ACFE.IIA Presentation - The Shocking Statistic You … Legislation (cont.) • To receive an award,...
Transcript of ACFE.IIA Presentation - The Shocking Statistic You … Legislation (cont.) • To receive an award,...
The Shocking Statistic You Don't Know About Hotlines
ACFE/IIA Fraud ConferenceMarch 23, 2012
Agenda
• The Shocking Statistic
• The Complication: Dodd-Frank Act Hotline Provisions
• Going Beyond Fraud
• Rewarding Employees: How Can You Afford Not To?
• A Tip Came in…Now What?
• Outsourcing Your Hotline: Pros and Cons
• Integrated Case Studies
The Shocking Statistic
Initial Detection of Frauds
Source: ACFE Report to the Nation 2010, page 16
Small Businesses are No Different
Source: ACFE Report to the Nation 2010, page 16
By Organization Type
Source: ACFE Report to the Nation 2010, page 19
Shock and Awe
If tips & whistleblowers seem to be the lead source of initial detection,
then why…
…are Rewards for Whistleblowers the LEAST used Anti-Fraud Control?
Source: ACFE Report to the Nation 2010, page 38
The Complication:
Dodd-Frank Act hotline provisions
Dodd-Frank Legislation
• Applies to:– All Securities and Exchange Commission
(“SEC”) registrants (e.g., public companies)– Entities regulated by the Commodities
Futures Trading Commission (“CFTC”)
• Permits whistleblower awards of 10-30% of the amount of monetary sanctions in cases where they exceed $1 million
Dodd-Frank Legislation (cont.)
• To receive an award, the information must be:– “Original” (e.g., must be derived from the
whistleblower’s independent knowledge or analysis only and not known to the Commission from any other source)
• “Securities law violation” includes:– Insider trading– Fraudulent financial reporting– Foreign Corrupt Practices Act (“FCPA”)
Dodd-Frank Legislation (cont.)• Awards for everyone!
– Employees– Vendors– Customers– Investors– Financial analysts– Short-sellers– Fund managers
• Increased whistleblower protection from retaliatory employers (e.g., penalties for retaliatory employers)
Dodd-Frank Legislation (cont.)
• SEC expects to receive approximately 30,000 tips, complaints and referral submissions each year
• SEC has launched a new Tips, Complaints, and Referrals Portal
– https://denebleo.sec.gov/TCRExternal/disclaimer.xhtml
The Challenge
So, the government is offering tremendous
rewards, yet…
…the Rewards for Whistleblowers are the LEASTused Anti-Fraud Control!
Source: ACFE Report to the Nation 2010, page 38
Potential Consequences for Companies
• If employee submits a false tip to SEC, the Company may:– Endure extensive legal fees– Endure an unnecessary
investigation/negative publicity
• If employee submits a true tip to SEC, the Company may:– Endure extensive legal fees– Be investigated by the SEC (and possibly
other federal authorities)
Source: Fraud Magazine, November/December 2011
All is not lost…
• The SEC allows whistleblowers to report a fraud within their company first and still be eligible for the financial award.
– The whistleblower would have to contact the SEC within 120 days after alerting the company in order to be eligible for the reward
Source: http://www.sec.gov/news/press/2011/2011-116.htm
Case Study #1: Whistleblower Perspectives
• Accounting employee at major public company– Worked for 31 years in Company’s accounts payable
department– Received high marks for his integrity, ethics and job
performance
• Employee objected to expenses from company events at vacation resorts
• Accounting employee refused to process these event expenditures because:– He considered them improper – Thought they violated tax laws
Source: DBR Article, “Federal judge limits definition of whistleblower”, August 1, 2011
Case Study #1: Whistleblower Perspectives
• Company’s tax department later declared that some of the resort costs had been improperly categorized as business expenses
• Accounting employee was then target of internal investigation – Told to not bother with a scheduled performance
review– Went on medical leave until he was terminated
seven months later
• Accounting employee sued the company, alleging that the company retaliated against him
Source: DBR Article, “Federal judge limits definition of whistleblower”, August 1, 2011
Case Study #1: Whistleblower Perspectives
• Federal Judge ruled:– Accounting employee failed to qualify for SOX
protection because his complaint focused on:• How they should be treated for tax purposes, or • That they may have violated internal company
procedures
• The complaint never alleged it was a fraud that would harm investors
• Bottom line: Allegation must state the conduct amounts to shareholder fraud
Source: DBR Article, “Federal judge limits definition of whistleblower”, August 1, 2011
Case Study #1: Whistleblower Perspectives
The judge stated:
“A fair reading of [Accounting employee’s] e-mail demonstrates that he only recommends
that the tax department review the areas listed in the e-mail…it appears that his advice was indeed followed…nothing in the e-mail would
allow the court to draw a reasonable inference that [his] concern about proper tax and
accounting treatment was connected in any way to a concern about shareholder fraud.”
