ASSESSING FRAUD RISK IN ENGAGEMENT PLANNING

Transcription

1 ASSESSING FRAUD RISK IN ENGAGEMENT PLANNING Matthew Clifton & Corrie Stokes from the Office of the City Auditor in Austin, Texas ALGA Webinar OPENING REMARKS Kinney Poynter Moderator Executive Director NASACT Corrie Stokes Speaker City Auditor Austin (TX) Matt Clifton Speaker Senior Investigator Austin (TX)

2 Session Objective Provide a practical approach to incorporating fraud risks into the planning stage of your audits, including: What the standards require Steps to take within your audit Questions targeting the likelihood of fraud Fraud definition GAO Obtaining s.t. of value Willful misrepresentation IIA Illegal acts Deceit, concealment, or violation of trust Sources: The Institute of Internal Auditors. International Standards for the Professional Practice of Internal Auditing, October U.S. Government Accountability Office. Government Auditing Standards, 2011

3 Fraud definition Federal Law State/Provincial Law Local Law Policies Fraud definition Austin City Code (City Auditor)

4 Examples of fraud Source: 2016 Report to the Nations on Occupational Fraud and Abuse. Copyright 2016 by the Association of Certified Fraud Examiners, Inc. Examples of fraud Corruption Asset misappropriation Financial statement Source: 2016 Report to the Nations on Occupational Fraud and Abuse. Copyright 2016 by the Association of Certified Fraud Examiners, Inc.

5 Examples of fraud Corruption Conflict of interest Bribery Source: 2016 Report to the Nations on Occupational Fraud and Abuse. Copyright 2016 by the Association of Certified Fraud Examiners, Inc. Examples of fraud Asset misappropriation Cash Inventory Source: 2016 Report to the Nations on Occupational Fraud and Abuse. Copyright 2016 by the Association of Certified Fraud Examiners, Inc.

6 Examples of fraud Financial statement Overstatement Understatement Source: 2016 Report to the Nations on Occupational Fraud and Abuse. Copyright 2016 by the Association of Certified Fraud Examiners, Inc. Examples of fraud Corruption Asset misappropriation Financial statement Conflict of interest Cash Overstatement Bribery Inventory Understatement Source: 2016 Report to the Nations on Occupational Fraud and Abuse. Copyright 2016 by the Association of Certified Fraud Examiners, Inc.

7 Fraud Considerations in Auditing The Yellow Book and Red Book include various fraud-related audit responsibilities regarding: assessing potential fraud risk as part of planning, Evaluating and testing related to identified fraud risks, and Reporting related to fraud identified. Fraud Considerations in Auditing??? of fraud investigations originate with internal audit activities Source: 2016 Report to the Nations on Occupational Fraud and Abuse. Copyright 2016 by the Association of Certified Fraud Examiners, Inc.

8 Fraud Considerations in Auditing over 16% of fraud investigations originate with internal audit activities Source: 2016 Report to the Nations on Occupational Fraud and Abuse. Copyright 2016 by the Association of Certified Fraud Examiners, Inc. About the Austin Office of the City Auditor City Auditor appointed by Council 26 permanent staff, divided into two units: Audit Services: Conduct planned performance audits and respond to special requests from Council City Auditor s Integrity Unit: Investigate allegations of fraud, waste, and abuse received via hotline, , intranet, or direct contact Conduct other integrity-related projects as time permits

9 Austin s Fraud Brainstorming/ Detection Process for Audits Audit stages Planning Fieldwork Reporting Austin s Fraud Brainstorming/ Detection Process for Audits Planning Auditors review prior related allegations and investigations Auditors meet with investigators to discuss planned objectives, brainstorm potential fraud risks, and develop fraud questions for planning interviews Auditors ask fraud questions in planning interviews

10 Planning Steps without in-house investigators Ask the entity responsible for investigating fraud about past allegations/cases Review news articles, professional publications, and other auditors reports for past fraud in your audit area Reach out to other audit shops in ALGA Meet to brainstorm possible fraud Discuss questions to ask in interviews and potential fieldwork tests Case study: Code Compliance Audit The Austin Code Department investigates complaints about things like: tall weeds and grass illegal dumping dangerous buildings construction without a permit The preliminary audit objective was to evaluate the consistency of code interpretation, investigation, and resolution by Austin Code inspectors.

