Catch Me If You Can. Fraud in Local Government. CITY & COUNTY OF SAN FRANCISCO Office of the Controller Audits Division

Transcription

1 Catch Me If You Can Fraud in Local Government CITY & COUNTY OF SAN FRANCISCO Office of the Controller Audits Division Steve Flaherty, Principal Investigator

2 2 Disclaimer Any names or incidents portrayed in this presentation are fictitious. No identification with actual persons (living or deceased) or City and County of San Francisco departments is intended or should be inferred.

3 3 Objectives Today we will Discuss who commits fraud and their motivations Review common and costly occupational fraud schemes Discuss scenarios to demonstrate the potential for fraud in local government

4 4 What is Fraud? 2018 Yellow Book Fraud involves obtaining something of value through willful misrepresentation. Whether an act is, in fact, fraud is determined through the judicial or other adjudicative system and is beyond auditors professional responsibility. Whether a particular act is, in fact, fraud may have to await final determination by a court of law or other adjudicative body.

5 5 Who Commits Fraud? Internal (Occupational) Fraud Employees Managers Executives Commissioners Examples of internal fraud include: Theft of Cash Payroll Schemes Expense Reimbursement Schemes Misuse of Inventory or Property Conflicts of Interest Bribery Gratuities Financial Statement Fraud External Fraud Vendors Customers Beneficiaries Other External Third Parties Examples of external fraud include: Hacking Insurance Fraud Healthcare Fraud Theft of Intellectual Property

6 6 Why Commit Fraud? Per Dr. Donald Cressey, individuals violate trust when: They have non-shareable financial problems PERCEIVED MOTIVATION They believe the problem can be secretly resolved by violating their position of trust PERCEIVED OPPORTUNITY They apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property RATIONALIZATION

7 7 Why Commit Fraud? The fraud triangle originated from Donald Cressey's hypothesis

8 8 Victims of Government Fraud Government departments and their employees Reputational damage Taxpayers Loss of confidence Beneficiaries of government funds Loss of access to services and support

9 9 Fraud Quiz From the Association of Certified Fraud Examiners 2018 Report to the Nations

10 10 Asset Misappropriation An asset can be misused or stolen Theft of inventory or cash Using work equipment for personal purposes on work time Extremely common, but usually the least costly Occurred 23% of the time with corruption fraud (ACFE 2018 Report to the Nations) Frequently caused by a lack of internal controls and lack of management review Can be mitigated by segregation of duties, physical safeguards, record keeping systems, and monitoring

11 11 Asset Misappropriation Scenario A tenured warehouse manager has full responsibility for all inventory related matters and warehouse security. This employee uses their position to steal copper parts late in the afternoon when most of the other employees have gone home. Would an audit uncover this behavior? What controls would you recommend?

12 12 Corruption One of the most significant fraud risks for any organization in any industry in any geographic region Can take the form of: Bribery Conflicts of Interest Gratuities The costliest occupational fraud Red flags include close associations with vendors and contractors More likely than other schemes to involve an override of existing controls

13 13 Corruption Scenario A purchaser obtains quotes from suppliers on behalf of operations staff. The purchaser is tenured in their role, trusted, and their recommendations of suppliers are consistently accepted. Unbeknownst to management, one supplier provides an allexpenses fishing trip each year to the purchaser as a thank you for the business. What s wrong with this scenario? Would an audit uncover this behavior? What controls would you recommend?

14 14 Final Words Recognize that fraud can occur in any organization Regularly promote your fraud hotline Keep up on fraud trends schemes may not change, but fraud vectors can

15 15 Thank you. Any questions? You can reach me at