1. Preventing and Detecting Fraud: Also know as, “Why does this always seem to happen to us?”
Prepared and presented by Frank Crawford, CPA

2. The Fraud Triangle Exacerbated in economic downturn
Perceived opportunity to commit fraud
Perceived pressure facing individual
Person’s rationalization or integrity

3. Victim Organizations

4. Victim Organizations Occupational Fraud Schemes in Government
and Public Administration (106 cases)12
12The sum of percentages in this chart exceeds 100 percent because several cases involved multiple schemes from more than one category.

5. Profile of Fraud Perpetrator
Male or female
No prior criminal history (<8%)
Well liked by co-workers
Likes to give gifts/compulsive shopper
Gambling problems not unusual
Long-term employee
Rationalizes: Starts small or “borrows”
Lifestyle clues

6. Cash Schemes Stealing cash funds processed or on hand
Not recording & stealing the cash receipts
Under ringing & stealing the difference in cash receipts
Altering bank deposits

7. Accounts Receivable Schemes
Lapping
Forging checks received
Altering credit card receipts
Granting bogus credits
Bogus bad debt write-offs or account adjustments

8. Accounts Payable & Purchasing
Personal bills
Fictitious suppliers
Kickbacks
Ordering personal items
Petty cash funds
Employee expense accounts
Credit cards

9. Payroll Schemes Ghost employees Manipulated time records
Unclaimed payroll checks
Writing extra payroll or bonus checks
Leave time manipulation
Withholding fraud
W-2 fraud

10. Top Ten Reasons Frauds Beat Internal Controls in Government and What You Can Do About It…

11. 1. Goin’ Through the Motions
Process mentality
Just doing the steps in the process
Not thinking about what one is doing
Example: Two signatures required on checks. Both check signers fail to notice the check has no payee and still sign the check.
Remedy: Reinforce the need to pay attention and the consequences for failure.

12. 2. See No Evil, Hear No Evil Blind trust
Failure to acknowledge warning signals
Example: Failure to follow up on a customer complaint of an incorrect bill for service and relying on the experienced and valued billing clerk’s response that it was just an error.
Remedy: Realize that anyone can commit fraud. Assume discrepancies are fraud and prove to yourself it is only an error.

13. 3. It’s Good to be The King Positional immunity
Rationalizing that controls don’t apply to me because I am in upper management.
Often referred to as management override.
Example: Executive director doesn’t report leave used, but still gets paid for unused leave annually.
Remedy: Identify someone within or outside the entity that you can report these circumstances to and not jeopardize your job.

14. 4. New Kid on the Block Situational incompetence
New employee not in a position to question why
Example: New accounts payable clerk questions why purchases from a certain vendor do not require bids, and is told that such purchases are exempt.
Remedy: If you are the supervisor, don’t assume new employee just doesn’t understand. Take their questions seriously and ask your self why. If you are the employee, ask more than one person.

15. 5. Where’s All the Time Gone?
Workload overload
Not enough time to perform control procedures
Example: Knowing that the supervisor is too busy to reconcile accounts receivable, a billing clerk steals cash and posts unauthorized adjustments.
Remedy: Reevaluate assignment of duties, and when needed, demand more resources by focusing on the consequences of fraud.

16. 6. Can’t We All Be Happy? Conflict avoidance
Responsible employees not comfortable in confronting other employees
Example: A supervisor recognizes that the cash drawer is always short at the end of the day, but is uncomfortable in confronting the employee.
Remedy: Reinforce supervisory responsibilities. Provide employee management training. Don’t tolerate poor performance.

17. 7. Where’s the Beef? Informational restraint
Responsible employees lack the information they need to identify an improper transaction
Example: An accounts payable clerk is not provided a contract that includes a not-to- exceed price limit and vendor takes advantage by over-billing.
Remedy: Reinforce with employees the openness and availability of records and information.

18. 8. It’s None of My Business
Behavioral ignorance
Responsible employees ignore behavioral signs or indicators of possible fraud
Example: Management and other employees fail to investigate or question an employee that is living well above their means or salary level.
Remedy: Create an environment within the government that fosters ethical and responsible behavior. Create an anonymous hotline.

19. 9. It’s Over My Head Informational ignorance
Officials ignore fraud warning signs in reports because they don’t understand the reports
Example: Highway patrol fine revenue was embezzled and monthly budget report shows a potential problem, but the report is too complicated for management and governing board to understand.
Remedy: When it comes to reports, use the KISS principle and train the users.

20. 10. A Bad Apple in the Bunch Ethically challenged
Employees responsible for controls are just not ethical and morally responsible individuals
Example: Purchasing supervisor is dishonest and convinces an accounts payable employee to process fake invoices for payment and split the money between them.
Remedy: Don’t hire crooks.