11 Code Compliance Audit: Prior fraud allegations and cases Planning Auditors review prior related allegations and investigations Code Compliance Audit: Prior fraud allegations and cases Planning Auditors review prior related allegations and investigations Allegations about: Inspectors helping owners find loopholes An inspector lying about inspecting properties he never visited An inspector failing to investigate a report of unpermitted building sites Cases about: Inspectors overreaching their authority and conducting code sweeps of an entire neighborhood A Code employee using inspectors to harass her ex-husband by citing code violations on his properties An inspector improperly failing someone on their electrical inspection and then encouraging the owner to hire his buddy to fix it

12 Code Compliance Audit: Brainstorming meeting with investigators Planning Auditors meet with investigators to discuss planned objectives, brainstorm potential fraud risks, and develop fraud questions for planning interviews Discussed potential fraud risks Code Inspector bribery Code Inspectors making inappropriate exceptions for themselves or family/friends Code Inspectors falsifying documents to cover up unperformed work Code Inspectors sloppy with documentation; time management Code Compliance Audit: Brainstorming meeting with investigators Planning Auditors meet with investigators to discuss planned objectives, brainstorm potential fraud risks, and develop fraud questions for planning interviews Identified relevant fraud questions: How do you ensure all complaints are captured? How do you know that an inspection is actually conducted for a complaint? For supervisors: What do you do to keep inspectors from working cases involving friends or family? For inspectors: Have you conducted an inspection of a friend s property? Have you ever been asked not to cite a particular property for a violation?

13 Sidebar: Generic Fraud Questions Are you aware of any fraud, waste, or abuse as it pertains to this audit or department? Sidebar: Generic Fraud Questions Are you aware of any fraud, waste, or abuse as it pertains to this audit or department? Tell me about a time when management made an exception. How would someone override the system without anyone else knowing?

14 Sidebar: Generic Fraud Questions If someone wanted to commit fraud here, how would they do it? Are there any transactions that you feel are handled differently than other similar transactions? Is there anyone here who has family in the business? Code Compliance Audit: Brainstorming meeting with investigators Planning Auditors meet with investigators to discuss planned objectives, brainstorm potential fraud risks, and develop fraud questions for planning interviews Discussed possible fieldwork tests: Review similar cases for the same inspector and different inspectors to identify outlier behaviors Review warnings versus citations ratios across inspectors Check with the Police Department about any bribery or corruption investigations involving Code inspectors Be alert to potential falsification of inspection documentation Analyze inspections data for a sample of inspectors to determine whether they inspected relatives properties

15 Code Compliance Audit: Conducted fieldwork Fieldwork Asked fraud questions as part of interviews Conducted recommended fieldwork tests related to potential fraud Gave out fraud hotline cards Checked in with investigators as needed Business card advertising

16 Code Compliance Audit: Fraud-related issues in final report Reporting Recap You must consider fraud risks in planning It s helpful to look at past incidents for context Avoid generic, boiler-plate interview questions Tailor your fieldwork to address some of the risks of fraud you identified Report or communicate, as necessary

17 Austin s Fraud Brainstorming/ Detection Process for Audits Other Resources: ACFE Training: Conducting Internal Investigations ACFE Training: Fraud Risk Management ACFE Report to the Nations IIA Internal Auditing and Fraud Practice Guidance IIA Red Book/Yellow Book Comparison (Fraud-related Section) Austin s Fraud Brainstorming/ Detection Process for Audits Our Contact Info: Matthew Clifton: (512) matthew.clifton@austintexas.gov Corrie Stokes: (512) , corrie.stokes@austintexas.gov

18 QUESTIONS & ANSWERS Kinney Poynter Moderator Executive Director NASACT Corrie Stokes Speaker City Auditor Austin (TX) Matt Clifton Speaker Senior Investigator Austin (TX)