25 afce global fraud conference june 15-20, 2014 san ... · r. a. (andy) wilson, cfe, cpp managing...

R. A. (Andy) Wilson, CFE, CPP

Managing Director

Wilson & Turner Incorporated

25th AFCE Global Fraud Conference

June 15-20, 2014

San Antonio, Texas

Tracy K. Webb, CSCP

Compliance Officer

State of New York Office of Comptroller

R. A. (Andy) Wilson, CFE, CPP Tracy K. Webb, CSCP

Wilson & Turner Incorporated ◦ Managing Director

◦ Fraud Practitioner for 28 years

Faculty Appointments: ◦ The University of Memphis

◦ Utica College of Syracuse University

Previous: ◦ Attorney General

◦ Southland Corporation

◦ Germantown Police

Department

State of New York Comptroller ◦ Compliance Officer

◦ Pension Investments & Cash Management

Boards: ◦ Economic Crime and Cybersecurity

Institute

◦ National Society of Compliance Professionals

Previous: ◦ INTECH

◦ GenSpring Family Offices

Certifications: ◦ CSCP, Certified Securities

Compliance Professional

An Introduction to Fraud

Fraud Theories

The Main Sources Fraudsters Use

A Fraudster’s Method of Approach

Fraud Symptoms Used to ID

Ethical Decisions People Make

Preventing Good People from Doing Bad Things

Identifying Fraud through Detection

Questions & Answers

Managing Director

June 15-20, 2014

San Antonio, Texas

Tracy K. Webb, CSCP

Compliance Officer

- An Introduction to Fraud -

Is a generic term, and embraces all the multifarious means which human ingenuity can devise, which are resorted to by an individual, to get an advantage over another by false representations. No definite and invariable rule can be laid down as a general proposition in defining fraud as it includes surprise, trickery, cunning and unfair ways by which another is cheated. The only boundaries defining it are those which limit human imagination.

Webster’s New World Dictionary

College Edition

A representation

About a material point,

Which is false,

And intentionally or reckless,

Which is believed

And acted upon by the victim

To the victim’s damage

Fraud is different from unintentional errors.

There must be intent!

Fraud Triangle Fraud Elements

Opportunity Concealment

Asset Misappropriation

Classifications of Fraud

Typical organizations loose ◦ 5% of revenues to fraud (globally, $3.7 trillion)

Median fraud loss $145,000 Median duration 18 months Fraud types ◦ Asset misappropriations 85%, median loss $130,000 ◦ Financial statement 9%, median loss $1,000,000 ◦ Corruption 37%, median loss $200,000

One third of the cases involved two or more types Tips are the main detection method at 40% (2x others) ◦ Employees ID fraud more than half the time

Hotlines work! ◦ Identify frauds quicker (50% faster) ◦ Less costly (by 41%)

Industry ◦ Banking and financial services, manufacturing, government

Higher the authority level, the greater the losses 77% of fraud committed by persons in these departments ◦ Accounting ◦ Operations ◦ Sales ◦ Executive ◦ Customer service ◦ Purchasing ◦ Finance

Sources of Attack

- Fraud Theories: What is Past is Prologue -

Managing Director

June 15-20, 2014

San Antonio, Texas

Tracy K. Webb, CSCP

Compliance Officer

Edwin Sutherland, Ph.D.

Defined White Collar Crime (1913)

Criminal behavior is learned through the interactions with other deviant persons

Learnings include: ◦ Techniques

◦ Rationale

◦ Motives

Peer relationships influence deviant

behavior

Donald Cressey, Ph.D.

Types: ◦ Independent businessmen

◦ Long-term violators

◦ Absconders

Three elements: ◦ Pressure

◦ Opportunity

◦ Rationalization

Non-shareable financial pressure

Steve Albrecht, Ph.D.

Expanded on Sutherland and Cressey

Theory: ◦ Situational pressure

◦ Perceived opportunity

◦ Personal integrity

When pressure and opportunities are

high and personal integrity is low, fraud

will likely occur

Red flags of fraud

Living beyond means

Overwhelming desire for personal gain

High personal debt

Close association with customers

Pay not commensurate with job

Wheeler-dealer

Strong challenge to beat the system

Excessive gambling

Family/peer pressure

Hollinger-Clark Study (1983) Survey of 10,000 workers ◦ Job dissatisfaction caused theft ◦ Identified the cost of fraud was drastically under stated

Two categories: ◦ Theft & actions against property ◦ Production violations [goldbricking]

Very strong relationship between theft and concern over individuals financial pressure Age vs. Theft

Policy Employee selection Inventory control

Security Punishment

Fraudsters feel justified Concept of wages-in-kind ◦ Hire the right people ◦ Treat employees fairly ◦ Have reasonable expectations

Controls must pose a visible and highly likely threat of detection ◦ Perception of detection is the greatest deterrent