21. Protection Mechanisms
Fraud risk assessment
Internal controls
Proper environment
External review
Reporting mechanism
Hire right
Fidelity bonding
Establish “Perception of Detection”
Forensic data mining

22. Protection Mechanisms
Segregation of duties
Effective bidding processes
Vendor approval controls
Policies
Code conduct, fraud policies
Conflict of interest, gifts, gratuities
Etc.
Fraud awareness training
Internal audit

23. Detection of Fraud Schemes
Initial Detection of Occupational Frauds4
4The sum of percentages in this chart exceeds 100 percent because in some cases respondents identified more than one detection method.

24. Resources
Managing the Business Risk of Fraud: A Practical Guide (AICPA & IIA) – REQUIRED READING
Management Anti-Fraud Programs & Controls (exhibit to SAS 99)
ACFE Fraud Prevention Check-Up
ACFE Best Practices in Ethics Hotlines
ACFE Sample Code of Conduct
ACFE Sample Ethics Policy

25. Management Antifraud Programs and Controls
Creating a Culture of Honesty & High Ethics
Developing an Appropriate Oversight Process
Evaluating Antifraud Processes & Controls

26. Creating Culture of Honesty and High Ethics
Setting the tone at the top
Creating a positive workplace environment
Hiring and promoting appropriate employees
Providing sufficient training
Confirming accountability for code of conduct
Implementing effective discipline

27. Evaluating Antifraud Processes and Controls
Identifying and measuring fraud risks
Mitigating fraud risks
Designing and implementing appropriate internal controls
Monitoring compliance with internal controls
Don’t miss the obvious…

28. Developing and Appropriate Oversight Process
Oversight by the audit committee or equivalent
Oversight by management
Use of an effective internal audit function
Open and candid dialogue with independent auditors
Take advantage of the COSO internal control element “Risk Assessment” by taking some time to “aim”…

29. Let’s talk a little more about Honesty and High Ethics for a bit…

30. Applying Ethics is About
Living a Life Worth Living
Ethics refer to the standards that tell us how we ought to act in situations we find ourselves in as parents, children, family members, friends, citizens, elected officials, professionals, employees, teachers, etc.

31. What Ethics is Not!
Ethics is not just following the law. The fact that it is possible or legal to do something doesn’t mean it “ought to be done”.
Ethics is not just following our feelings. Our feelings can betray our ethics. Often we may feel it is uncomfortable to do the right thing.
Ethics is not just following our religion. Ethics applies to all people, whether religious or not. Some ethical dilemmas are not addressed by one’s religion.
Ethics is not just following culturally accepted norms. Some cultures may be blind to certain basic issues, such as human rights.
Ethics is not just following science. While science may provide us better information to make decisions, just because something is scientifically or technologically possible, does not mean it is ethical.

32. Ethics in 21st Century As a Society are We Living a Life Worth Living?
Corporate officers, greed, and accounting scandals
Athletes and performance-enhancing drugs
Martha Stewart and broker/dealer scandals
College students and increased cheating
Hackers, internet viruses, and identity theft
Politicians and government corruption
Catholic priests and sex scandals
Danny Almonte and little league baseball

33. Ethics in 21st Century
Recent study found that nearly 1/3 of U.S. workers called in sick in the past year when if fact they were fine.
Most common reasons given:
Had plans with family and friends
Needed to relax or catch up on sleep
Just didn’t feel like going to work
Source: Harris Interactive Survey for CareerBuilder.com (Aug-Sept. 2007)

34. Ethics in 21st Century Advertising “Prepaid” Bail Bonds
Is this Really Necessary?

35. Ethics in Work and Life
Hard to separate moral behavior in personal life from moral behavior in public life
Where there are ethical lapses in private life, there are often ethical lapses in public life (and vice versa)
Ethical lapses in private life can result in lack of trust in public life

36. Unethical Behavior Triangle
Motive/Pressure
Potential for Unethical Behavior
Opportunity
Rationalization

37. Rationalizing Bad Behavior
Do we rationalize bad behavior?
In what ways?
The “Broken Window Rationalization Theory” - if we allow inappropriate behavior to go unchallenged, we create the invitation for rationalizing that such behavior is considered acceptable

38. An Individual’s Ethics Evolution
Stage 1 – Educational Level
Stage 2 – Societal Level
Stage 3 – Independent Level

39. Educational Level
Right and wrong defined in terms of what authority figures say is right and wrong or what rewards and punishment result
Parents
Teachers
Ministers

40. Societal Level
Right and wrong defined in terms of what society believes and law requires
Family
Friends
Peers
Community
Nation
Circle of Morality Theory

41. The Circle of Morality©
CONCEPT:
For a shift to higher Ethics, there must be meaningful enough Consequences to the Actions of individuals to cause a shift in the Beliefs of a majority of society that is significant enough to change individual Values.
The Circle
of Morality™

42. Effective Consequences

43. Independent Level
Right and wrong defined from an independent point of view based on our individual ideals of justice or human rights and welfare
These ideals are acquired through our knowledge, experiences, and personal feeling
These ideals may differ from the norm of society

44. Ethical Orientation Question
You are driving on a highway (with a normal speed limit of 70 mph) with no other vehicles around. The highway has recently been repaved. Construction is now complete and all construction barriers have been removed. However, the temporary speed limit signs of 55 mph are still posted. You are driving 70 mph.
Are you doing anything wrong?

