Fraud Risk Assessment Awareness in Employee Benefit Plans Tyler Geiman, CPA, CFE, CFF Novak Francella, LLC Phone: (443) 832-4009 Fax: (443) 393-0323 Web: www.novakfrancella.com Fraud is any intentional act or omission designed to deceive others, resulting in the victim suffering a loss and/or the perpetrator achieving a gain. Source: Managing the Business Risk of Fraud: A Practical Guide, The Institute of Internal Auditors, AICPA and ACFE 1
Two types of fraud an auditor should consider: Fraudulent Financial Reporting Misappropriation of Assets Source: AICPA Fraud Risk Factors Specific to Employee Benefit Plans Incentives/Pressures Examples Funding issues for defined benefit plans Employer/Plan sponsor ability to make contributions Management pressure based upon investment market performance Plan employee financial pressures Adverse relationships Opportunities Examples Use of estimates valuation of investments Limited internal controls/monitoring Nature of assets susceptibility of misappropriation Unqualified provider of services to the plan (auditors not attending this conference) Lack of adequate control over automated records 2
Attitudes/Rationalization Examples of red flags Domineering behavior by plan management or plan sponsor Fiduciaries have been investigated by government agencies Failure of management to have timely and adequate valuations performed (actuarial, investment portfolio) Unreasonable demands placed on auditors and nonresponsiveness of management to requests for information Inappropriate related party transactions Management disregards SAS 115 communications and other recommendations to improve plan operations and controls Auditor Responsibilities SAS No. 99 - Summary Professional skepticism Identification of risks of material misstatement due to fraud - Planning o Inquiry o Understanding of the plan and operations o Results of analytical procedures o Fraud risk factors present o Other information and circumstances Assessment of risks Response to results of the fraud risk assessment Communication and documentation Auditors Fraud Tool Box 3
Understanding the Plan Environment Operations Controls Knowledgeable Audit Personnel Assignment of personnel should be commensurate with the level of risk identified Effective brainstorming Brainstorming Who to include When to conduct Professional skepticism What to cover 4
Fraud Interviews Identification of individuals for interviews o Those charged with governance (trustees) o Management (plan administrator) o Employees (in identified risk areas) o Other (service provider TPA) Fraud Interviews - continued Conducting a quality interview o Be prepared o Set the tone o Leading questions o Response questions o Observation o Listening and attention to details Designed Procedures Unpredictability Analytical Sampling Substantive testing Journal entry review Confirmation Review of estimates Unusual transactions 5
Fraud Examples Applicable to Most Types of Plans General o Embezzlement using plan assets via wire transfers, forged checks or other means o Improper valuation of investments o Fraudulent reporting on government filings and reports to participants o Kickbacks o Insufficient participant data provided to an actuary/consultant for purposes of computing benefit obligations in a defined benefit plan Applicable to Most Types of Plans - continued Contributions o Delinquent contributions o Omission of eligible employees o Fictitious employees/participants o Intentional inappropriate definition of compensation o Misdirection/diversion of employer contributions 6
Applicable to Most Types of Plans - continued Distributions o Fictitious participants o Incorrect individual/payee o Incorrect address o Deceased participants o Manipulation of benefit calculations Applicable to Most Types of Plans - continued Administrative expenses o Bogus vendors o Altered invoices o Personal benefit expenses or reimbursements 401K/Pension Plan Specific Employee contributions and loan repayments are not remitted timely Participant eligibility for contributions Fictitious participant accounts Participant loans in excess of allowable limits 7
Health Plan Specific Failure to pay claims Fictitious claims (at the provider level and at plan level by employees) Benefits paid to ineligible individuals, dependents Misdirected payments (assignment) Improper claims calculations for the benefit of fraudster Questions? Tyler L. Geiman, CPA, CFE, CFF Novak Francella, LLC 7226 Lee DeForest Drive Suite 201 Columbia, MD 21046 Tel. 443.832.4009 Fax 443.393.0323 Email: tgeiman@novakfrancella.com 8