Shades of Fraud Today Fraud
Transcript of Shades of Fraud Today Fraud
Fifty Shades of Fraud May 24, 2018 VGFOA Conference Norfolk, VA CPE Session
Rusty Pounds, CFE
Manager – Risk Assurance
Advisory Services
SPEAKER
Fraud Today Old Wine, New
Bottles
Enterprise Risk Management
Control Maturity
Internal Audit
Fraud & Forensics
Process Transformation
Risk Advisory Services
Accounting & Compliance Readiness
Cybersecurity & Privacy
Data Analytics
Fraud & Forensics
Risk Advisory Services: Fraud & Forensics
Fraud Risk Training
Internal Review Discovery Services
Fraud Examination Services
Asset recovery
Coordination with law enforcement
Assistance with Civil, Criminal/Disciplinary
Anti-fraud control remediation
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Redefining Fraud & Financial Crime
When crimes of passion are removed from the realm of investigations, what is left?
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CRIMES OF PROFIT
Crimes for profit come in all forms, such as
shoplifting, drug dealing, burglary, armed
robbery, embezzlement, false pretense,
public corruption, human trafficking or
murder. The common thread or motivating
factor of such crimes is MONEY (financial
benefit).
Federal Sentencing Guidelines
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Career Criminal, Evolved
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RECOVERING FRAUD LOSSES
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ACFE INSIGHTS, May 2017
Whenever austerity measures are put in place, fraudsters come to the fore to prey on the desperate and needy (not to mention the greedy). The U.K., for example, recorded a whopping 25 percent increase in 2016 for reported fraud in general, much of this fueled by banking and online scams.
Most police forces across the Western world have borne the brunt of austerity measures imposed by their governments. The problem is that, as a consequence, they have inadequate resources and frontline policing must take priority. The U.K. has seen its fraud squads dismantled and specialist fraud investigators deployed elsewhere. 1 Why Law Enforcement is Not to Blame for Fraud, by Martin Kenney for ACFE INSIGHTS, Published May 2017
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ACFE INSIGHTS, May 2017
Investigating fraud is a highly specialized discipline, requiring significant training and ongoing courses designed to try to ensure that concerned detectives keep pace with a highly dynamic crime that is constantly evolving. In particular, fraud perpetrated by cyber criminals is extremely difficult to police. Not only does it require an added expertise that only few detectives possess, it also introduces cross-jurisdictional issues typically associated with this form of deception. Law enforcement agencies (and police in particular) are being blamed for failures to investigate fraud. In an ideal world, police forces would be able to open a “new box of detectives” and deploy them as demand requires. Unfortunately, this is not the case. So until there is a reinvestment in the police, fraud will continue to grow and go unpunished. 1 Why Law Enforcement is Not to Blame for Fraud, by Martin Kenney for ACFE INSIGHTS, Published May 2017
What is Fraud?
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Fraud is defined by Black’s Law Dictionary as: A knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment. 1
Consequently, fraud includes any intentional or deliberate act to deprive another of property or money by guile, deception, or other unfair means.2
1 Bryan Garner, ed., Black’s Law Dictionary. 8th Ed. (2004), s.v., “fraud.” 2 According to Association of Certified Fraud Examiners (ACFE).
Internal Fraud
External Fraud
Fraud Against individuals
Types of Fraud
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The Fraud Triangle
FRAUD
INCENTIVE Perceived Pressure
Facing Individual
OPPORTUNITY Perceived Opportunity to
Commit Fraud
RATIONALIZATION Person’s Rationalization or integrity
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How is Fraud Discovered?
Tip 42%
Management Review 16%
Internal Audit 12%
Accident 6%
Acct Reconciliation 6%
Document Examination
4%
External Audit 3%
Other 9% Tip
Management Review
Internal Audit
Accident
Acct Reconciliation
Document Examination
External Audit
Other
42% Tip
16% Management
12% Internal Audit
70%
How is Fraud Discovered?
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Irregularities & Defalcations
A typical organization loses 5% of its revenues to fraud each year
Corruption and billing schemes pose the greatest risks
The industries most victimized:
1. Banking
2. Government & Public Administration
3. Manufacturing
…are just fancy words for lying and stealing
The presence of anti-fraud controls correlates with significant
decreases in the cost and duration of the fraud schemes
Key Principles to Manage Fraud
The 5 Key Principles to proactively Manage Fraud Risk1
1. Governance Structure (i.e., Written policies)
2. Fraud risk assessment
3. Prevention controls (e.g., Segregation of Duties)
4. Detection controls ( e.g., Data Analytics)
5. A reporting process, which includes a coordinated approach
to investigation and corrective action.