45. An Individual’s Ethics Orientation
Whatever our level of moral development, we have all developed our own individual ethical orientation or tendencies we follow when faced with making decisions that involve ethical dilemmas.
Let’s determine our own ethical orientation.

46. What is my Ethical Orientation?
Which is worse?
a. Hurting someone’s feelings by telling the truth or
b. Telling a lie and protecting their feelings

47. What is my Ethical Orientation?
2. Which is the worse mistake?
a. To make exceptions too freely or
b. To apply rules too rigidly

48. What is my Ethical Orientation?
3. Which is it worse to be?
a. unmerciful or
b. unfair

49. What is my Ethical Orientation?
4. Which is worse?
a. Stealing something valuable from someone for no good reason or
b. Breaking a promise to a friend for no good reason

50. What is my Ethical Orientation?
5. Which is it better to be?
a. Just and fair or
b. Sympathetic and feeling

51. What is my Ethical Orientation?
6. Which is worse?
a. Not helping someone in trouble or
b. Being unfair to someone by playing favorites

52. What is my Ethical Orientation?
7. In making a decision, on which do you rely more?
a. Hard facts or
b. Personal feelings and intuition

53. What is my Ethical Orientation?
8. Your boss or superior orders you to do something that is hurtful to someone. If you carry out the order, have you actually done anything wrong?
a. Yes or
b. No

54. What is my Ethical Orientation?
9. Which is more important in determining whether an action is right or wrong?
a. Whether anyone actually gets hurt or
b. Whether a rule, law, commandment, or moral principle is broken

55. What is my Ethical Orientation?
Ethics of Justice (J orientation)
Based on equal application of moral principles and laws or policies with little flexibility or exceptions
Actions are either inherently right (truthfulness, respect, honoring promises) or inherently wrong (lying, theft, manipulation, broken promises)
Generally more common of men than women
Ethics of Care (C orientation)
Based on sense of responsibility to reduce harm and suffering with considerable flexibility for individual cases
Actions that produce more good than harm are “right”; those that don’t are “not as right”
Generally more common of women than men
(Based on Ethical Orientation Questionnaire developed by the Center for Ethics and Business at Loyola Marymount University)

56. Contemporary Ethics Theories
Another perspective:
Ethics of Justice Orientation
RIGHT versus WRONG
Ethics of Care Orientation
RIGHT versus Not As RIGHT

57. What is an Ethical Dilemma?
A situation where there are compelling reasons for taking an action and competing compelling reasons for not taking the action
Ethical dilemmas exist because of these conflicting or competing compelling reasons

58. An Ethical Dilemma
You want to borrow another individual’s truck, without approval (compelling reason not to do it), and use it to deliver food, clothing, and sleeping bags to desperately hungry and homeless families immediately after a natural disaster strikes (compelling reason to do it).
What action should the individual take?
In what direction would an Ethics of Justice thinker lean?
In what direction would an Ethics of Care thinker lean?

59. Resolving Ethical Dilemmas
First get all the facts and consider alternative actions.
Analyze the actions themselves (ethics of justice considerations)
Do they comply with the law
Are they honest, fair and equitable
Are they respectful of others rights
Analyze the potential results or consequences of the actions (ethics of care considerations)
Do they advance the common good
What is the extent of good versus harm to others
What is the extent of good versus harm to me
Combine both analyses and make a decision (none of the considerations should be ignored, each acts as a check on the limitations of the other)

60. Ethical Dilemma Decision Test
“Ask yourself whether or not you would feel good about your decision while appearing on prime-time television being interviewed by a highly-skilled, well- informed, and hard-hitting journalist, knowing that your family, friends and peers are watching.”
Quote from Warren Buffet

61. My 10 Basic Principles of Ethics
Avoid conflicts of interest in fact and appearance
Don’t misuse nonpublic information for personal gain
Don’t accept or solicit gifts or items of value
Put forth honest effort in duties
Make no unauthorized or unfullfilable promises or commitments
Be impartial and avoid giving preferential treatment
Don’t misuse or misappropriate company funds or property
Exercise civility and respect others opinions and beliefs
Comply with laws and meet all obligations as a citizen
Expose corruption and report fraud, waste and abuse

62. Avoid The Sergeant Shultz Approach to Responding to Immoral Behavior
“I know nothing,
I see nothing, and
I say nothing!"

63. Living a Life Worth Living

64. QUESTIONS???