1. Fraud Prevention: It is not so Ducky when Fraud Happens! Steven Bateson 2010

2. Last couple of Presentations I have given you the results of the Survey done by the Association of Certified Fraud Examiners. And, nothing has changed!!!

3. Fraud Factors in Economic Downturn  Increased and often severe financial needs  Decreased loyalty to the company because of real or potential layoffs.  Increased opportunity due to the elimination of “non-essential” positions such as auditors. Fraud Magazine November/December 2009

4. KPMG Fraud Survey 2009 Reports:  From senior executives 32% expect increase in Fraud activity in their organizations.  65% believe that Fraud poses a significant risk to their industry.  70% were concerned that a Fraud in their company would pose loss of public trust.  And, 66% reported that inadequate internal controls enabled Fraud to go unchecked.

5. These same Senior Executives offer advice.  67% say to increase employee communication and Fraud prevention training.  65% suggest increasing technology driven continuous auditing and monitoring.  60% suggest improving Fraud and misconduct assessments in their companies.

6. FRAUD, WASTE, ABUSE

7. Fraud The intentional, wrongful obtaining of either money or some other advantage or benefit from another or an organization.

8. Waste Incurring unnecessary costs as a result of inefficient or ineffective practices, systems or controls.

9. Abuse Administrative violations of regulations which impair effective and efficient operations.

10. Fraud Characteristics

11. Fraud Triangle Opportunity Motive Rationalization

12. Motives  Vices or addictions  Unexpected expenses  Resentment against agency or boss  Living beyond one’s means

13. Opportunities  Familiarity with operations  Position of Trust  Poor management oversight  Weak Internal Controls  Collusion

14. Rationalization  Owed to me  Just borrowing  Big organization they won’t miss it  Everybody does it  I deserve it  Overall employee thinks he is honest

15. Of these which can we control? Opportunity!!

16. Myths about Fraud  Most people will not commit Fraud.  Fraud is not material.  Most Fraud goes undetected.  Fraud is well concealed.  Auditor can not do any better in detecting Fraud.  Prosecuting Fraud perpetrators deters others.

17. Other Comments on Fraud  Management does not think Fraud will happen to them.  Fraud is always first defended as an “accounting problem”.  The perpetrator may admit to what the auditor already knows.  The position and background of the perpetrator are unpredictable.

18. Other Comments - Continued  Blind Trust is the number one internal control weakness.  Employees may not comply with internal controls.  Management fails to prosecute those suspected of Fraud.  Early audit involvement is needed.

19. Characteristics of a Fraudster  Intelligent  Non-conformist  Egotistical  High roller  Hard working  Stressed  Inquisitive  Disgruntled

20. What were the criminal histories of those who were caught in Fraud schemes?  5.7% - Had been charged with a crime but not convicted.  6.8% - Had prior convictions.  87.4% - Had never been charged or convicted. First offense.

21. Fraud Prevention

22. 5 Step Approach to Fraud Detection  Know your exposure risks.  Know the symptoms. SOC  Be alert to the symptoms.  Auditors/employees build processes to look for symptoms.  Follow through on symptoms observed.

23. To Catch a Thief… Think Like One

24. Develop Fraud Fitness  Have a fraud risk evaluation  Have Internal/surprise Audits  Establish a Fraud Hotline  Have ongoing fraud education/ethics training  Create culture of honesty and ethics in the work place (Code of Conduct)  Tone at the Top  Establish an Audit Committee

25. Fraud Risk Assessment  Identify potential inherent Fraud risks.  Assess the likelihood of the identified risks to occur.  Assess the significance to the organization of the Fraud risks.  Evaluate those people and departments most likely to commit Fraud and identify the likely methods they may use.

26. Fraud Risk Assessment – cont’d  Identify existing preventive and detective controls to mitigate Fraud risks.  Evaluate identified controls to determine if they are operating efficiently and effectively.  Identify and evaluate residual Fraud risks resulting from ineffective or non-existent controls.  Respond to residual Fraud risks.

27. Reduce the Risks of Fraud  Establish sound hiring practices  Establish the correct internal controls, document them and enforce them  Establish training, policies, and review processes  Create message of deterrence

28. Hiring the Right People  Criminal background check  Credit history  Drug screening  Always check references

29. Best Practices  Set a good example for others  Segregate duties  Rotate duties  Strong Internal Controls  Surprise audits

30. More Best Practices  Educate employees on fraud prevention  Establish Fraud Policy and publicize it  Establish a code of conduct  Establish a hot-line

31. Perception of Detection  Surveillance  Anonymous tips  Surprise audits  Prosecution  Enforcement of ethics and fraud policies  Catch me if you can!

32. Training  Managers need to know the red flags  Produce newsletter, other communication  Educate on the consequences of fraud  Take appropriate action against perpetrators

33. Suggestions related to behavior red flags  Pay attention to sudden dramatic changes in observable spending patterns.  Some types of fraud require active ongoing cover-up activity. Staying late, coming in early, and never take vacation are common in frauds. Identify employees who do not take vacation. Enforce vacations and mandatory rotation of assignments.  Excuses, like “I am working on those at home”, “We haven’t had time to make the deposit.”, or “the bank lost the deposit”, demand immediate follow-up action.

34. Ten Commandments of Detecting Fraud by Dennis Dycus  Assume anyone can commit Fraud under the right circumstances.  Use your knowledge of internal controls to “think dirty” and check out your suspicions.  Remember that all good documentation does not mean something happened, only that someone said it happened.

35. Ten Commandments – cont’d  Pay attention to documents themselves and supporting paper-work, observing the consistency of numbers, dates, dollar amount, tax, type of ink used and general condition of the document.  Consider reasonableness of account balances and accounting entries, especially adjustments.

36. Ten Commandments – cont’d  Develop relationships and pay attention to hints or rumors of wrongdoing. Follow up. Remember that people are often torn between their moral standards and their reluctance to get involved. They seldom tell all they know in the first interview.  Check out hunches; first impressions are often right. Have faith in yourself. Perception increases with experience.

37. Ten Commandments – cont’d  Be nosy; don’t easily accept explanations, especially if you don’t understand them.  Use statistical sampling to force you to look at items you would not generally otherwise examine.  Look for patterns of unusual transactions.

38. A Note of Caution Symptoms of Fraud are valuable tools to management, however, symptoms are sometimes present even though fraud may not be! So avoid jumping to conclusions. Also be aware that management can explain symptoms away, and say, “Well, chances are these are okay.” The only way to know is to follow through on all symptoms observed. Courtney Thompson Fraud Awareness for Managers 1999

39. Examples & SOC  SOC – Strange, odd or curious

40. Questions?