Source: DBR Article, “Federal judge limits definition of whistleblower”, August 1, 2011
Case Study #1: Lessons for Consideration
• After learning of this case and the outcome:
– What is the perception of how companies treat whistleblowers?
– How will potential whistleblowers feel about coming forward?
– Are whistleblowers more inclined to report internally or go straight to the SEC?
– If the judge ruled in favor of the whistleblower, would that have possibly changed the perception of future whistleblowers?
– What can companies do differently to encourage employees to come forward with tips without fearing retaliation?
Going Beyond Fraud
Expansion of Use• COMMON PROBLEM: Employees are concerned about
being labeled "tattletale, snitch, or whistleblower”
• SUGGESTION: Expand use of hotline to include anonymous comments regarding:
– Process improvement– Safety issues– Quality control enhancements– Human Resource suggestions– Sexual harassment– Vendor comments– General complaints – General employee suggestions
Source: Fraud Magazine, July/August 2011
Positive Spin
• COMMON PROBLEM: Employees are psychologically intimidated by potential retaliation associated with being a whistleblower
• SUGGESTIONS:– Avoid using negative words in publicizing hotline
(e.g., fraud, corruption, bribery)
– Instead, use positive language. Examples:• Responsibility• Ethics• Transparency• Efficiency• Process improvement
Source: Fraud Magazine, July/August 2011
Everyone Loves Free Stuff
• Consider giving out items with the hotline number printed on it, such as:– Mugs– Notepads– Key chains– Pens/pencils/markers– Squishy balls– Jelly bean containers
• Consider listing the hotline in other places, such as:– Pay stubs– Invoices– Training materials– New hire packages– Email signatures
Source: Fraud Magazine, July/August 2011
Fundamental Message
Create positive tone, image,
and energysurrounding hotline
Rewarding Employees
How can you afford not to?
Monetary Rewards
• Consider offering monetary rewards for tips that lead the company to:– Saving money through process improvement– Identifying fraud, waste, and abuse
• Monetary rewards can a percentage of the savings
• Other reward ideas:– Extra days of vacation– Tickets to sporting/recreational events– Donations to charity of their choice
Source: Fraud Magazine, July/August 2011
Rewarding Employees
Sr. management should consider publicly praising employees for performance-
improvement suggestions
– This sets the tone at the top in the organization
– More employees may be inclined to use it
– The negative stigma of a hotline will likely be minimized
– Employees may feel less intimidated when looking at the hotline posters in hallways
– Employees moral may be strengthened (e.g., they feel like their opinions are being heard)
Source: Fraud Magazine, July/August 2011
Fundamental Message
Employees who call the hotline are respectedand not the subject of
retaliation
A Tip Came in…
Now What?
Who Should Be Involved?• Setting up the hotline:
– Internal/external legal counsel– Human resources department – Public relations
• Managing Hotline:– Investigators– Internal audit– Internal/external legal counsel– Process improvement personnel– Information systems divisions– Financial accounting– Forensic Accountants/Consultants
• Various departments should open lines of communications
Source: Fraud Magazine, July/August 2011
After a Tip is Received
• For fraud related tips, consider:
– Information provided (e.g., the who, what, where, when, how, why)
– Have there been similar tips reported recently?