Hidden controls do not deter Controls cannot be predicable

Managing Director

June 15-20, 2014

San Antonio, Texas

Tracy K. Webb, CSCP

Compliance Officer

- The Main Sources Fraudsters Use -

Holes in the “corporate armor” ◦ These are the opportunity elements

Ways to (Fraud Elements): ◦ Steal

◦ Conceal

◦ Convert

Money, money, money

Main five sources of attack: ◦ Accounting

◦ Operations

◦ Sales

◦ Customer service

◦ Purchasing

Managing Director

June 15-20, 2014

San Antonio, Texas

Tracy K. Webb, CSCP

Compliance Officer

- A Fraudster’s Method of Approach -

Fraudsters take advantage of sloppy practices ◦ Poor accounting system

◦ Lack or records accountability

◦ Little or no physical security

◦ Lack of management supervision

Too much responsibility & authority ◦ Little or no segregation of duties and responsibilities

◦ Override policies, procedures and controls

COMPLIANCE!!!

Fraudsters steal assets by ◦ Decreasing revenue ◦ Increasing expenses

Creation and posting of fraudulent journal entries and the manipulation of ledgers

Disrupt the normal process of records ◦ Late receipt ◦ Modified ◦ Misplaced (stolen)

Irregularities develop ◦ AP ◦ AR ◦ Inventory, etc.

Managing Director

June 15-20, 2014

San Antonio, Texas

Tracy K. Webb, CSCP

Compliance Officer

- Fraud Symptoms Used to ID Sources & Methods -

Symptoms are just symptoms; not proof!

There may be an explanation for the existence

Six main groups of Fraud Symptoms:

◦ Accounting Anomalies - Unusual processes & procedures

◦ Internal Control Weaknesses - Overridden controls, absent

◦ Analytical Anomalies - Unrealistic relationships, odd occurrences

◦ Extravagant Lifestyles - Starts as need; exceeds to greed

◦ Unusual Behavior - 1st as fear | guilt; then stress - patterns develop

◦ Tips and Complaints - Usually from employees; categorized as a

Fraud Symptom because many turn out to be unjustified

Fraud by nature is HIDDEN

There is NO TECHNIQUE to absolutely ensure that fraud does not exist in an organization

To prove that fraud has NOT occurred, one must endeavor to prove it HAS occurred.

To prove that fraud HAS occurred, one must endeavor to prove it has NOT occurred.

“Silver Blaze”

Curious incident

One of the 56 Sherlock Holmes short stories

Sir Arthur Conan Doyle

About “Silver Blaze” a famous race horse ◦ Disappearance on the eve of an important race

◦ Apparent murder of the horse’s trainer

Plot focused on: ◦ “The curious incident of the dog in the night-time.”

Script: ◦ Gregory (Scotland Yard detective): "Is there any other point to which you would wish to draw my attention?“

◦ Holmes: "To the curious incident of the dog in the night-time.“

◦ Gregory: "The dog did nothing in the night-time.“

◦ Holmes: "That was the curious incident."

Irregularities in Source Documents JE & Ledgers

Missing documents

Photocopied documents

Stale item on bank reconciliations

Excessive voids or credits

Common names | addresses

Increasing “Past Due” accounts ◦ Payable

◦ Receivables

Alterations on documents

Duplicate payments

Second endorsements

Document sequences – no sense

Questionable handwriting

Faulty Journal Entries

◦ Accounting Language: D C

◦ Legal Expense ………… 500

◦ Cash …………………………………. 500

◦ Recognize Fraud Symptoms:

Assets (Cash | Inventory)

Liabilities (Nope: No one steals L) Inaccuracies in Ledgers

◦ Ledger = “Book of Accounts”

◦ Assets equal Liabilities

◦ Many involve manipulating

Staples

Copies

Invoice

Lack of segregation of duties

Lack of physical safeguards

Lack of independent checks

Lack of proper authorization

Lack of proper documents or records

Overriding existing controls (most common)

Inadequate accounting system (upgrades)

Managing Director

June 15-20, 2014

San Antonio, Texas

Tracy K. Webb, CSCP

Compliance Officer

- Case Study 1: Brenda Stayton -

Time for an Old Time

Fraud History Lesson!

