SCOUTING FOR FRAUDSCOUTING FOR FRAUD IN YOUR BUSINESSIN YOUR BUSINESS
Seminar on Fraud as a Strategic Riskg“What CFOs and CEOs don’t notice, but should”
Parag DeodharParag DeodharBANGALORE – 27 July 2012
FRAUD RISKFRAUD RISK
• Fraud is now so common that its occurrence is• Fraud is now so common that its occurrence is no longer remarkable, only its scale.If f d di l t ll i• If fraud were a disease, almost all companies would have a slight temperature…
• What’s @ Risk?– The typical organization loses an estimated 5% of yp gits annual revenues to fraud
– Regulatory sanctionsg y– Reputation / Brand image– Company closure!Company closure!
27 July 2012 2Parag Deodhar
TYPES OF OCCUPATIONAL FRAUDTYPES OF OCCUPATIONAL FRAUDSOURCE: ACFE 2012 GLOBAL FRAUD STUDY
87% 8%33%
27 July 2012 3Parag Deodhar
ASSET MISAPPROPRIATION SCHEMESASSET MISAPPROPRIATION SCHEMESCategory Description Examples
SCHEMES INVOLVING THEFT OF CASH RECEIPTS
Skimming Cash is stolen from an organization before it is recorded on the organization’s books and records
Employee accepts payment from a customer but does not record the sale and instead pockets the money
Cash Larceny Cash is stolen from an organization after it has been recorded on the organization’s books and records
Employee steals cash and checks from daily receipts before they can be deposited in the bank
SCHEMES INVOLVING FRAUDULENT DISBURSEMENTS OF CASH
Billing Person causes his or her employer to issue a payment by submitting invoices for fictitious goods or services, inflated invoices or invoices for personal purchases
Employee creates a shell company and bills employer for services not actually rendered Employee purchases personal items and submits an invoice to employer for paymentemployer for payment
Expense Reimbursements
An employee makes a claim for reimbursement of fictitious or inflated business expenses
Employee files fraudulent expense report, claiming personal travel, nonexistent meals, etc.
Check Tampering A person steals his or her employer’s funds by intercepting, forging or altering a check drawn on one of the
Employee steals blank company checks and makes them out to himself or an accompliceg g g
organization’s bank accountsp
Employee steals an outgoing check to a vendor and deposits it into his or her own bank account
Payroll An employee causes his or her employer to issue a payment by making false claims for compensation
Employee claims overtime for hours not worked Employee adds ghost employees to the payroll
C h R i t A l k f l t i h i t t E l f d l tl id l hi h h i tCash Register Disbursements
An employee makes false entries on a cash register to conceal the fraudulent removal of cash
Employee fraudulently voids a sale on his or her cash register and steals the cash
OTHER ASSET MISAPPROPRIATION SCHEMES
Misappropriation of Cash on Hand
The perpetrator misappropriates cash kept on hand at the victim organization’s premises
Employee steals cash from a company vaultCash on Hand victim organization s premises
Non-CashMisappropriations
An employee steals or misuses non-cash assets of the victim organization
Employee steals inventory from a warehouse or storeroomEmployee steals or misuses confidential customer financial information
27 July 2012 4Parag Deodhar
PROFILE OF A FRAUDSTERPROFILE OF A FRAUDSTERSOURCE: ACFE 2012 GLOBAL FRAUD STUDY
27 July 2012 5Parag Deodhar
HOW ARE FRAUDS DETECTED…HOW ARE FRAUDS DETECTED…SOURCE: ACFE 2012 GLOBAL FRAUD STUDY
27 July 2012 6Parag Deodhar
WHISTLE‐BLOWER MECHANISMWHISTLE BLOWER MECHANISM
KEY ELEMENTS FOR SUCCESSKEY ELEMENTS FOR SUCCESS
Who Wh d idHigh
Availability Anonymous
Who receives the complaints?
Who decides the actions?
& Accessibility
& Secure
Who i ti t ?
Who takes ti ?
Independent & Credible &
Impartial
investigates? actions?
transparentImpartial
Who reports?