– Which departments need to be involved or intentionally excluded?
Source: Fraud Magazine, July/August 2011
After a Tip is Received (cont.)
– Should outside forensic accountants be consulted?
– What is the cost to investigative the tip?
– What is the cost not to investigate the tip (e.g., potential risk and exposure to the company)?
– Sorting by commonalities• Originator• Allegation• Date• Suspect Name• Location (e.g., specific plant/branch)
Source: Fraud Magazine, November/December 2011
After a Tip is Received (cont.)
• Have all departments shared tips?
• Does the suspect’s peers have similar metrics?
• Test your hotlines (e.g., report an allegation, and see what happens)
• Create a decision tree matrix– Differentiate between process improvement
and fraud tips
Source: Fraud Magazine, November/December 2011
Same Decision Tree Matrix
Source: Fraud Magazine, July/August 2011
Case Study #2:Whistleblower Allegations
• Barry Minkow founded “ZZZZ Best”– Carpet-cleaning and restoration company– Front for a Ponzi scheme– Collapsed in 1987, costing investors and
lenders $100
• After Minkow’s release from prison in 1995:– Became pastor in San Diego– Minkow began the Fraud Discovery Institute– Gained national media attention
Case Study #2: Whistleblower Allegations
• In 2009, Minkow issued a report accusing public company of fraud, including allegations:
– Irregularities in the company’s off-balance-sheet debt accounting, which he claimed was indicative of a Ponzi scheme
– Company not disclosing enough information regarding its off-balance-sheet debt to its shareholders
– Claiming that a Company executive took out a fraudulent personal loan
Case Study#2:Whistleblower Allegations
• Company’s stock plummeted after the allegations
• From January 9 (when Minkow first made his accusations) to January 22:
Company’s stock dropped from $11.57 a share to $6.55
Case Study #2: Whistleblower Allegations
• The Rest of the Story:– Minkow was contacted by a third party,
who had previously filed lawsuits against the Company for fraud
• Both lawsuits were ruled in the Company’s favor
– The Plan:• Drive down the Company stock
through fictitious allegations • Minkow sent his allegations to
the FBI, IRS, and SEC
Case Study #2: Whistleblower Allegations
• The Rest of the Story (cont.):– Minkow shorted the Company stock, buying
$20,000 of options (betting stock would fall)
– He also bought Company stock after his allegations were released
• Minkow was:– Sentenced to 5 years in prison– Ordered to pay the Company $583.5 million
in restitution
Case Study #2: Whistleblower Allegations
Guess who was the fraud specialist for the Company when Minkowhurled his allegations?
Case Study #2: Whistleblower Allegations
• Lessons to Consider:– Allegations alone do not mean there is
necessarily a fraud– After a tip/allegation comes in, it must
be treated seriously• Can not be discounted, even if the
accuser has a history of frauds– Mere allegations can cost a company
significant market share and reputational damage
– Are all tips/allegations treated equally?
Case Study #2: Whistleblower Allegations
“Where there is smoke, there is usually some sort
of fire.”
The question is: Where is the fire?
Outsourcing Your Hotline
Pros and Cons
Should you outsource your hotline or keep it in-house?
