1. Managing Fraud Risk in Government 2015 IIA District Conference March 10, 2015 David A. King, CPA, CFE – Director, Special Investigations North Carolina Office of the State Auditor

2. Session Objective Discuss challenges, trends, and strategies for managing fraud risk in government

3. Managing fraud risk requires awareness, tools, and proactive efforts, including collaboration with professional peers

4. Session Outline The Tone at the Top Discussion of Government Fraud Cases ACFE Report to the Nations Fraud Prevention and Mitigation

5. The Tone at the Top AICPA / ACFE Video: “The Tone at the Top”“The Tone at the Top” https://www.youtube.com/watch?v=x2MjKe6X5nE https://na.theiia.org/periodicals/Public%20Documents/TAT-Jan-Feb-2015.pdf

6. Steven Salbu Georgia Institute of Technology – Atlanta, GA

7. Four Things Leaders Can Do to Create An Ethical Climate within Their Organization

8. 1.Lead with Integrity –By Example

9. 2. State Clearly and Convincingly the Organization’s Ethical Requirements and Values

10. 3. Create a Path for Reporting Misdeeds (e.g., – a Whistleblower Hotline)

11. 4. Reward (at least recognize) Integrity

12. Are you in a leadership role as an internal auditor?

13. What are you doing in your organization to promote an ethical culture?

14. From the Headlines……..

15. Failed Charter School Mismanaged Taxpayer Funds

16. Social Services Nonprofit Mismanaged Millions

17. ACFE’s Report to the Nations According to the 2014 ACFE’s Report to the Nations – tips were the most common means by which occupational fraud was detected 45% of the fraud cases in the ACFE study were initially detected through tips 14% of the fraud cases were detected through internal audits

18. Initial Detection of Fraud Schemes

19. Whistleblower Hotlines (Federal – State – Universities)

20. Government Fraud Internal Control Deficiencies? Circumvention of Internal Controls? Management Override of Internal Controls?

21. The Elements of Fraud (The Fraud Triangle) Rationalization Pressure / Need Opportunity

22. Fraud Prevention and Detection Verify the deliverable – payments should always require adequate supporting documentation Know the people in your organization Perform proactive audits Focus on internal control Leverage technology – use data mining / data analysis

23. The COSO Framework Control Environment Risk Assessment Control Activities Information and Communication Monitoring Activities

24. The Updated COSO Cube The

25. Control Activities Authorization of Transactions and Activities Segregation of Duties Use of Adequate Documents and Records Adequate Safeguards over Access to and Use of Assets and Records Independent Verification of Transactions

26. Data Mining / Predictive Analytics / Benford’s Law http://www.nigrini.com/

27. Fraud Involves People Systems Don’t Commit Fraud Processes Don’t Commit Fraud People Commit Fraud Fraud Prevention Requires Effective Supervision

28. Fraud Prevention and Detection Internal Control / COSO Framework / Hotlines Management Control / Effective Supervision Employee Education and Training The Role of Human Resources in Selecting and Screening Employees Management Due Diligence in Selecting and Screening Employees Establishing and Maintaining an Ethical Workplace

29. Managing Fraud Risk Requires Effective Internal Controls and an Ethical Culture

30. The State Auditor’s Hotline The State Auditor maintains a toll-free telephone number to report allegations of improper governmental activities. 1-800-730-TIPS (8477) Webpage link: www.ncauditor.netwww.ncauditor.net

31. Resources http://antifraud.aicpa.org/ http://www.acfe.com/home.asp http://www.coso.org/ http://www.acua.org/ http://www.theiia.org/

32. Contact Information David A. King, CPA, CFE Director of Special Investigations North Carolina Office of the State Auditor Phone (919) 807-7606 Email: david_king@ncauditor.net State Auditor’s Hotline: 800-730-TIPS (8477)