27 July 2012 Parag Deodhar 9
RED FLAGSRED FLAGS SOURCE: ACFE 2012 GLOBAL FRAUD STUDY
87% First timers87% First timers35% Cases never reported t lito police49% No recovery
27 July 2012 10Parag Deodhar
BEHAVIORAL RED FLAGSBEHAVIORAL RED FLAGS
• Excessive Family/Peer • Irritability, SuspiciousnessExcessive Family/Peer Pressure for Success
• Complained About Lack f A th it
Irritability, Suspiciousness or Defensiveness
• Wheeler‐Dealer Attitudeof Authority
• Past Legal Problems• Excessive Pressure from
• Divorce/Family Problems• Control Issues,
Unwillingness to Share• Excessive Pressure from Within Organization
• Refusal to Take Vacations
Unwillingness to Share Duties
• Unusually Close • Complained About
Inadequate Pay
yAssociation with Vendor/Customer
• Financial Difficulties /• Past Employment‐Related Problems
• Addiction Problems
• Financial Difficulties / High Debt
• Living Beyond Means• Addiction Problems Living Beyond Means
27 July 2012 Parag Deodhar 11
FRAUD DETECTIONFRAUD DETECTION
• Employee Background ChecksEmployee Background Checks– Not just during recruitment– Mystery ShoppingMystery Shopping
• Mandatory Leave / Job Rotation, Transfers• Anti‐Bribery clause in ContractsAnti Bribery clause in Contracts• Review of Processes and Controls• Dedicated team for fraud detection /• Dedicated team for fraud detection / investigation
• Clear reporting lines & Segregation of duties• Clear reporting lines & Segregation of duties• Electronic / Digital surveillance• Over riding Controls!!!• Over‐riding Controls!!!
27 July 2012 12Parag Deodhar
VENDOR / PARTNER DUE DILIGENCEVENDOR / PARTNER DUE DILIGENCE
Organizations often operate in unfamiliar territories or with little knowledge of the background, reputation or ability to conduct business of their business associates and service providers. Many a times the track record and reputation can be overlooked, while focusing only on the potential gains. While positive impact is often expected, the potential negative impact from these associates normally ignored at the time of selection which might have significant impact.
Almost all organizations rely on third parties/ vendors to help them
It is, therefore, in the interest of the organizations to discover as much
conduct their business
Each of these associates can have a significant impact on your
information as possible about their vendors
The focus should be on validation ofg p ybusiness
While the positive impact is often expected the potential negative
The focus should be on validation of details provided as well discovery of any undisclosed information
expected, the potential negative impact, normally ignored at the time of selection of a vendor can h t i ifi
It is also important that the right partners are brought on board to assist on the collation and validationhave greater significance assist on the collation and validation of this information
1327 July 2012 Parag Deodhar
MIS & DATA ANALYTICSMIS & DATA ANALYTICS“BIG DATA”- 80% unstructured – emails / spreadsheets & other docs
• Increased revenues without a corresponding increase in cash flow,
i ll i
• Unusual increases in income or income in excess of industry peers
Red Flags can be visible in routine MIS as well:
especially over time• Significant, unusual or highly complex
transactions, particularly those that are closed near the end of a financial
• Significant unexplained increases in fixed assets
• Recurring negative cash flows from operations while reporting earnings and
reporting period• Unusual growth in the number of days’
sales in receivablesSt th h
operations while reporting earnings and earnings growth
• Allowances for sales returns, warranty claims, etc., that are shrinking in
t t th i t• Strong revenue growth when peer companies are experiencing weak sales
• Recurring negative cash flows from operations while reporting earnings and
percentage terms or are otherwise out of line with those of industry peers
• Assets, liabilities, revenues or expensesbased on significant estimates that p p g g
earnings growth• Significant declines in customer demand
and increasing business failures in either the industry or the overall economy
ginvolve subjective judgments or uncertainties that are difficult to corroborate
the industry or the overall economy
27 July 2012 Parag Deodhar 14
PREDICTIVE MODELINGPREDICTIVE MODELING
Assimilate data from multiple sources and apply predictive
Accepting, prioritizing and distributing alerts
Analysis and visualization tool for
uncovering previouslyanalytics to accurately assess transactions, activities and customer state in real time
& determine if it is actual fraud or
suspicious transaction
uncovering previously unknown relationships
among accounts or entities
27 July 2012 15Parag Deodhar
DIGITAL SURVEILLANCEDIGITAL SURVEILLANCE
• Most frauds leave a trail on the system• Most frauds leave a trail on the system –emails, internet access, access control logs etc
• Data Leakage is a major challenge• Tools are available to:• Tools are available to:
– Log events– Scan logs for suspicious events and alert– Correlate suspicious events across systems and p ynetwork
– Digital forensicsDigital forensics
27 July 2012 16Parag Deodhar
ETHICAL DILEMMAETHICAL DILEMMA Align the third party code of conduct to the employee code of conduct
• Discrimination and harassment• Wages and benefits
W k h d ti
Demonstrate through actions
• Work hours and over time• Health and safety• Labor – forced labor / child labor /
abuse of employees
• Any activity that you engage in with customers will be fair and defensible –NO EXCEPTIONSabuse of employees
• Compliance to environmental laws and adherence to sustainable business
NO EXCEPTIONS• Approach your big and small customers/
suppliers the same way.• Let all your current and potential
t / li k th t• Anti-bribery and corruption policies customers/ suppliers know that everyone gets a fair chance
• Transparency in process• Take a stand against customer who
Key issues to address
gbehave in a less than ethical manner
• Be willing to miss revenue or earnings targets if things are not done the right wayaddress y
27 July 2012 17Parag Deodhar
Top Related