1. Fraud Update April 27, 2016 Duane Reyhl, Partner

2. Summary 2016 Report to the Nations Risk of Fraud
Establishing the Right Culture
Preventive Measures

3. 2016 ACFE Report to the Nations
The 2016 ACFE Report to the Nations on Occupational Fraud and Abuse provides an analysis of 2,410 cases of occupational fraud that occurred in 114 countries throughout the world.

7. Costs

16. Who and Why?

17. Of the cases involving a government victim, those that occurred at the federal level reported the highest median loss ($194,000), compared to state or provincial ($100,000) and local entities ($80,000).

18. Conflicts of interest
- Purchasing schemes
- Sales schemes
Bribery
- Invoice kickbacks
- Bid rigging
Illegal gratuities
Economic extortion

19. Conflicts of interest
- Purchasing schemes
- Sales schemes
Bribery
- Invoice kickbacks
- Bid rigging
Illegal gratuities
Economic extortion

20. Asset misappropriation was by far the most common form of occupational fraud, occurring in more than 83% of cases, but causing the smallest median loss of $125,000. Financial statement fraud was on the other end of the spectrum, occurring in less than 10% of cases but causing a median loss of $975,000. Corruption cases fell in the middle, with 35.4% of cases and a median loss of $200,000.

22. Type of Victim Organization

23. Type of Victim Organization

24. Type of Government Victim

25. Schemes

26. Scheme Comparison Blue = All
Green = Government and Public Administration
Pink = Services (Professional)

27. Overlap of Fraud Schemes

29. Detection
Who sounds the alarm?

30. Fraud Duration
The longer a fraud lasted, the greater the financial damage it caused. While the median duration of the frauds in our study was 18 months, the losses rose as the duration increased. At the extreme end, those schemes that lasted more than five years caused a median loss of $850,000.

31. Fraud Concealment Fraudulent or altered documents
Fraudulent or altered transactions
Destroyed or deleted records
In 94.5% of the cases in our study, the perpetrator took some efforts to conceal the fraud. The most common concealment methods were creating and altering physical documents.
Page 19 of RTTN
Created Fraudulent Physical Documents
Altered Physical Documents
Altered Transactions in the Accounting System
Created Fraudulent Transactions in the Accounting System
Destroyed Physical Documents
Altered Electronic Documents or Files
Created Fraudulent Electronic Documents or Files
Created Fraudulent Journal Entries
Altered Account Balances in the Accounting System
Altered Account Reconciliations
Deleted Electronic Documents or Files
Deleted Transactions in the Accounting System
Altered Journal Entries
Deleted Journal Entries
Other
No Concealment Method

32. The most common detection method in our study was tips (39
The most common detection method in our study was tips (39.1% of cases), but organizations that had reporting hotlines were much more likely to detect fraud through tips than organizations without hotlines (47.3% compared to 28.2%, respectively).

33. Source of Tips

34. Source of Tips

35. Whistleblower Stats Percentage of Tips Received by Methods
Top to bottom:
Telephone hotline (40%)
(34%)
Web-based/Online Form (24%)
Mailed Letter/Form (17%)
Other (10%)
Fax (2%)

36. Whistleblower E-methods
Percentage of Tips Received by Methods
Top to bottom:
Telephone hotline (40%)
(34%)
Web-based/Online Form (24%)
Mailed Letter/Form (17%)
Other (10%)
Fax (2%)

37. Whistleblower Recipient
Percentage of Tips Received by Methods
Top to bottom:
Telephone hotline (40%)
(34%)
Web-based/Online Form (24%)
Mailed Letter/Form (17%)
Other (10%)
Fax (2%)

38. Control

39. Control Weakness Contributors

40. Internal Control Weaknesses

41. Effective Controls

42. Prevention

43. Weigh Risks
COSO - Risk Assessment – Principle 8 – The organization considers the potential for fraud in assessing risks to the achievement of objectives.
Points of Focus
The following points of focus highlight important characteristics relating to this principle:
Considers Various Types of Fraud-The assessment of fraud considers fraudulent reporting, possible loss of assets, and corruption resulting from the various ways that fraud and misconduct can occur.
Assesses Incentive and Pressures-The assessment of fraud risk considers incentives and pressures.
Assesses Opportunities-The assessment of fraud risk considers opportunities for unauthorized acquisition, use, or disposal of assets, altering of the entity's reporting records, or committing other inappropriate acts.
Assesses Attitudes and Rationalizations-The assessment of fraud risk considers how management and other personnel might engage in or justify inappropriate actions.

44. Internal Control
Control Environment - Principle 1 - The organization demonstrates a commitment to integrity and ethical values.
Risk Assessment – Principle 8 – The organization considers the potential for fraud in assessing risks to the achievement of objectives.
Control Activities – Principle 10 - The organization selects and develops control activities that contribute to the mitigation of risks to the achievement of objectives to acceptable levels.
Information and Communication – Principle 13 – The organization obtains or generates and uses relevant, quality information to support the functioning of internal control.

45. Internal Control – Fraud Risk
COSO - Risk Assessment – Principle 8 – The organization considers the potential for fraud in assessing risks to the achievement of objectives.
Principle 8 has 4 points of focus that highlight important characteristics of how an organization adopts this principle:
Considers Various Types of Fraud-The assessment of fraud considers fraudulent reporting, possible loss of assets, and corruption resulting from the various ways that fraud and misconduct can occur.
Assesses Incentive and Pressures-The assessment of fraud risk considers incentives and pressures.
Assesses Opportunities-The assessment of fraud risk considers opportunities for unauthorized acquisition, use, or disposal of assets, altering of the entity's reporting records, or committing other inappropriate acts.
Assesses Attitudes and Rationalizations-The assessment of fraud risk considers how management and other personnel might engage in or justify inappropriate actions.

46. Internal Control – Culture
Control Environment - Principle 1 - The organization demonstrates a commitment to integrity and ethical values.
Risk Assessment – Principle 8 – The organization considers the potential for fraud in assessing risks to the achievement of objectives.
Control Activities – Principle 10 - The organization selects and develops control activities that contribute to the mitigation of risks to the achievement of objectives to acceptable levels.
Information and Communication – Principle 13 – The organization obtains or generates and uses relevant, quality information to support the functioning of internal control.

47. Internal Control – Detection
Control Environment - Principle 1 - The organization demonstrates a commitment to integrity and ethical values.
Risk Assessment – Principle 8 – The organization considers the potential for fraud in assessing risks to the achievement of objectives.
Control Activities – Principle 10 - The organization selects and develops control activities that contribute to the mitigation of risks to the achievement of objectives to acceptable levels.
Information and Communication – Principle 13 – The organization obtains or generates and uses relevant, quality information to support the functioning of internal control.

48. COSO – Control Environment
5 Principles
Principle 1 - The organization demonstrates a commitment to integrity and ethical values.
4 points of focus
The next slide shows the 4 points of focus:
Tone at the top
Establish standards of conduct
Evaluate adherence
Address deviations

49. Commitment to Integrity / Ethics
Tone at the top
Establish standards of conduct
Evaluate adherence
Address deviations
COSO Principle 1 – the 4 points of focus
One element of a code of conduct might be an anti-fraud policy

50. Risk Considerations What can happen? What is the potential loss?
Likelihood of occurrence?
How do you mitigate?

51. Risk Mitigation Noncontrollable Controllable Internal control
Insurance
Acceptance

52. Anti-Fraud Controls - Frequency

53. Anti-Fraud Controls – Govt

54. Hotline Effect Hotline challenges: Cost Trust Reliability Vetting
Feedback

55. Resources

56. Fraud-Related Information
2016 Report to the Nations
GFOA Best Practices
The Accounting Procedures Manual for Local Units of Government in Michigan references the Federal Green Book, COSO, and GFOA Best Practices

57. Questions and Discussion