Fraud and AbuseFraud and AbuseDon Pursley, Don Pursley, Col Ret. USAFA, BSE, MS, Col Ret. USAFA, BSE, MS,

DBADBAThe speaker does not have any relevant financial relationships with any commercial interests

Are You Losing Assets?Are You Losing Assets?

Association of Certified Fraud Association of Certified Fraud ExaminersExaminers

“ “ Report to the Nations on Report to the Nations on Occupational Fraud and Occupational Fraud and

Abuse”Abuse”

2014 Global Fraud Study2014 Global Fraud Study

““It Does Not Happen in My It Does Not Happen in My Country”Country”

““These offenses occurred in These offenses occurred in over 100 countries on six over 100 countries on six

continents…”continents…”ACFE 2014 Global Fraud StudyACFE 2014 Global Fraud Study

““It Does Not Happen in My It Does Not Happen in My Country”Country”

Number one with 646 cases:Number one with 646 cases:United StatesUnited States

Number two with 173 cases:Number two with 173 cases:Sub-Saharan AfricaSub-Saharan Africa

2014 Global Fraud Study2014 Global Fraud Study

Three Questions To AnswerThree Questions To Answer

• What Is Occupational Fraud?What Is Occupational Fraud?

• How Do You Detect Occupational Fraud?How Do You Detect Occupational Fraud?

• What Do You Do To Prevent What Do You Do To Prevent Occupational Fraud?Occupational Fraud?

Case StudiesCase Studies

What Is Occupational Fraud?What Is Occupational Fraud?

““The use of one’s occupation The use of one’s occupation for personal enrichment for personal enrichment through the deliberate through the deliberate misuse or misapplication of misuse or misapplication of the employing organization’s the employing organization’s resources or assets”resources or assets”

ACFE 2014 GLOBAL FRAUD STUDYACFE 2014 GLOBAL FRAUD STUDY

How Do You Detect How Do You Detect Fraud?Fraud?

Behavioral Red FlagsACFE 2014 GLOBAL HEALTH STUDY

33%

30%

12%

11%

8%

9%5%

Living Beyond Means Financial Difficulties Close Association with Vendor

Unwillingness to Share Duties Wheller-Dealer Attitude Complaining About Indequate Pay

Complaining About Lack of Authority

Initial DetectionACFE 2014 GLOBAL FRAUD STUDY

43%

15%

14%

7%

5%

4%

3%3%

2%2%1%1%

Tip Management Review Internal Audit

By Accident Account Reconcilliation Document Examination

External Audit Notified by Police Surveilance/Monitoring

Confession IT Controls Other

How Do You Detect?How Do You Detect?

• TipTip• Management ReviewManagement Review• Internal AuditInternal Audit• By AccidentBy Accident• Account ReconciliationAccount Reconciliation

86%86%

What Do You Do?What Do You Do?

1.1. External AuditExternal Audit

2.2. Code of ConductCode of Conduct

3.3. Internal AuditInternal Audit

4.4. Independent Audit CommitteeIndependent Audit Committee

What Do You Do?What Do You Do?

5.5. Hotline Hotline

6.6. Fraud Training for Managers/Executives Fraud Training for Managers/Executives

7.7. Fraud Training for Employees Fraud Training for Employees

8.8. Anti-fraud Policy Anti-fraud Policy

What Do You Do?What Do You Do?

9.9. Surprise Audits Surprise Audits

10.10. Rewards for Whistleblowers Rewards for Whistleblowers

What Do You Do To What Do You Do To Prevent?Prevent?

• Internal Controls Internal Controls

•Auditing Auditing

•TrainingTraining

•Hot LineHot Line

Internal ControlsInternal Controls

• Segregation Of DutiesSegregation Of Duties

• Proper Authorization of Transactions and ActivitiesProper Authorization of Transactions and Activities

• Adequate Documents and Records.Adequate Documents and Records.

