OAPT June 9, Deterring Fraud and the Latest Fraud Schemes in Public Entities TAKE AWAY #1

Transcription

1 OAPT June 9, 2015 Deterring Fraud and the Latest Fraud Schemes in Public Entities TAKE AWAY #1 Fraud can happen at any entity, at any time with the right circumstance Be Vigilant and Skeptical of what is going on in your organization. 1

2 Red Flags to Watch For: Complaints from Taxpayers Infrequent/late financial reporting Frequently behind on reconciliations by more than a month or two Unexplained variances between budget and actual amounts Abnormal changes in account balances Cressey s Fraud Triangle Opportunity Pressure/Incentive Rationalization Source: ACFE 2012 Report to the Nations on Occupational Fraud and Abuse 2

3 Pressure/Incentive Lost job by family member Reduced pay/benefits/insurance Additional responsibility caused by R.I.F. Addictions Debt: mortgage, car, credit card Opportunities Impact of cutbacks: Knowledge is lost Less segregated duties created by R.I.F. Less review by supervisory team Established controls not being used IT security controls overridden without being detected New vendors not investigated 3

4 Rationalization They owe me I deserve it I ll pay it back It s not their money anyway They don t need it It won t hurt anyone I have no other choice Water/Sewer District Recent Case #1 One Clerk who did billing, collections through the Utility System and controlled the Budgetary system, deposit preparation (someone else took them to the bank=main internal control) and reconciliations Change in Utility system approximately 4 years ago; Management had no idea what happened to the old system and never did recover it No cash flow issues, so no suspicion of fraud Same customers paid with cash routinely; customer accounts adjusted and monies diverted 4

5 Recent Cases Risk Response Utility payments (or any outside collections) Require System generated report with pay-in to budgetary system Require month-end system report at least randomly Review of adjustments What accounts, how frequently and who is making them Segregate duties as much as possible City Police Department Recent Case #2 Police officer orders personal items and has them shipped directly to city Typical Practice Historically costs charged to individual Purchases made to vendor without a Purchase Order Personal expenses were charged to the City and officer did not reimburse the City to date (total roughly $7,000); however, City had not yet paid bills 5

6 Recent Cases Risk Response Look at payments being made to vendors with NO Purchase Order Typically these payments consist of refunds Require POs for all purchases unless clearly documented otherwise (i.e. refunds) Someone other than the person requisitioning approve the receipt of the good or service Recent Case #3 Township Clerk retired suddenly and new clerk found irregularities Checks written to Clerk, PayPal and related companies Paid for personal expenses from Township funds Paid for cable bills, family cell phone bills Rubber Stamp with Trustee names used Overpaid salary through payroll by over $23,000 Went back to using paper records when took office rather than maintaining UAN UAN/hard-drive erased Finding for over $100,000 6

7 Recent Cases Risk Response Bank Statements and cancelled check copies mailed to Board President or Audit Committee Review cancelled check copies Someone other than clerk prepare reconciliation or at least someone review and approve Do NOT allow use of Rubber Signature Stamps Trustees or equivalent to review and approve expenses Inherent High Risk Areas Fees Receipts Utility and Income Tax Payments Outside cash collections or related organization Foundations Credit/Purchase Card Expenses Central Garage or Other Storage Locations Fake Vendors Payroll With-holdings 7

8 TAKE AWAY #2 Fraud can happen at any entity, at any time with the right circumstance Consider doing a Fraud Risk Assessment even if it s informal. i.e. Start talking about where fraud might happen. Types of cases at risk Government and Public Administration % of Cases Corruption 36.2% Billing 19.1% Expense Reimbursements 12.8% Non-Cash 17.7% Larceny 10.6% Check Tampering 5.7% Skimming Cash on Hand 11.3% 12.1% Payroll 15.6% Financial Statement Fraud 5.0% Register Disbursements 0.7% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% Source: ACFE 2014 Report to the Nations on Occupational Fraud and Abuse 8

9 Detection in US (1,001 cases) Tip 42.2% Management Review Internal Audit 14.1% 16.0% By Accident Account Reconciliation 6.8% 6.6% Document Examination External Audit Notified by Police Surveillance/Monitoring IT Controls Confession 4.2% 3.0% 2.2% 2.6% 1.1% 0.8% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% Source: ACFE 2014 Report to the Nations on Occupational Fraud and Abuse Perpetrator s Age 25.0% 20.0% 15.0% 19.6% 18.1% 17.6% 18.0% 15.9% 16.1% 14.6% 13.5% 11.3% % 9.8% 9.0% 9.8% % 3.9% 5.8% 5.4% 5.2% 3.4% 3.1% 0.0% < >60 Source: ACFE 2014 Report to the Nations on Occupational Fraud and Abuse 9