1 Managing the Business - Risk of Fraud: A Practical Guide Joint Study conducted by The Institute of Internal Auditors, the
American Institute of CPAs and the Association of Certified Fraud Examiners. Published July 2008
According to the ACFE 2016 Global Fraud Study, Report to the Nations on Occupational Fraud and Abuse.
https://s3-us-west-2.amazonaws.com/acfepublic/2016-report-to-the-nations.pdf
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5 Key Principles to Manage Fraud
1. Governance
Written policies
2. Fraud risk
assessment
3. Prevention
controls
4. Detection controls
5. Reporting process,
coordinated approach to investigation / corrective
action
Managing the Business - Risk of Fraud: A Practical Guide Joint Study conducted by The Institute of Internal Auditors, the American Institute of CPAs and the Association of Certified Fraud Examiners. Published July 2008
If you could only accomplish 1 principle, which is most impactful?
2. Fraud Risk
Assessment
Common Types of Internal Fraud
Corruption • Refers to schemes in which
fraudsters use their influence in business transactions in a way that violates their duty to their employers in order to obtain a benefit for themselves
Asset Misappropriations
• Asset misappropriation schemes are frauds in which the perpetrator steals or misuses an organization’s resources
Financial Statement Fraud
• Involves the intentional misstatement or omission of material information from the organization’s financial reports these are the cases of “cooking the books or figures”
• Involves the reporting of fictitious revenues or the concealment of expenses or liabilities in order to make an organization appear more profitable than it really is.
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2016 ACFE Report to the Nations
Conflicts of interest:
Purchasing schemes
Sales schemes
Billing Schemes
Shell companies
Non-accomplice vendors
Purchasing schemes
Corruption & Billing Schemes
a. 6 months
b. 12 months
c. 18 months
d. 24 months
How long does the
average fraud go on
before it is
uncovered?
Quiz Question:
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Materiality?
Does your Org expect the audit
firms to catch fraud?
Does the board of directors expect auditors to catch
fraud?
The amount of the fraud can be
relatively small but…
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The “Fajita Bandit”, Audits & Materiality
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The “Fajita Bandit” Case
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The Fraud Triangle
FRAUD
INCENTIVE Perceived Pressure
Facing Individual
OPPORTUNITY Perceived Opportunity to
Commit Fraud
RATIONALIZATION Person’s Rationalization or integrity
Attacked from the Top: Chief Executive Officer
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Dana Cope - SEANC
CEO for State Employees Association of NC (SEANC)
Cope was CEO for 15 years
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Dana Cope - SEANC
Tip from former Treasurer
Treasurer went to media first
N&O published a story on Sunday
Monday, Wake County DA announced that she had requested an SBI investigation
Wednesday, Cope resigned
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Dana Cope - SEANC
SEANC Counsel, the CFO and the Board never questioned Cope formally regarding the allegations
The weekend that the story broke, the Counsel, CFO and a quickly empaneled “Ethics Committee” determined that Cope had done nothing wrong and put its findings on the website after 2 days of looking at credit card receipts and internal documents
The Board allowed Cope to resign with a $200,000 severance package
He created documents to cover his tracks during the days leading up to his resignation.
$77,000: landscaping at his residence
$4,565: trip to Bermuda
$5,700: shutters/shades
$3,000: iron fence
$3,200: pool / patio furniture
$3,613: audio system / DJ mixer
$2,200: a sofa
$1,400: garage shelving
$618: massages at the Umstead Hotel
“He did nothing wrong…”
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Dana Cope - SEANC
Questionable Credit Card Charges: $457,500
Included: Plastic surgery, vacations, hotels, clothing, jewelry and home renovations
Fraudulent Check Purchases: $113,346
Included: Flying lessons, vacations and landscaping
Cope was charged with 2 Class C Felony charges > $100,000
He pled guilty
He paid $165,000 in restitution at the time of the guilty plea
Ordered to pay $510,500 in restitution
He received active jail time: 50-82 months (4-7 years)
CFO resigned
In-house counsel resigned
Impact:
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What was the reputational damage to the organization?
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Data Analytics
Looking at large volumes of data quickly to determine patterns and outliers
Data Analytics serves as a pointer, identifying individuals, accounts, transactions and other places to look to get behind the numbers (Bus #235)
Running analyses such as:
Benford’s Analysis
Linear Regression
Missing Data & Duplicate Data
Classification & Stratification
Identification of Error Conditions
Wake County School Board Multi-million dollar scheme
Kickbacks Fake orders for auto parts
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Linear Regression WCPSS
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0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000
Maintenance Costs ($M)
Number of buses in service
Annual School Bus Maintenance ($Million)
Annual Maint ($Million) Linear (Annual Maint ($Million))
Transportation costs including fraud
Amount excluding fraud
Annual fraud amount
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Wake County Investigation Results
Estimated loss of approximately $5 million
On some days, receiving over 200 invoices from the same vendor
Clustering of invoice amount just under approval limit for purchase orders
Corruption
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Questions?
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Contacts: How Can We Help?
Scott M. McKay, CPA, CFE, CIA, CCSA Partner I Risk Advisory Services P 919.782.1040 D 919.825.4277 C 919.985.6801 [email protected]
Rusty Pounds, CFE Manager I Risk Advisory Services P 919.782.1040 D 919.782.4233 [email protected]