Fraud and Abuse Don Pursley, Col Ret. USAFA, BSE, MS, DBA The speaker does not have any relevant financial relationships with any commercial interests

Are You Losing Assets?

Association of Certified Fraud Examiners “ Report to the Nations on Occupational Fraud and Abuse” 2014 Global Fraud Study

“It Does Not Happen in My Country” “These offenses occurred in over 100 countries on six continents…” ACFE 2014 Global Fraud Study

“It Does Not Happen in My Country” Number one with 646 cases: United States Number two with 173 cases: Sub-Saharan Africa 2014 Global Fraud Study

Three Questions To Answer What Is Occupational Fraud? What Is Occupational Fraud? How Do You Detect Occupational Fraud? How Do You Detect Occupational Fraud? What Do You Do To Prevent Occupational Fraud? What Do You Do To Prevent Occupational Fraud? Case Studies

What Is Occupational Fraud? “The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets” ACFE 2014 GLOBAL FRAUD STUDY

How Do You Detect Fraud?

How Do You Detect? Tip Tip Management Review Management Review Internal Audit Internal Audit By Accident By Accident Account Reconciliation Account Reconciliation86%

What Do You Do? 1. External Audit 2. Code of Conduct 3. Internal Audit 4. Independent Audit Committee

What Do You Do? 5. Hotline 6. Fraud Training for Managers/Executives 7. Fraud Training for Employees 8. Anti-fraud Policy

What Do You Do? 9. Surprise Audits 10. Rewards for Whistleblowers

What Do You Do To Prevent? Internal Controls Internal Controls Auditing Auditing Training Training Hot Line Hot Line

Internal Controls Segregation Of Duties Segregation Of Duties Proper Authorization of Transactions and Activities Proper Authorization of Transactions and Activities Adequate Documents and Records. Adequate Documents and Records. Physical Control Over Assets and Records Physical Control Over Assets and Records Independent Checks On Performance Independent Checks On Performance

Segregation Of Duties The person who orders supplies is not the same as the one who receives and pays. The person who orders supplies is not the same as the one who receives and pays. The person who handles the asset is different than the person who documents. The person who handles the asset is different than the person who documents.

Hospital/Clinic Purchase ResponsibilityDutyIdeal 4 person Good 3 Person Minimal 2 Person Order Initiation Asset Handling Coworker1Coworker1Coworker1 Order Approval Booking/RecordingCoworker2Coworker2Coworker2 Confirm Receipt Asset Handling Coworker3Coworker3Coworker1 Journal Voucher Booking/RecordingCoworker2Coworker2Initiation Coworker 2 Approval Coworker 1 Ledger Review Comparison/ReviewCoworker4Coworker3Coworker2

Proper Authorization Limits on the amount certain entities can approve. Limits on the amount certain entities can approve. Employee up to 4,999 Department Head 5, ,999 CFO/CMO/CNO 10, ,999 CEO 20, ,999 Board 50,000 and up Random Review of Records

Documents and Records Original documents with expense reports. Original documents with expense reports. Pre-numbered and consecutive documents. Pre-numbered and consecutive documents. Timely preparation of documents Timely preparation of documents

Physical Control Over Assets and Records Inventory control system. Inventory control system. Petty cash system Petty cash system Labeling of equipment and furniture Labeling of equipment and furniture Backup and recovery systems Backup and recovery systems

Independent Checks Supervisor verifies accuracy of the clerk’s cash drawer at the end of the day. Supervisor verifies accuracy of the clerk’s cash drawer at the end of the day. Check inventory. Check inventory. Look for equipment. Look for equipment. Reconcile agency bank accounts each month. Reconcile agency bank accounts each month.

Auditing Independent Check on Compliance Independent Check on Compliance  External  Internal Department Department Supervisors Supervisors

Training Have writing policies. Have writing policies. Have a conflict of interest policy. Have a conflict of interest policy. Inform employees: Inform employees: 1.Fraud hurts the organization. 2.What is fraud. 3.If they observe fraud what should they do. 4.The discipline for fraud.

What Is The Number One Method of Detection?

Have a safe method which employees and others can use to inform you of the potential fraud/abuse and remain anonymous.

Hot Line “Perception of Detection” “Perception of Detection” Used to report unsafe conditions and other serious issues. Used to report unsafe conditions and other serious issues.

Hot Line

Around the clock Around the clock –40% of calls are at night or on weekends –No answer –no call back Caller must be allowed to be anonymous Caller must be allowed to be anonymous –Third party provider –Trained professional

Suggestion Box

Summary of Findings 5% of revenue is lost 5% of revenue is lost Occupational fraud is more likely to be detected by a tip. Occupational fraud is more likely to be detected by a tip. Implement common anti-fraud controls. Implement common anti-fraud controls. ACFE 2014 GLOBAL FRAUD STUDY

Case Studies 1. Should We Have a Financial Audit? 2. Who Ordered the Furniture? 3. Whose X-ray Is It? 4. Where Was The Baby Born? 5. Where Are The Supplies? 6. Why Did the Ambulance Run Out of Gas?

For Each Case What detection method is illustrated? What detection method is illustrated? What should you do? What should you do? What changes should you make to prevent it from happening again? What changes should you make to prevent it from happening again? Is it a true case that happened in an Adventist Hospital? Is it a true case that happened in an Adventist Hospital?

Where Are The Supplies? You are the Chief Executive Officer (CEO) of the O’Reilly Health System (OHS) in a developing country. The system consists of two hospitals containing a total of 120 beds and 25 clinics. Some clinics are in developed cities and some are in more rural areas. The system is financially struggling. One of the hospitals is doing well financially and the other is not. Some of the clinics are financially strong and some are financially very weak. The most successful clinic is the Pursley Clinic (PC) which is located in a highly populated area and contains a dental practice and a medical family practice service. The dental practice is staffed with two dentists and the medical practice with one physician. It is well known that the physician practices medicine at the PC and has a private clinic in the same city. In reviewing the financial statements of the system and of each clinic you see that the profitability of the PC is declining. You notice that the revenue is stable, however, the expenses are rapidly increasing particularly in the supply areas. You call the clinic administrator and ask her what is happening. She informs you that she suspects the physician is taking supplies from the clinic to use in his private practice. You immediately send a person to the clinic to conduct an audit of the supply system. The audit person calls you and informs you that the physician refuses to cooperate with the audit. The physician is an elder in the local church and is a member of the Union Executive Committee. As the CEO what are you going to do?

The End Do Not Have Your Hospital/Clinic Become The Next Case Study