Fraud Awareness and Internal Controls Theresa L. Ashman Contact: t.ashman@miami.edu or 86429

What is fraud? Fraud encompasses an array of irregularities and illegal acts characterized by intentional deception The elements of fraud are: A representation about a material fact – which is false Made intentionally, knowingly, or recklessly – which is believed Acted upon by the victim To the victim’s damage

5 Myths About Fraud (Adapted from www. fraudauthor. wordpress 5 Myths About Fraud (Adapted from www.fraudauthor.wordpress.com Tracy Coenen) Fraud will be detected by our auditors Small frauds aren’t important enough to worry about If we follow government regs, we will be protected against fraud Most people are honest and won’t commit fraud The University doesn’t have a fraud problem

“Fun” Facts According to the Association for Certified Fraud Examiners 40.2% of frauds are detected through tips – 15.4% by management review Lack of adequate internal controls is the biggest contributing factor The average organization loses 5% of revenue to fraud and abuse The median fraud loss is $160,000 The average fraud has gone on for 1.5 years before detection Small organizations are disproportionately victimized Only 15% of fraud perpetrators had prior convictions Source: Association for Certified Fraud Examiners, www.acfe.org, 2010 Report to the Nations on Occupational Fraud and Abuse

The Fraud Triangle Opportunity Pressure Rationalization

Opportunity Opportunity is generally provided through weaknesses in internal controls. Some examples include inadequate or no: Supervision and review Separation of duties Management approval System controls This is the ONLY thing we as an employer can control – so we need to focus on this

Pressure Pressure can be imposed due to: Personal financial problems Personal vices such as gambling, drugs, extensive debt, etc. Desire to lead a lavish lifestyle Unrealistic deadlines and performance goals Fear about the economy

Rationalization Rationalization occurs when the individual develops a justification for their fraudulent activities. The rationalization varies by case and individual. Some examples include: “I really need this money and I’ll put it back when I get my paycheck” “I’d rather have the company on my back than the IRS” “I just can’t afford to lose everything – my home, car, everything” “I’m working so hard – I deserve this”

Who is likely to commit fraud? 1 in 10 people will not commit fraud regardless of the circumstances 8 in 10 will commit fraud if the fraud triangle is in place 1 in 10 people seeks a particular job in order to commit fraud (predatory employee) Source: State of Utah Risk Management Workshop

Internal controls

Definition of Internal Controls Broadly defined as a process effected by an entity’s board of directors, management, and other personnel Designed to provide reasonable assurance regarding: Effectiveness and efficiency of operations Reliability of financial reports Compliance with applicable laws and regulations Source: COSO

Components of Internal Control Control environment Risk assessment Control activities Information and communication Monitoring

Internal Control Objectives Recorded transactions are valid Transactions are properly authorized Existing transactions are recorded Transactions are properly valued

Segregation of Duties In an ideal world, no one employee would have more than two of the key duty types If duties can’t be properly segregated, then compensating or mitigating controls must be implemented Supervision and review are an important compensating control Proper segregation of duties is important at all times – consider this when assigning backup responsibility or coverage when someone is out of the office

Questions?

Resources University of Miami – Office of Compliance Association of Certified Fraud Examiners, www.acfe.com Committee of Sponsoring Organizations, www.coso.org Association of College & University Auditors, www.acua.org

Training Roadshow on Internal Controls* – 15-30 minutes Internal Controls for Department Administrators Internal Control Workshop* – 90 minutes with case study Business Process Analysis* - custom Internal Controls in the Face of Staffing Reductions* - 60 minutes Segregation of Duties Analysis* - custom * signifies live training upon request