• Physical Control Over Assets and RecordsPhysical Control Over Assets and Records

• Independent Checks On PerformanceIndependent Checks On Performance

Segregation Of DutiesSegregation Of Duties

• The person who orders supplies is The person who orders supplies is not the same as the one who not the same as the one who receives and pays.receives and pays.

• The person who handles the asset is The person who handles the asset is different than the person who different than the person who documents.documents.

Hospital/Clinic PurchaseHospital/Clinic Purchase

ResponsibilitResponsibilityy

DutyDuty IdealIdeal

4 person4 personGoodGood

3 Person3 PersonMinimalMinimal

2 Person2 Person

Order InitiationOrder Initiation Asset HandlingAsset Handling CoworkerCoworker

11CoworkerCoworker

11CoworkerCoworker

11

Order ApprovalOrder Approval Booking/Booking/RecordingRecording

CoworkerCoworker

22CoworkerCoworker

22CoworkerCoworker

22

Confirm Confirm ReceiptReceipt

Asset HandlingAsset Handling CoworkerCoworker

33CoworkerCoworker

33CoworkerCoworker

11

Journal Journal VoucherVoucher

Booking/Booking/RecordingRecording

CoworkerCoworker

22CoworkerCoworker

22InitiationInitiation

Coworker 2Coworker 2

ApprovalApproval

Coworker 1Coworker 1

Ledger ReviewLedger Review Comparison/Comparison/ReviewReview

CoworkerCoworker

44CoworkerCoworker

33CoworkerCoworker

22

Proper AuthorizationProper Authorization

• Limits on the amount certain entities can Limits on the amount certain entities can approve.approve.

Employee up to 4,999Employee up to 4,999Department Head 5,000 - 9,999Department Head 5,000 - 9,999CFO/CMO/CNO 10,000 - 19,999CFO/CMO/CNO 10,000 - 19,999CEO 20,000 - 49,999CEO 20,000 - 49,999Board 50,000 and upBoard 50,000 and up

Random Review of RecordsRandom Review of Records

Documents and RecordsDocuments and Records

• Original documents with expense Original documents with expense reports.reports.

• Pre-numbered and consecutive Pre-numbered and consecutive documents.documents.

• Timely preparation of documentsTimely preparation of documents

Physical Control Over Assets Physical Control Over Assets and Recordsand Records

• Inventory control system.Inventory control system.

• Petty cash systemPetty cash system

• Labeling of equipment and furnitureLabeling of equipment and furniture

• Backup and recovery systemsBackup and recovery systems

Independent ChecksIndependent Checks

• Supervisor verifies accuracy of the clerk’s Supervisor verifies accuracy of the clerk’s cash drawer at the end of the day.cash drawer at the end of the day.

• Check inventory.Check inventory.

• Look for equipment.Look for equipment.

• Reconcile agency bank accounts each month.Reconcile agency bank accounts each month.

AuditingAuditing

• Independent Check on ComplianceIndependent Check on Compliance

ExternalExternalInternalInternal

DepartmentDepartmentSupervisorsSupervisors

TrainingTraining• Have writing policies.Have writing policies.

• Have a conflict of interest policy.Have a conflict of interest policy.

• Inform employees:Inform employees:1.1. Fraud hurts the organization.Fraud hurts the organization.

2.2. What is fraud.What is fraud.

3.3. If they observe fraud what should they If they observe fraud what should they do.do.

4.4. The discipline for fraud.The discipline for fraud.

What Is The Number One What Is The Number One Method of Detection?Method of Detection?

Have a safe method which Have a safe method which employees and others can employees and others can use to inform you of the use to inform you of the

potential fraud/abuse and potential fraud/abuse and remain anonymous.remain anonymous.

Hot LineHot Line

•““Perception of Detection”Perception of Detection”

•Used to report unsafe Used to report unsafe conditions and other serious conditions and other serious issues.issues.

