Approaches to Fraud Prevention Bill Brown: Partner – Forensic & Litigation Services Tel:...
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Transcript of Approaches to Fraud Prevention Bill Brown: Partner – Forensic & Litigation Services Tel:...
Approaches to Fraud Prevention
Bill Brown: Partner – Forensic & Litigation Services Tel: 972-448-6966
E-mail: [email protected]
Overview
• Introduction: Padlock vs. Bolt cutter• Goal of Fraud Prevention• Internal Controls, the “Conventional
Wisdom”• Fraud’s Impact on Prevention• The “People” Solution
Padlock Theory
Padlock Theory
• Basic internal control• Controls physical access• Safeguards property/assets• Will keep the 95% “honest” people
honest
Bolt Cutter Theory
The Bolt Cutter Theory
• Controls will not deter the “other” 5% • The dishonest people will find a way to
“beat” the controls• They have time and energy on their side• They know where to find the bolt
cutters!
Beaumont ISD$4,041,705 Fraud
Beaumont ISD
• Collusion between CFO & Controller• I8 fraudulent transfers over 16 months• Each had “Unilateral” funds transfer
authority (no $$ limitation)
Beaumont ISD Cont’
• Assumed Name Record (dba) to create bogus bank accounts: fooled the bank
• Legitimate sounding descriptions documenting transfers: fooled the District and others
Fraud Prevention Goal
The Goal of Fraud Prevention
Fraud Prevention Goal
Anti-fraud programs should be aimed at reducing the likelihood that if fraud occurs, it will not go undetected for an unreasonable amount of time
Cost vs. Benefit – can’t completely prevent fraud
Internal Controls
The Conventional Wisdom Re: Controls
General Conception
• Careful consideration & design• Proper implementation• Effective compliance/monitoring• Appropriate corrective/remedial actions• Reliance on routine auditing procedure
So What’s the Problem?
5% “Tool Kit”
Circumventing Internal Controls
• 5% have intimate knowledge of controls exposes weaknesses
• Collusion will circumvent most controls• Flawed design• Ineffective implementation• Auditing procedures can be predictable
& easily fooled
Fraud’s Impact on Prevention
What is Fraud?
A generic term, embracing all multifarious means which human ingenuity can devise and which are resorted to by individual(s) to get advantage over another byfalse suggestions or suppression of truth, and includes surprise, trick, cunning, and any unfair way by which another is cheated
Fraud Engineering
Fraudulent schemes are “engineered” (meticulously designed) to perpetrate and conceal the theft, including an exit strategy complete with “fall guys” and “alibis”
Detection is Difficult
• Fraud is an “intentional” act, often involving detailed planning and concealment
• Crooks “anticipate” the routine audit procedures, audit evidence is often fabricated
• Exploits weaknesses in routine audit procedures or internal controls
• Breach of trust• Test crash dummy – observe & adapt
Initial Detection
• Tip 43.3%• Management Review 14.6%• Internal Audit 14.4%• By Accident 7.0%• External Audit 3.3%• IT Controls 1.1%
Source: 2012 ACFE Report to the Nation
Tipsters vs. Controls
Why are tipsters, management, and internal auditors the most effective sources for the detection of fraud?
Inside Info
• Intimately familiar with “detailed” information
• First-hand knowledge: know the entity, live it daily
• See and hear what other employees say and do (lifestyle changes)
• Understand the control systems and how to circumvent
Prevention: The “People” Solution
The “People” Solution
REMEDIATION
95%
INVESTIGATE
EDUCATE EMPLOYEES
REPORTING MECHANISM
TONE at the Top
REDUCE DETECTIO
N TIME
Tone at the Top
• Establishes standards for ethical behavior• Affixes responsibility for maintaining
ethical culture• Sets positive example for others to follow
El Paso ISD: Cheating Scandal
El Paso ISD
• Wide-spread cheating scandal, state & federal accountability standards
• Superintendent created “culture of corruption” – Top administration– Campus Directors– Cutoff communications between campuses &
Central Office
EPISD Cont’
• Arrest & Removal of Superintendent created a “void”
• “Culture” devised new schemes to continue the corrupt environment
• Internal audit manipulated by Superintendent & top administration
• I/A reports “draft” form >over 18 months
EPISD Cont’ I/A Failures
• Internal audit manipulated by Superintendent & top administration
• I/A reports kept in “draft” form >over 18 months to avoid public disclosure
• Board of Trustees unaware of internal audit
Informed Employees
• Informed employees will be more likely to act ethically
• Raises awareness of potentially fraudulent conduct by other employees or vendors
• Encourages reporting of fraudulent conduct (early detection)
Reporting Mechanism
• Commitment to non-retaliation• Anonymous reporting extremely
important• Appropriate response (part of the
solution or part of the problem)• Reduces detection time• Cornerstone to enterprise-wide anti-
fraud system
Investigation
• Objective/probing• Identify stakeholders/isolate interested
individuals• Utilize appropriate investigative
personnel (appropriate skills)• Timely conclusion/recommendations
Remediation
• Report to appropriate level within entity• Report facts upon which appropriate
action can be taken• Detailed recommendations for corrective
actions• Inform affected (especially the tipsters)
of investigative results and corrective actions taken
Goal: Reduce Detection Time:“reducing the likelihood that if fraud occurs, it
will not go undetected for an unreasonable amount of time”
Engage the 95% to improve the effectiveness of “detection” efforts
Fraudulent activity manifests itself in changes in behavior
Common Red Flags
• Living Beyond Means 35.6%• Financial Difficulties 27.1%• Close Association with Vendor 19.2%• Control Issues 18.2%• Divorce/Family Issues 14.8%• Addiction Problems 8.4%
Source: 2012 ACFE Report to the Nation
Observe Lifestyle Changes
• Spending habits: people generally spend what they steal. The more they steal, the more they spend. Fraud almost always starts small and grows.
• Behavioral changes: look for signs of drug abuse, gambling or other patterns (dress, work habits, or attitude toward others)
City Dixon, Illinois: $53,000,000 Theft
City of Dixon, Ill
• 12/18/1990 thru 4/17/2012• City Finance Officer indicted 5/1/2012,• Transferred funds to bank account in
name of City with her as signatory• Forged endorsement & deposit in fake
City account
City of Dixon, Cont’
• Always picked up City’s mail & no one saw fake bank account statements, until the end (accidental)
• Extravagant life style:– Large horse ranch (150 horses)– Two 18-wheel transport trucks– Expensive real estate– Lavish personal expenses Change in lifestyle went on for over 12 years!
Hotline
• The most effective crime detection device is the Hotline.
• Expands your view to all the “eyes” in your organization.
• Cost effective• Provides a vehicle for honest employees
to contribute to the well being of the organization
95% Solution
• Your people are the best control system!–Encourage–Empower–Enlist