10 Position of Perpetrator - Based on Gender Employee 44.1% 55.9% Manager 29.5% 70.5% Female Male Owner/Executive 17.1% 82.9% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% Source: ACFE 2014 Report to the Nations on Occupational Fraud and Abuse Tenure of Perpetrator 45.0% 40.0% 40.7% 41.5% 35.0% 30.0% 25.0% 27.3% 27.2% 25.2% 25.3% % % 10.0% 5.0% 6.8% 5.9% 0.0% < 1 Year 1-5 Years 6-10 Years >10 Years Source: ACFE 2014 Report to the Nations on Occupational Fraud and Abuse 10

11 Schemes from Perpetrators working in Accounting Department Accounting Check Tampering 35.7% Billing 31.3% Skimming Cash Larceny Payroll Cash on Hand 18.3% 19.1% 18.7% 18.7% 2014 Expense Reimbursement 15.7% Corruption 22.2% Non-Cash Financial Statement Fraud 7.8% 8.3% Register Disbursements 3.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% Source: ACFE 2014 Report to the Nations on Occupational Fraud and Abuse Schemes from Perpetrators in Executive or Upper Management Corruption Billing Expense Reimbursement Non-Cash Payroll Check Tampering Financial Statement Fraud Skimming Cash on Hand Cash Larceny Register Disbursements 18.3% 21.2% 16.1% 15.4% 14.3% 10.9% 13.8% 13.8% 10.9% 12.5% 9.0% 11.6% 7.7% 1.3% 2.6% 29.9% 26.9% 26.3% 35.9% 40.6% 48.7% 51.9% % 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% Source: ACFE 2014 Report to the Nations on Occupational Fraud and Abuse 11

12 Behavioral Red Flags UNITED STATES CASES Percent Behavioral Red Flag of Cases Living beyond means 43.8% Financial difficulties 33.0% Unusually close association with vendor/customer 21.8% Control issues, unwillingness to share duties 21.1% Wheeler-dealer attitude 18.4% Divorce/family problems 16.8% Irritability, suspiciousness or defensiveness 15.0% Addiction problems 11.6% Complaining about inadequate pay 9.4% Past employment-related problems 8.9% Refusal to take vacations 8.6% Excessive pressure from within organization 8.4% Social isolation 7.4% Complaining about lack of authority 6.5% Excessive family/peer pressure 6.0% Instability in life circumstances 5.9% Past legal problems 5.6% Source: ACFE 2014 Report to the Nations on Occupational Fraud and Abuse CASE STUDY/GROUP EXERCISE See Handout Provided 12

13 Recent Case #4 Clerk of Courts #1 Cash collections taken although booked to system Covered tracks by including Deposits in Transit on cash reconciliation Note: Deposits in Transit are RARE for a cash basis entity Clerk of Courts #2 Required employees to do Political work on County time Allowed employees to track off-the books comp-time for the work the political work they were doing during normal hours Vendor prepared false invoices to cover personal expenses Recent Cases Risk Response Segregation of Duties double check of reconciliations Allow open lines of communication for employees to share concerns 13

14 External Fraud Individuals external to entity perpetrating fraud most commonly through IT systems Examples: Crypto Locker, False Wire Transfers Risk Response Daily back ups of financial information Store back ups off site Periodically test the back up Formal Disaster Recovery Plan Must also be tested! Dual Authentication Follow Bank Policy or you could be liable Best Practice - Vendor Files What needs done to vendor s files Clean vendor file annually Vendor approval process Training Google new vendor requests IT controls limiting access 14

15 Best Practice - Effective Fraud Deterrents Written Fraud Policy Policy sets expectations Zero Tolerance Review and sign-off by each employee for personnel file Include Reporting Process Whistleblower Protection Issues addressed consistently and timely Ethics Policy, Conflict of Interest Policy Training Continuous Risk Assessment Best Practice: Steps to Reduce Fraud Risk Fraud risk analysis performed Educate Tone at the Top Conflict Disclosures (Council and Management) Establish whistle-blower hotlines Rotation of job duties Review and Update Insurance Policies/Bonding including Cyber Insurance 15

16 Best Practice: Steps to Reduce Fraud Risk Zero tolerance Background checks for new hires don t hire crooks Keep eyes and ears open regarding employee behavior Discuss concerns with auditors Establish effective Internal Audit division Use of Data Mining Software Surprise audits Special Note Auditor of State issued DRAFT Bulletin ( ) on Abuse Standards Make sure you read this Currently in comment period and asking for comments through 6/18/15: DraftBulletinComments@ohioauditor.gov 16

17 Questions? Contact: Don McIntosh, Principal PH: Mindee Johnson, Senior Manager PH: