COVERAGE FRAUD IN EMPLOYEE BENEFIT PLANS 5/15/2014. Where employee benefit fraud is likely. Internal controls that help prevent fraud

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1 FRAUD IN EMPLOYEE BENEFIT PLANS COVERAGE Where employee benefit fraud is likely Internal controls that help prevent fraud What should management have done? Schemes and war stories 1

2 FRAUD TRIANGLE Incentive/pressure Opportunity Rationalization WHERE IS FRAUD LIKELY IN AN EMPLOYEE BENEFIT PLAN? Contributions Benefits Investments Participant data Administrative expenses 2

3 IMPACT OF FRAUD ON HEALTH AND WELFARE PLANS In 2007 in the United States $2.26 trillion spent on health care Four billion health care claims Estimates of Fraud Percentage Dollars Claims 3% $67.8 billion 120 million 10% $ 226 billion 400 million 12% $271.2 billion 480 million Opinion of experts Main driver is provider fraud Billing for services not delivered Unnecessary services and products Pay no attention to explanations of benefits (EOB) Does not include fraud in life, disability and auto claims DEFINITION AND TYPES OF FRAUD Definition of Fraud False representation In reference to a material fact Made with the knowledge of its falsity With the intent to deceive On which an action is taken in justifiable reliance on the representation with resulting damage Criminal v. Civil Fraud Types of Fraud Misappropriation of assets Fraudulent financial reporting Identify theft 3

4 SAS NO. 99 CONSIDERATION OF FRAUD IN A FINANCIAL STATEMENT AUDIT Brainstorming session Emphasis on inquiry Expanded use of analytics Assume improper revenue recognition is a fraud risk Test for management override of controls Consider bias in accounting estimates FRAUD IN CONTRIBUTIONS Delinquent contributions Deficiencies Omission of covered employees Omission of covered wages Improper inclusion of individuals Division of employee contributions Multiemployer plans Alter ego Shortage of hours reported 4

5 WHERE FRAUD IS LIKELY IN BENEFIT DISBURSEMENTS Pension Annuity Health FRAUD IN PENSION DISBURSEMENTS Deceased pensioners Phony pensioners Manipulation of pension calculation 5

6 FRAUD IN ANNUITY DISBURSEMENTS Fictitious annuitants Theft of unclaimed annuity benefits Interception of annuity checks FRAUD IN HEALTH BENEFITS DISBURSEMENTS Health claims Sweetheart deals with network providers General kickbacks Money Items of value Non transmittal of appropriate rebates and discounts 6

7 HEALTH CLAIMS Rejection of valid claims Claims by service providers Unbundling Upcoding Performance of unnecessary services Referral kickbacks from providers Duplicate claims Claims by Participants Claims for invalid dependents Phony out of pocket expenses Duplicate claims Duplicate coverage WHERE FRAUD IS LIKELY IN PLAN EXPENSES Inflated professional fees Fictitious employees Unreasonable allocation of shared expenses Inflated purchase prices Fictitious payments for goods and services Inflated travel expense Kickbacks Inflated payroll tax deposits 7

8 WHERE FRAUD IS LIKELY IN PLAN EXPENSES (CONT.) Personal use of computer equipment Inflated salaries Personal expenses paid by fund Improper use of credit card points awards WHERE FRAUD IS LIKELY IN INVESTMENTS Unauthorized transfers from investment accounts Diversions of investment income Investments with no substance Kickbacks Self dealing investment transactions 8

9 WHERE FRAUD IS LIKELY IN PARTICIPANT DATA Improper allocation of contributions/ investments income Phony participants All contributions or income not allocated Participant balances dropped HOW TO PREVENT FRAUD 9

10 ADOPTION AND MAINTENANCE OF POLICIES AND COMMITTEES Policies Code of conduct Investment policy Whistle blower policy Collection policy Travel and expense policy Committees Investment committee Collection committee Audit committee GENERAL CONTROLS Separation of duties Personnel competency and integrity Authorization Recording proper amount, account, accounting period Confirmation or comparison Limited access 10

11 SPECIFIC CONTROLS A PLAN MUST HAVE Separate eligibility from claims Separate cash receipts from posting remittances Two signatures on checks Due diligence on investment managers Trustees and administrator reimbursement Professional fees Claims testing and verification LARRY S LAWS OF LARCENY Lapping had nothing to with the Daytona 500. Kiting isn t a windy March past time. Double entry bookkeeping doesn t produce a double set of books. Larceny often starts with American Express charges. The auditor can t find what isn t on the books. The petty thief always gets greedy The dishonest employer often starts with the pension contribution. The smart crook makes the abnormal look normal. Sloppiness is the sign of an intelligent crook. 11

12 LARRY S LAWS OF LARCENY The confusing transaction is often a fraudulent transaction. Beware of the long term trusted employee who doesn t taken vacations. A perfect set of books can mask the prefect crime. There is no computer crime The computer just allows the crooks to steal faster and bigger. Beware of the person who says he had nothing to hide. Martha Stewart knows nothing about window dressing. Julia Child isn t into cooking books. Investment income disappears if you don t account for it. Two signature on a check may be no better than one. LARRY S LAWS OF LARCENY A P.O Box address is often an empty shell. A lazy crook never buys more than one receipt book. Does it matter who entered the new vendor on the system? You can t always tell phony documents by its looks. Petty cast sometimes isn t. You can drive a Mack truck though an internal control hole. Positive pay prevents problems. Scan the payee line on checks cleared. The monthly bank statement you print on line is not as good as the one you got in the mail. 12

13 A FRAUD STORY SELECTION OF AN INVESTMENT ADVISOR Plan sent RFP for new Investment Advisor Plan selected new Investment Advisor Relative of Trustee went to work for Investment Advisor Relative paid six figures annually for no work. Suggested audit procedure: Have Investment Advisors confirm annually that no conflict of interest exist. A FRAUD STORY BEWARE OF THE SIGNATURE STAMP Bookkeeper for third party administrator Had access to blank checks stock and the signature stamp. Stole more than $470,000 over a nine year period Suggested control: Dispose of this signature stamp. 13

14 A FRAUD STORY THE CONTRIBUTIONS STOPPED For five years failed to make semi annual payments to profit sharing account. Created phony accounts and falsified bank accounts. Embezzled over $270,000 Falsified Vanguard statements Control failure: No Separation of Duties. A FRAUD STORY A VACATION TO REMEMBER Employee of Third Party Administrator diverted vacation fund payments of over $550,000 to herself. Made herself payable on over 400 checks over a four year period. 14

15 A VACATION TO REMEMBER (CONT.) INTERNAL CONTROLS VIOLATED No adequate separation duties Fraudster realized no one looked at payee line on returned checks. Vacation fund balances not tied to net assets Fraudster had access to bank reconciliations. Bank reconciliations never reviewed. QUESTIONS? 15