IBM ◦ Typewriter: “IBM Selectric III”

◦ Monster of a machine

◦ Characters on a ball

◦ Correcting tape (orange spool)

◦ Backspace key …

Old style AP check fraud ◦ Received approved invoice to pay vendor ◦ Prepared “manual check” using IBM Selectric III ◦ Coded in ledger to vendor ◦ Took to authorized signer ◦ Reinserted check into the IBM:

Backspaced the name of vendor off Typed in her name

◦ Deposited into her bank account (the same account for 7 years) ◦ Weeks later prepared another check to vendor

Didn’t send them for weeks Used increasing LOC of owner to cover her theft

◦ Destroyed cancelled checks upon receipt

$1 Million Check Fraud

9 Years

Depositary account (nothing there)

Operating account dry

LOC of owner maxed-out

And, the need by Stringer for more cash

She wrote a personal check to the Depositary account ◦ $4,000

◦ Deposited at bank

◦ Float to give her time to receive customer checks

Her check was

Accounting Anomalies ◦ Missing documents

◦ Alteration of documents (unknown)

◦ Duplicate payments

◦ Document sequences that do not make sense

◦ Increasing LOC

◦ Increased “Past Due” accounts

Brenda Stayton $180,000 a year from a $1.2 Million organization!

For 9 years. … that is an impressive task!

Significant Increase or Decrease in Account Balances

Physical Anomalies

Cash Shortages or Overages

Excessive Late Charges

Unreasonable Expenses or Reimbursements

Unexplained Inventory Shortages or Adjustments

Deviations from Specifications

Increased Scrap

Excess Purchases

Too Many Debit or Credit Memos

Managing Director

June 15-20, 2014

San Antonio, Texas

Tracy K. Webb, CSCP

Compliance Officer

- Case Study 2: Construction Fraud -

Invoices for Painting

were received before the

sheet rock was installed

Most people who steal are under financial pressure: ◦ Sometimes real

◦ Sometimes just “greed”

At first to fulfill their financial needs; then to improve their lifestyle

Fraudsters often live beyond their means, since their income does not support their lifestyle. Few save the money. Lifestyle changes are often easy

for friends, coworkers and managers

to spot.

Managing Director

June 15-20, 2014

San Antonio, Texas

Tracy K. Webb, CSCP

Compliance Officer

- Case Study 3: Accountant Fraud -

Concrete floor coating company ◦ Installation

◦ Design

◦ Polishing

30 Employees

Southeastern US

Jay Thompson, Owner ◦ Matthew Cruse, Operations manager

◦ Michelle Nemeth, Accountant

$50,000 annual salary Company credit card misuse and abuse Excess of $120,000 Personal purchases ◦ El Porton ◦ Target ◦ ATT Uverse ◦ Fuel purchases ◦ Kirby Liquor/ The Winery ◦ Deangelus Jewelers ◦ Gymboree ◦ Vera Bradley ◦ Lane Bryant ◦ Others

$80,000 annual salary Company credit card misuse and abuse Excess of $100,000 Personal purchases ◦ Home Depot ◦ Lowes ◦ Costco ◦ Kroger ◦ AutoZone ◦ Fuel purchases ◦ Germantown Storage ◦ Internet purchases

Amazon Paypal

◦ Others

Cruse Nemeth

Opportunity ◦ Manager

◦ Not questioned

◦ Best friend of Nemeth (Boo)

Motivation ◦ Money, Money, Money

Rationalization ◦ Owed to him (Hard work)

Opportunity ◦ Accountant ◦ No Segregation ◦ Supervises CC Account ◦ Best friend of Cruse

Motivation ◦ Not paid enough ◦ Overworked (O = 3, H = 2)

Rationalization ◦ Owed to her

Jay just txt Michelle and wanted to know how to access Amex statements online Whaaaaatttttttt????? How do you know??? Can she tell when someone else logs in?? Oh F_ _ _ ! Did you talk to her What else What about my light box All he has to do is Google the name Can you look at previous months

She has over $2000 in charges this month More words carabas target ATT bills dog grooming elporton etc I just logged on And yes, can go back I don’t care if she knows F _ _ _ no Bella vita Sonic pier 1 mcDonalds That is back, I can say I order diamond samples

No particular behavior signals fraud

But, fraudsters exhibit a host of emotions: ◦ Guilt

◦ Fear

◦ Others

These express themselves as: ◦ Stress

Causes behavior changes

Behavior changes are recognizable

Changes in behavior are fraud symptoms

Stress

Behavior Changes

Insomnia Sweats Increased ◦ Smoking ◦ Drinking ◦ Drugs ◦ Gambling

Suspicious nature Can’t relax Early in | Late out No vacation

Behavior Changes

Unexplained

wealth

Drugs, drinking

or other vices Disaffected

Life style

changes Mood swings

Unusually

friendly/distant

Overprotective of

turf Never absent

Complains of

“errors”

