Mitigating Fraud June 22, 2016 Sept. 21, 2014
Agenda Overview of the 2016 Report to the Nations on Occupational Fraud and Abuse Real Life Fraud Cases Mitigation Tools Lone Star College s Ethics Hotline
Association of Certified Fraud Examiners 2016 Report to the Nations
Executive Summary Based on information provided by certified fraud examiners from 114 countries 2,410 fraud cases investigated between January 2014 and October 2015 The CFEs who participated in our survey estimated that the typical organization loses 5% of revenues in a given year as a result of fraud.
Fraud Losses
Types of Fraud Asset misappropriation was by far the most common form of occupational fraud, occurring in more than 83% of cases, but causing the smallest median loss of $125,000. Financial statement fraud was on the other end of the spectrum, occurring in less than 10% of cases but causing a median loss of $975,000. Corruption cases fell in the middle, with 35.4% of cases and a median loss of $200,000.
Most Common Occupational Fraud
Interesting Stats More occupational frauds originated in the accounting department (16.6%) than in any other business unit. In 94.5% of the cases in our study, the perpetrator took some efforts to conceal the fraud. The most common concealment methods were creating and altering physical documents.
Length of Time
Asset Misappropration Asset Misappropriation is a more frequent type of fraud, however, it is also the least costly type of fraud. Schemes include: Skimming Refunds Write offs Lapping Larceny Theft of equipment Fraudulent disbursements Billing Schemes
Asset Misappropriation Schemes
Corruption Corruption includes: Bid rigging Bribery Collusion (price setting) Kickbacks Conflicts of interest Illegal gratuities Fraud Indicators for Corruption: Circumventing established procurement procedures Vendor complaints
Most Common Concealment Methods
Initial Detection
Reporting Mechanisms
Source of Tips
Case Study #1 Housing Authority Fraud High level agency official worked with a bank president friend to falsify loan documents for nonexistent borrowers Over 3 years, 27 loans and received $1M in loan proceeds. Sentenced to 12 years plus restitution.
Victim Organizations
Anti-Fraud Controls
Reporting Mechanism
Fraud Perpetrators
Perpetrator s Criminal Background
Action Taken Against Perpetrator
Fraud Triangle Opportunity is the only element that an organization can control
Behavioral Red Flags In effort to limit loss due to fraud, it is important for employers to be aware of certain behavioral red flags that employees display when they are engaged in fraudulent activity.
Living Beyond One s Means Red Flag #1 Living Large
Red Flag #2 Financial Difficulty Warning signs of financial difficulties Known legal or financial issues Excessive phone calls from debt collectors Sick family member Affairs or divorce Child custody battle Borrowing money from co-workers
Red Flag #3 Refusing to Take Time Off For fear of detection, employees committing fraud often refuse to take time off Refusing to delegate Refusing help when an employee is clearly overloaded Refuse a promotion When an employee is out, it is important that another employee performs their functions
Internal Controls Preventative vs. Detective Preventative Control - A key control that prevents misstatements from occurring, whether due to fraud or error. Detective Control A mitigating control, in the absence of a key control, that will detect a misstatement, whether due to fraud or error.
Construction Triangle Schedule Quality Cost Remember the tendency to focus too heavily on only two of these three areas will cause the third to suffer.
Fraud Risks Capital Projects Construction Projects Areas of risk Billing for equipment or labor at higher rates than agreed upon Billing for costs not associated with the project Intentional mathematical errors on pay application Material substitution Failure to credit for unused materials Overpricing change orders
Case Study #2 Construction Fraud University of Texas San Antonio (August 2013) Three contractors and a former project manager indicted on charges they committed more than $1 million in fraud through bid rigging scheme 17 count federal indictment Rigged and inflated bids Kept contracts under $25,000 threshold for formal sealed bid Same three companies would respond Only one company was real Reported by an anonymous caller to fraud hotline at UTSA
Lessons Learned Primary internal control weaknesses of victim organizations with greater than 100 employees: Lack of internal controls Override of existing internal controls Lack of management review Poor tone at the top Lack of competent personnel in oversight roles Lack of independent checks/audit Lack of clear lines of authority Lack of employee fraud education Lack of reporting mechanism
Recommended Mitigation Tools External Audit of Financial Statements Management Certification of Financial Statements Code of Conduct Anti-Fraud Policy Fraud Training Internal Audit Department Independent Audit Committee Hotline Management Review Employee Support Program Surprise Audit Data Monitoring/Analysis Job Rotation/Mandatory Vacation Fraud Department/Function Formal Fraud Risk Assessment
Lone Star College Ethics Hotline Home Page
Lone Star College Ethics Hotline Categories Academic Affairs Accounting and Financial Human Resources Information Technology Research Risk and Safety Matters Other
Why implement a Hotline? Chancellor initiative Good business practice Demonstrates fiscal responsibility Serves as a deterrent to fraud, waste, and abuse Inspires confidence with stakeholders Creates a culture that values ethical behavior Ability to deal with problems internally Leverages small internal audit department
Third Party Hotline Provider NavexGlobal EthicsPoint Hotline available 24/7/365 Web and phone based Multilingual Ability to follow-up and communicate anonymously Case management and reporting capability Advanced analytics module
Lone Star College Ethics Hotline Hotline launched 9/1/2015 Managed by Chief of Staff Less than 30 cases received to date Most have been complaints related to Human Resources
Closing Questions? diane.novak@lonestar.edu Special Thanks to Whitley Penn, LLP