized travel or deviations in authorized travel plans
• Travel expenses in excess of authorized amounts
• Expenses or activities that violate university policy
• Missing, copied, or handwritten receipts
• Lack of segregation of duties (e.g., the individual traveling is also approving his/her
travel and expense reimbursements)
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Warning Signs and Red Flags (Cont.)
Stipends, Salaries, and “Ghost” Employees (e.g., student, Part Time, and Temporary
Workers)
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Wages paid not supported by time sheets
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Hours clocked in excess of agreed or approved work schedules
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Number of workers in excess of budget justification or scope
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Student employees working greater than expected number of hours
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Signs of inaccurate effort reporting (e.g., salary charged not commensurate with
research completed per technical reports, 100% of salary charged to sponsored projects
when the individual also performs teaching or administrative duties)
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Key Construction Activities
Examples of Fraud and Noncompliance
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Examples of Fraud and Noncompliance
University of Georgia
June 2012; Rebecca Adams Hill, a former business manager of
the UG Carl Vinson Institute of Government, embezzled nearly
$220,000 from March 2005-September 2009. Hill abused the
university’s reimbursement system by submitting fraudulent
expenses for supplies purportedly purchased with personal funds.
Hill was sentenced to 20 years in prison and ordered to repay
$219,795 in restitution. Hill employee had worked at the university
for 30 years.
Kansas City University of Medicine & Biosciences
March 2011; Karen L. Peltz, former President, CEO and Trustee,
accused of embezzling more than $1.5 million over a 5 year
period. Peltz allegedly engaged in a variety of fraudulent
reimbursement schemes, including receiving additional
compensation.
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Examples of Fraud and Noncompliance
(Cont.)
Columbia University
November 2010; George Castro, formerly affiliated with the
university in some undisclosed manner, charged with embezzling
$4.5 million over a several month period. Castro manipulated
university accounts and caused electronic funds transfers to
accounts he controlled under the name of an apparent vendor.
Iona College
October 2010; Sister Marie E. Thornton, former vice president of
finance, charged with and ultimately plead guilty to embezzling
$1.2 million. Thornton, who reportedly had a gambling problem,
issued college checks and used college credit card accounts for
her own benefit and was also fraudulently reimbursed by the
college with phony invoices.
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Examples of Fraud and Noncompliance
(Cont.)
Duke University
Late 2010; Dr. Anil Potti resigned from his job at Duke University
amid questions of research fraud. It was discovered that Potti
exaggerated his credentials, claiming incorrectly that he was a
Rhodes scholar, a discovery that led to the American Cancer
Society suspending hundreds of thousands of grant dollars that
were to be used for Potti’s work. Since then, nine of Potti’s papers
on individualized treatments for cancer have been retracted.
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Examples of Fraud and Noncompliance
(Cont.)
Penn State UniversityProfessor Craig Grimes has been accused
of defrauding the National Institutes of Health and Advanced
Research Projects Agency of federal grant monies, to the tune of
$3 million. Grimes requested grants to study the measurement of
gases in a patient’s blood, but the money was not spent for this
research. Instead, clinical trials were never performed, and the
grant funds were misappropriated, largely for the personal use of
Grimes. Grimes has been charged with making false statements,
money laundering, and fraud. He faces up to 35 years in prison
and a fine of $750,000.
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Key Construction Activities
The Impact of Fraud
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The Impact of Fraud
Fraud can have a devastating impact for a university or
research organization. Though fraud is perpetrated against
an organization and typically thought of as an internal
concern, there are many consequences of fraud to consider:
• Monetary damages
oOrganizations are estimated to lose up to five percent of
revenue to employee fraud.
oThe ACFE estimates the average loss amounts to
universities at a median loss of $36,000.1
1 The
Association of Certified Fraud Examiners (ACFE), 2012 Report to the Nation on
Occupational Fraud and Abuse
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The Impact of Fraud (Cont.)
• Reputational damages
o A University of Washington study 1 found that monetary loss due to
damaged reputations was much greater - more than 7.5 times the sum of
regulatory system penalties.
o When news of fraudulent activities becomes public, the impact on an
organizations’ value is just the start of reputation damage. Ultimately, the
long-term impact of lower revenue and higher contracting and financing
costs contributes to a larger total loss over a period of months and years.
• Impact on licensing potential for university discoveries
o Discoveries based on falsified, or fraudulent date could hinder the ability
to patent, or license
o A patented product or drug based on fraudulent data or studies could
potentially put a university at risk for suit should adverse events occur.
1
The Cost to Firms of Cooking the Books (with D. Scott Lee and Gerald S. Martin), Journal of
Financial and Quantitative Analysis, 43 (September 2008), 581-612.
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Key Construction Activities
Detecting, Investigating, and Monitoring Fraud
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Detecting, Investigating, and Monitoring
Fraud
Fraud is discovered in a variety of ways, but the ACFE’s 2012
Report to the Nation on Occupational Fraud and Abuse found that
fraud detection occurs most often through tips or whistleblowers,
with employees providing the majority of tips.
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Detecting, Investigating, and Monitoring
Fraud (Cont.)
After potential fraud or noncompliance is suspected or detected, it
is important to notify relevant parties, including:
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Key management personnel
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Legal counsel
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Internal Audit
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Compliance function (if applicable)
Notification should also include a discussion of the roles and
responsibilities of each party, and any necessary shift in the
prioritization of workflow. Once the preliminary discussion is
completed, the parties should work together to take preliminary
steps to determine if an investigation is warranted. Investigations
take time, cost money, and often detract the participants from their
normal business activities.
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Detecting, Investigating, and Monitoring
Fraud (Cont.)
Is an investigation warranted?
There are several procedures to determine if an investigation is
necessary:
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Identify employee(s) to conduct the evaluation (e.g., compliance
officer, internal audit, key management)
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Evaluate tips
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Perform non-invasive investigative procedures
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If leads and tips have been substantiated, initiate internal
investigations
When it is determined that an investigation is needed, it is
important to have a realistic understanding of the scope and
timeframe needed to complete.
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Detecting, Investigating, and Monitoring
Fraud (Cont.)
When performing a fraud investigation:
• Proceed quickly: Prematurely tipping off an employee may result in losing opportunities to
obtain valuable information that can be used to substantiate the fraud.
• Proceed cautiously: Making false allegations or a wrongful termination may backfire against
an employer and cause damage worse than the fraud itself.
• Gather the facts and safeguard the organization from continued fraud: Documentation
substantiating your losses must be complete and thorough.
• Develop your objectives: Will the organization be satisfied with a termination, or do they
want full restitution and prosecution?
• Obtain professional assistance: It is important understand employer rights concerning
access to a suspected employee’s office and e-mail/voicemail communication. Professional
assistance may be useful when interviewing suspected employees. The initial interview may
be the last and best opportunity to obtain information before the suspected employee seeks
counsel.
• Identify appropriate personnel to coordinate the investigation: An investigation may quickly
become overwhelming and disruptive to an organization. The fact finding phase may be
quick to start and end but potential litigation is often prolonged and slow moving.
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Detecting, Investigating, and Monitoring
Fraud (Cont.)
Monitoring for Fraud
• Monitoring starts at the hiring stage. Appropriate hiring policies
and procedures (thorough interviews, reference checks, and
background checks) should be in place, as sound hiring practices
serve to protect the organization and the individuals likely to
perpetrate a fraud.
•Implementing a code of conduct and having employees sign a
fraud policy ensure that employees know what is expected of
them, and provides protection should a problem arise in the
future. It also sends a clear message to the employee that fraud
of any kind is totally unacceptable.
•Periodically perform background and record checks. This will
capture questionable or illegal activities not available at the time
of hire, or since the time of hire.
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Detecting, Investigating, and Monitoring
Fraud (Cont.)
• Employees’ circumstances change, which may compel them to
commit a fraud they otherwise would not have committed. As a
result, organizations should have a policy that requires
employees’ work and behavior be monitored on an ongoing basis.
Work should be reviewed to see that appropriate procedures are
being followed and that the individual’s manager is checking for
both quality and propriety on a regular basis.
• The financial records of the organization should be checked for
changes on a regular basis. The monthly financial statements
must be checked for unusual fluctuations. Changes of this type
could be contribution income going down at a time of year when it
should go up, or a noticeable and unexplained increase in office
supplies or travel expenses. Major frauds may well be found by
analyzing financial statement activity, but minor frauds will not.
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Key Construction Activities
Adopting Standards and Procedures for Fraud and
Compliance Policy Creation, and Enforcement
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Adopting Standards and Procedures for
Fraud and Compliance Policy Creation, and
Enforcement
Adopting standards and procedures for fraud is one measure an
institution may take to safeguard itself from fraud. This may be
achieved through the development of compliance policies. In
developing a fraud policy, the following items should be
considered for inclusion:
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Policy purpose: what is the intent of the policy and what does it
hope to achieve?
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Policy: what is the institutional rule, what are the procedures to be
followed should deficiencies be identified, and who does the policy
apply to?
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Laws or regulations: what are there federal, state, or local laws that
may apply or help reinforce the policy? Are there fines and
penalties for noncompliance?
•
Resources for employees: is there a compliance program or hotline
an employee may use to report fraud? What is the policy on
protection from retribution (i.e., whistleblower protection)?
Adopting Standards and Procedures for
Fraud and Compliance Policy Creation, and
Enforcement
Institutions also need to develop procedures for enforcing fraud
and compliance policies.
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Obtain buy-in from senior leadership that the institution has a zerotolerance policy on fraud
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Communicate the policy across the institution
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Be consistent in investigations (e.g., approaches, procedures,
methods)
•
•
Be consistent in intuitional standards
Include fraud checks in investigations across all functions of the
institution (e.g., purchasing card use, cash collection, academic
dishonesty, research misconduct)
Strive for equitable resolutions
Adopting Standards and Procedures for
Fraud and Compliance Policy Creation, and
Enforcement
The best deterrent to fraud is having a control environment that is
communicated and supported by management. The perception of
detection is the best deterrent to fraud. In order to have an
appropriate environment in place, your institution should:
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Communicate expectations – tone at the top. More importantly
consider your actions
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Assess your fraud risk – how would someone commit fraud here?
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Train your employees on:
o
Internal controls
o
Fraud awareness
o
Ethics
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Maintain an ethics and compliance program
•
Maintain an ethics/whistleblower hotline
Adopting Standards and Procedures for
Fraud and Compliance Policy Creation, and
Enforcement
Maintain a control environment –
• Require expenses to be well-documented. This will decrease the
opportunity for fraud in your organization. This means that expenses
should include original receipts and a clear explanation of the business
purpose for the expense.
• Segregation of duties is important in many areas. There should be
separate personnel completing tasks and performing reviews as described
above.
• Conflicts of interest should be evaluated. Researchers who hire, contract
to, or receive money from related parties have an inherently greater
opportunity to commit fraud by inappropriately dealing with those parties.
Questions & Comments
Raina Rose Tagle, CPA, CIA CISA
[email protected]
(703) 923-8251
Adrienne Larmett
[email protected]
(703) 923-8134
Baker Tilly Beers & Cutler, PLLC, is a wholly-owned subsidiary of
Baker Tilly Virchow Krause, LLP. © 2010 Baker Tilly Beers & Cutler, PLLC.