Hot LineHot Line

Hot LineHot Line

• Around the clockAround the clock– 40% of calls are at night or on weekends40% of calls are at night or on weekends– No answer –no call backNo answer –no call back

• Caller must be allowed to be Caller must be allowed to be anonymousanonymous– Third party providerThird party provider– Trained professionalTrained professional

Suggestion BoxSuggestion Box

Summary of FindingsSummary of Findings

• 5% of revenue is lost 5% of revenue is lost

• Occupational fraud is more likely to be Occupational fraud is more likely to be detected by a tip.detected by a tip.

• Implement common anti-fraud controls.Implement common anti-fraud controls.

ACFE 2014 GLOBAL FRAUD STUDYACFE 2014 GLOBAL FRAUD STUDY

Case StudiesCase Studies

1.1. Should We Have a Financial Audit?Should We Have a Financial Audit?

2.2. Who Ordered the Furniture?Who Ordered the Furniture?

3.3. Whose X-ray Is It?Whose X-ray Is It?

4.4. Where Was The Baby Born?Where Was The Baby Born?

5.5. Where Are The Supplies?Where Are The Supplies?

6.6. Why Did the Ambulance Run Out of Why Did the Ambulance Run Out of Gas?Gas?

For Each CaseFor Each Case

• What detection method is illustrated? What detection method is illustrated?

• What should you do?What should you do?

• What changes should you make to prevent it What changes should you make to prevent it from happening again?from happening again?

• Is it a true case that happened in an Adventist Is it a true case that happened in an Adventist Hospital?Hospital?

Should We Have a Financial Audit?

You have just been appointed as the Chief Executive Officer (CEO) of Daly Adventist Hospital. It is a 45 bed hospital located in a developing country and is struggling financially. Your leadership team consists of a Chief Financial Officer (CFO), who has been at the hospital for 15 years and is an elder in the local SDA church, a Chief Medical Officer, who is a Loma Linda University trained missionary physician and a Chief Nursing Officer, who has been at the hospital for 25 years. In order for you to get a good understanding of the hospital financial position you ask the CFO for the last five years of audited financial statements. He informs you that the hospital finances have not been audited for the past 10 years. He explains to you that the General Conference Auditing Services came 8 years ago and issued a report stating that the financial records were so incomplete that they could not audit them. You meet with a local auditing firm and they inform you that they could come into the organization and establish, with some assumptions, a starting point and audit the last two years. You ask them to send you an audit agreement which would include their fees. You receive the engagement letter and the fees and you talk to the CFO. He informs you that there is not funding available to support the audit. He further states that an audit is not needed as he and his team of accountants have good records and the audit would be a waste of time. As the CEO what are you going to do?

Who Ordered The Furniture?

You are the Chief Financial Officer (CFO) of the Zumwalt Adventist Hospital (ZAH). The hospital is a large hospital with over 400 beds and is located in a developed country. The hospital is financially successful, although reimbursement from some of the insurance companies is always open for negotiation. You supervise an accounting and purchasing office of about 15 employees, all of which are practicing Seventh Day Adventists. Every year the finances of ZAH are audited by a reputable external auditor. You have never had a finding dealing with your internal controls and the financial accounts are always ready the audit. One day, while you are sitting in your office, reviewing insurance contracts you get a phone call from the President of the Pursley Furniture Company (PFC). Your organization has used this company on many occasions to purchase furniture for the hospital. The President of PFC informs you of some strange purchase orders from the ZAH. He says that numerous furniture items have been ordered by ZAH, to be paid by ZAH, but to be delivered to a private residence. He wants to know what to do about the order. As the CFO what are you going to do?

Where Are The Supplies? You are the Chief Executive Officer (CEO) of the O’Reilly Health System (OHS) in

a developing country. The system consists of two hospitals containing a total of 120 beds and 25 clinics. Some clinics are in developed cities and some are in more rural areas. The system is financially struggling. One of the hospitals is doing well financially and the other is not. Some of the clinics are financially strong and some are financially very weak. The most successful clinic is the Pursley Clinic (PC) which is located in a highly populated area and contains a dental practice and a medical family practice service. The dental practice is staffed with two dentists and the medical practice with one physician. It is well known that the physician practices medicine at the PC and has a private clinic in the same city.

