Strategies for preventing and detecting fraud The Truth About Fraud! Strategies for preventing and detecting fraud

Today’s Agenda A little bit about me and disclaimers What do you want to walk away with today? Fraud Statistics Elements of fraud Public Sector Fraud Internal control and fraud Audit’s role Wrap up 5/17/2018 Greg Hill, CPA CIA

Fraud Statistics $7 Billion total losses $130,000 median loss per case for all types of organizations $100,000 median loss for state/provincial entities $850,000 median by owners/executives Greatest organizational weaknesses contributing to fraud: a. Lack of internal controls (nearly ½ of all frauds) and b. Override of internal controls Source: 2018 Report to the Nations. Copyright 2018 by the Association of Certified Fraud Examiners, Inc. 5/17/2018 Greg Hill, CPA CIA

Who Commits Fraud ? Age: Those between 36 and 59 commit almost 2/3 of all frauds The higher the age the greater amount of the fraud Male 82% Female 18% Owner / Executive 32% 50% of government agencies experienced corruption fraud Source: 2018 Report to the Nations. Copyright 2018 by the Association of Certified Fraud Examiners, Inc. 5/17/2018 Greg Hill, CPA CIA

Elements of Fraud Fraud must be proved by showing that the perpetrator’s actions involved five separate elements: A false statement of a material fact Knowledge on the part of the perpetrator that the statement is untrue 5/17/2018 Greg Hill, CPA CIA

Elements of Fraud Intent on the part of the perpetrator to deceive the alleged victim Justifiable reliance by the alleged victim on the statement Injury to the alleged victim as a result. 5/17/2018 Greg Hill, CPA CIA

Public Sector Fraud Procurement Bid Rigging Inflated billings Suppliers not providing the agreed to quality or quantity of goods 5/17/2018 Greg Hill, CPA CIA

Public Sector Fraud Payroll Fraud Expense statement fraud Overtime not worked Leave not charged FMLA mischarged Expense statement fraud Travel Re-Location Other 5/17/2018 Greg Hill, CPA CIA

Fraud Example 1 5/17/2018 Greg Hill, CPA CIA

Fraud Example 2 FOR IMMEDIATE RELEASE Monday, July 27, 2015 Husband and Wife Admit to Procurement Fraud Scheme and to Embezzling Employee Benefits Defendants - Fraudulently Obtained Over $30 Million in Government Service Contracts Using False Representations, Embezzled Over $1.6 Million from Employee Benefits Plans. Source: Department of Justice Press Release April 2, 2015 5/17/2018 Greg Hill, CPA CIA

Internal Controls and Fraud Internal Controls should be designed to prevent and detect fraud ”… process effected by an entity’s oversight body, management, and other personnel that provides reasonable assurance that the objectives of an entity will be achieved.” 5/17/2018 Greg Hill, CPA CIA

Internal Controls and Fraud Considerations for Internal Controls Control Design (Principle 10) Will this control, if implemented as designed, achieve the control objective? Control Effectiveness (Principle 12) Assuming the control is well designed, has it been effectively implemented? 5/17/2018 Greg Hill, CPA CIA

Internal Control and Fraud Standards for Internal Control in the Federal Government Principle 10 – Design Control Activities Principle 12 – Implement Control Activities 5/17/2018 Greg Hill, CPA CIA

Internal Control and Fraud Principle 8 – Assess Fraud Risk (a component of Risk Assessment) Fraud Risk Factors -- Incentive/Pressure -- Opportunity --Attitude/Rationalization 5/17/2018 Greg Hill, CPA CIA

Fraud Example # 3 Arizona ex-DES worker faces charges of welfare fraud According to an Az Central.com story from June 2015, a state Department of Economic Security employee was charged with fraud stemming from allegations that she created 10 fake families and approved them for cash assistance and food stamps. 5/17/2018 Greg Hill, CPA CIA

Internal Control and Fraud Examples of Control Activities: Accurate and Timely Recording of Transactions Controls over Information Processing Physical Control Over Vulnerable Assets Appropriate Documentation of Transactions and Internal Controls 5/17/2018 Greg Hill, CPA CIA

Audit’s Role Institute of Internal Auditors “Three Lines of Defense Model” First Line – Operational Management Second Line - Compliance (Environmental, Safety, Financial) and possibly a Risk Management Committee Third Line – Internal Audit 5/17/2018 Greg Hill, CPA CIA

Audit’s Role Generally Accepted Government Auditing Standards (GAGAS) Require assessing the risk of fraud significant within the context of the audit objectives For financial statement audits requires considering fraud in accordance with AICPA audit standards (AU-C Section 240 and GAGAS Paragraph 4.06) For performance audits, the auditors should assess risk of fraud significant within the context of the audit objectives (GAGAS Paragraph 6.30) 5/17/2018 Greg Hill, CPA CIA

Audit’s Role Although Audit should not be the primary deterrent for fraud, engagements such as surprise audits (of cash for example) can be an effective deterrent to fraud. 5/17/2018 Greg Hill, CPA CIA

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Wrap Up 5/17/2018 Greg Hill, CPA CIA