FRAUD PREVENTION TIPS AND TRAPS 10 Things Contractors Need to Know J. Lester Alexander, III & Misty Decker August 9, 2012

TOP TEN COUNTDOWN Things Contractors Need to Know about Fraud

Number 10. In connection with the American Recovery and Reinvestment Act of 2009 (“the Stimulus Act”), on May 20, 2009, President Obama signed the Fraud Enforcement and Recovery Act (“FERA”). FERA extends liability under the False Claims Act (“FCA”) to claims (including progress payments) under any contract partially funded by the federal government. The intent portion of the FCA was removed. Penalties include fines of $5,000 - $10,000 per false claim and up to three times the amount of the government’s damages.

Number USC Sec Loan and credit applications generally; renewals and discounts “Whoever knowingly makes any false statement or report, […] for the purpose of influencing in any way the action of […] any institution the accounts of which are insured by the Federal Deposit Insurance Corporation, […] shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.”

Number USC Sec Acknowledgment of appearance or oath “Whoever, being an officer authorized to administer oaths […] knowingly makes any false acknowledgment, certificate, or statement concerning […] any proposal, contract, bond, undertaking, or other matter submitted to, made with, or taken on behalf of the United States or any department or agency thereof, […] with respect to the financial standing of any principal, surety, or other party to any such proposal, contract, bond, undertaking, or other instrument, shall be fined under this title or imprisoned not more than two years, or both.”

Number 7. External audit detected fraud only 3% of the time; Even though 80% of fraud victims were audited. Source: Association of Certified Fraud Examiners’ 2012 Report to the Nations on Occupational Fraud and Abuse.

Number 6. Internal controls detected fraud only 10% of the time. Source: Association of Certified Fraud Examiners’ 2012 Report to the Nations on Occupational Fraud and Abuse.

Number 5. Internal audit detected fraud only 14% of the time. Even though 68% of the victims had internal auditors. Source: Association of Certified Fraud Examiners’ 2012 Report to the Nations on Occupational Fraud and Abuse.

Number 4. Management review detected fraud only 15% of the time. Even though 61% of the victims performed management review procedures. Source: Association of Certified Fraud Examiners’ 2012 Report to the Nations on Occupational Fraud and Abuse.

Frauds by Category CategoryFrequencyMedian LossOther Exposure Asset Misappropriation86.7%$120,000Fines; Prison Corruption33.4%$250,000Fines; Prison Financial Statement Fraud 7.6%$1,000,000Fines; Prison Note: Frequency totals greater than 100% as reported frauds often spanned more than one category. Source: Association of Certified Fraud Examiners’ 2012 Report to the Nations on Occupational Fraud and Abuse.

Number 3. The largest frauds are typically committed by those you least suspect 53% of frauds were perpetrated by those with over 5 years experience. Highly compensated and highly educated fraudsters historically have perpetrated frauds with the highest cost to victims. Perpetrators in executive positions caused losses more than 300% greater than all other perpetrators. Source: Association of Certified Fraud Examiners’ 2012 Report to the Nations on Occupational Fraud and Abuse.

Number 2. 52% of frauds are detected by tip, confession, or by accident. Whistleblower hotlines are among the most effective tools at catching unethical behavior. Adequate resources must be devoted to implementing the hotline. A response mechanism must be in place. Source: Association of Certified Fraud Examiners’ 2012 Report to the Nations on Occupational Fraud and Abuse.

Number 1. Tone at the top has the greatest impact on a company’s ethical environment. A code of conduct must be in place. Management must adequately educate its workforce and consistently communicate zero tolerance toward unethical behavior. Policies regarding ethical practices should be consistently enforced.

Learn More… ACFE Report to the Nations AICPA Professional Standards Fraud Casebook: Lessons Learned from the Bad Side of Business Encyclopedia of Fraud: 2005 Edition Financial Statement Fraud: Prevention and Detection Corporate Fraud Handbook: Prevention and Detection Investment Valuation: Tools and Techniques for Determining the Value of Any Asset

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