• Considerations:
– Confidentiality/data protection– Resources– Costs– Call volume– International audience– Time allocated for following up on a
tip– Industry-specific regulations/laws
Outsourcing the Hotline: Pros• No need to re-invent the wheel
• Resources trained to draw information from tipster
• Company is released from tedious burden of:– Receipt– Documentation– Retention
• Perception that company is unbiased in its evaluation of tips
• Employees may feel confident they are truly “anonymous”
• Possible reduction in cost/resources in running the hotline
• Multiple languages/jurisdictions may be supported
Outsourcing the Hotline: Cons
• Possible loss of attorney-client privilege
• If federal investigation, third party is not bound by company policy
• Third party may be unfamiliar with company culture (e.g., to eliminate false positives)
• Companies may not be able to monitor tips as closely as they may like
• May be a lengthy process to find the right third party for the company's needs and budget
Case Study #3: Olympus Olympus is a maker of cameras and medical equipment
Michael Woodford worked for Olympus for 30 years– Moved up in the rankings:
• Low-ranking salesman • President of Olympus European operations• CEO
– Woodford was only CEO for two weeks before he was fired
• Woodford became aware of articles published in FACTA– A little-known Japanese publication with only 9 staff
Case Study #3: Olympus
• July 2011: FACTA published an article questioning exorbitant fees Olympus paid consultants and extravagant purchase prices of three small companies
– Advisory fees of $687 million paid in 2008 for the purchase of Gyrus, a UK medical instruments firm
– $773 million paid for three small Japanese companies (each with fewer than 50 employees):
• Face cream maker• Plastic container maker• Recycling business
Case Study #3: Olympus
• Deceptive accounting practice is known as “tobashi” in Japan
– Companies hide losses by selling bad assets (e.g., investments that went bad) to other companies
– Buy them back in good times using “advisory fees”
– Losses were incorrectly reported (in wrong period) to hide the true nature of the losses
Case Study #3: Olympus• August 2011:
– Chairman Tsuyoshi Kikukawa:• Woodford questioned Chairman Tsuyoshi Kikukawa• Kikukawa said, “You are president, you are too
busy.”• Asked if the allegations in the article were true,
Woodford claims Kikukawa said: “Most of it -- but we've made some provisions.”
– Executive vice president Hisashi Mori:• Woodford asked Mori about the transactions. • Frustrated by the responses, Woodford says he
asked: “Mr. Mori, who do you work for?”• He said, “Michael, I work for Mr. Kikukawa, I'm
loyal to Mr. Kikukawa”
Case Study #3: Olympus September 2011: FACTA published new article alluding to
possible Japanese mafia involvement (the Yakuza)
Woodford wrote several emails of his concerns to: Kikukawa Mori Entire Board of Directors Outside auditors
Case Study #3: Olympus October 2011: Woodford asked for Kikukawa and Mori to
resign
Instead, the board of directors fired Woodford
Woodford was asked to: Turn over the keys to the company apartment Return his phones and computers Told he couldn't use the company car to get to
the airport – he would have to use the shuttle bus
Case Study #3: Olympus November 2011:
New president Shuichi Takayama admits: Company’s accounting practice was "inappropriate" Money had been used to cover losses on investments
dating to the 1990s (fraud was over 2 decades old!)
The company blamed the inappropriate accounting on: Former president Tsuyoshi Kikukawa Auditor Hideo Yamada Executive vice president Hisashi Mori
The stock price tumbled 70% in three weeks
Case Study #3: Olympus• Lessons to Consider:
– Tone at the top can make or break a company
– Who sets the tone at a company:• BOD? Audit committee? CEO? Anyone else?
– If the CEO can’t be an effective whistleblower, who can?
– If Olympus had a better tone at the top, is it likely this fraud would have emerged earlier?
– Are employers who don’t reward whistleblowers at a disadvantage?
What can CFE’s and Internal Audit department’s do?
– Ensure company hotline program is comprehensive • Available 24/7 and in all languages• Tips can be reported anonymously• Availability to report via phone/email/Internet
– Strong Tone at the Top • Sr. Management should want to hear from you!• If employees fear retaliation, something is wrong• Encourage company to create positive tone,
image, and energy surrounding hotline
– Swift Responses• Company responses should be timely/credible • Company should consider publicizing cases
where hotline was utilized and had success
SummaryTips are the lead source of fraud detection,
yet rewards for whistleblowers are the least used Anti-Fraud Control
• Dodd-Frank legislation complicates matters
• Suggestions to improve hotline:– Expand use to include process improvement– Create positive tone, image, and energy– Consider rewarding employees
• After a tip is received, consider all variables and situations
• Outsourcing your hotline has pros and cons; no one size fits all
• Tone at the top has the potential to make or break your company
Contact Information
Craig Hirsch, CPA, CFE, CAMSManager, Forensic & Regulatory Compliance Kaufman, Rossin & Co., P.A. Phone: 305-646-6067 Email: [email protected]