In reviewing the financial statements of the system and of each clinic you see that the profitability of the PC is declining. You notice that the revenue is stable, however, the expenses are rapidly increasing particularly in the supply areas. You call the clinic administrator and ask her what is happening. She informs you that she suspects the physician is taking supplies from the clinic to use in his private practice. You immediately send a person to the clinic to conduct an audit of the supply system. The audit person calls you and informs you that the physician refuses to cooperate with the audit. The physician is an elder in the local church and is a member of the Union Executive Committee.

As the CEO what are you going to do?

Whose X-ray Is It? You are the Chief Executive (CEO) of the Acosta Adventist Hospital. This hospital is located in a developing country and is struggling financially. The hospital contains 75 beds and has a variety of medical services. The largest and most financially viable service is orthopedics. This service is supported by very successful imaging and laboratory departments. The income from these two departments support many of the medical service areas in the hospital which do not have enough revenue to cover their direct costs. One of the largest medical service contracts is with the United States Embassy. This contract amounts to over 60% of the total hospital revenue. The biggest service in this contract is to evaluate individuals for tuberculosis who are requesting visas to travel to the United States. A critical component of this evaluation is a chest x-ray. If the chest x-ray shows tuberculosis the United States will not issue a visa. The process involves the individual coming to the hospital, getting a chest x-ray, the individual is given the x-ray and the individual takes the x-ray to the Embassy for review and issuance of the visa if no tuberculosis is shown on the x-ray. One day you are in your office reviewing the hospital financial statement and you get a phone call from the United States Embassy. The representative from the embassy informs you that there is evidence that someone in the hospital imaging department is switching x-rays. If an individual's x-ray shows tuberculosis, then someone in the department is giving the individual another x-ray which is free of tuberculosis. The embassy representative informs you that they are canceling the service contract with the hospital and you will be receiving a formal letter to that effect. As the CEO what are you going to do.?

Where Was The Baby Born?

You are the Chief Executive Officer (CEO) of the Lake Adventist Hospital (LAH). LAH is a 45 bed hospital in a developing country. One of the service lines that is strong in your hospital is maternal care. Although the hospital struggles financially, the maternal care service line along with general surgery and dentistry make the hospital financially profitable. The hospital has an excellent reputation in the community for the maternal care service and it is desirable for a family to have their children born in the hospital. The hospital has just received the certification from the government as being "baby friendly". The maternal services physician is excellent and is supported by skilled midwifes and nurses. Each morning when you arrive for work at the hospital you review the nights activities in a report provided by the night charge nurse. There is one item in the report that you see as strange. The report contains the following entry: "An individual and a new born baby arrived by taxi. The individual wanted the new born check and a birth certificate issued." You go to the records area and review the records and you find that a birth certificate was issued. As the CEO do you have a problem and what are you going to do?

Why Did The Ambulance Run Out Of Gas?

You are the Chief Executive Officer of the Landless Adventist Hospital (LAH) in a developing country. LAH has 35 beds, 2 surgical theaters, a laboratory, and imaging department with ultra sound and x-ray, an outpatient area and an emergency room. One of the financially successful services that the hospital offers to the community is ambulance service. The ambulance and emergency technicians not only transport LAH patients to and from your hospital but is called upon to service other area hospitals and local events such as soccer games, evangelistic meetings and musical concerts. Financially LAH is able to maintain a balanced budget and to pay all bills in a reasonable amount of time. On early morning you are in your office having you morning devotions when there is a knock on your door. You invite the individual into your office. The person is very nervous but states that they have just witnessed something that they needed to share with you. The person tells you that as they drove into the parking lot they witnessed the head of maintenance siphoning gas from the ambulance. They said the head of maintenance was putting the gas from the ambulance into a can and then dumping the gas into his private car. As the CEO of LAH what are you going to do?

The End

Do Not Have Your Hospital/Clinic Become The Next Case Study