Most frauds are reported

The persons best in position to spot fraud are: ◦ Employees

◦ Vendors

◦ Customers Fraud

Elements

Theft | Concealment | Conversion

Witness someone

taking

Altered records & miscounts can be

recognized

Lifestyle changes

are visible

Managing Director

June 15-20, 2014

San Antonio, Texas

Tracy K. Webb, CSCP

Compliance Officer

- Case Study 3: Hevesi Case -

State Assemblyman 1971-1993

NYC Comptroller 1994-2001

NYS Comptroller 2002 - 2006

Discovered based on an unrelated tip

Pay to Play scandal

Sentenced to 1-4 years

Industry wide changes as a result

Managing Director

June 15-20, 2014

San Antonio, Texas

Tracy K. Webb, CSCP

Compliance Officer

- Ethical Decisions People Make -

Reasons ◦ Rules outlining the responsibilities or proper practices

Individuals

Organizations

◦ Concepts: ethical, honor and moral codes

Best practices today ◦ Influence behavior

◦ Create standards for behavior

No Fraud

Pressure Opportunity

Ethics

Opportunity Pressure

Managing Director

June 15-20, 2014

San Antonio, Texas

Tracy K. Webb, CSCP

Compliance Officer

- Preventing Good People from Doing Bad Things -

Training ◦ Awareness ◦ Reinforcement of policies & procedures

Compliance monitoring ◦ Management ◦ Compliance professionals

Policy Breach ◦ Response ◦ Document

Hiring Honest People and Providing

Fraud Awareness

Training

Providing an Employee Assistance Program

Creating a Positive Work Environment

Hiring Honest People and Providing Fraud Awareness Training ◦ Background investigation (Are all

backgrounds ~ backgrounds) Levels (Basic / Mid / Executive)

Criminal History

Civil Litigation

Financial History

Education

Former Employment

Drug Screens

◦ Solid verification process (always followed)

◦ Interview process (Train managers) “Our company … Is there any reason”

◦ Paper & pencil honest tests

Creating a Positive Work Environment

◦ Does not “just happen”

◦ This is hard work

Awareness programs

Education/training

Blurbs in company news about fraud – waste – abuse

Create expectations about honesty

Open-door policies

Positive operating procedures

Tone at the Top

Providing an Employee Assistance Program (EAP) ◦ Fraud Triangle = O M R

Formal Assistance Programs ◦ Un-sharable situation

Substance

Gambling

Money management

Health

Family

ROI: Touted by corporations

Managers Not Caring about Honesty

Inadequate Pay

Low Loyalty

Crisis Management

Rigid Rules

Repression of Differences

Poor Promotion Opportunities

Poor Communications

Lack of Recognition

Unreasonable Budget Expectations

Short-Term Focus

Reactive vs. Proactive

Hostile Work Environment

Poor Training

Lack of Clear Responsibilities

1. Install Internal Controls

• Control Procedures to Prevent and Detect Fraud

• Institute of Internal Auditors (to affect accountability):

• Does company foster control consciousness

• Realistic goals and objectives

• Written corporate policies (and Code of Conduct)

• Authorization levels

• Processes to monitor activities and safeguard assets

• Communication channels ~ open with adequate & reliable information

• Cost effective controls to deter fraud

No.: 1

71% Committed by Individuals

29% Collusion

2. Discourage Collusion

• Today’s market is Complex

• Crimes

• Individuals

• Collusion

• Supplier Alliances

• Purchase & Sales Fraud are common Kickback Frauds

No.: 2

3. Fraud Awareness Policy

• Establish a Company Policy

• Alert Venders and Contractors

• Document their Awareness

• Insist on their Compliance

• Develop a “Right to Audit” Clause

• Establishes the Process and Protocol to inspect the records of Vendors and Contractors

No.: 3

4. Monitor Employees

• Hoarding? Most don’t!

• Expensive habits – can these be seen?

• Spend conspicuously

• Develop the theory: “Others are watching”

• Watch for: Cruises, homes, limo, Rolex, parties, condos, art, remodel home

No.: 4

5. Tip line

• Whistleblower policy:

• Must be anonymous – employees must know they are free from retribution

• Independence

• Accessible – multiple method of reporting

• Follow-up is essential

No.: 5

What happens if we don’t follow -up on tips?

Don’t Have

Hotline

Have Hotline

48 % 52% Toll-FreeHotlines

Talk toManagers

Talk toSecurity

17% 38%

6. Create an Expectation of Punishment

• Fear of punishment – does deter dishonesty

• Swift and Consistent Punishment

• NOT Just Termination

• Expensive and Time Consuming

• Unfavorable Publicity for the Company

No.: 6

7. Proactive Fraud Auditing

• Only a few organizations AUDIT for Fraud

• Fraud Audits create:

• Fraud awareness among employees

• Let’s everyone know their actions are subject to review

• Creates a fear of getting caught

No.: 7

Identify Risk

Exposures

3 Proactively

Look for Symptoms &

Exposures

Identify Fraud Symptoms for Each Exposure

2 Investigate Identified Symptoms

(a) (1) Hire Honest People & Provide Fraud Awareness Training

Eliminate

Opportunities

Create Culture of Honesty, Openness, & Assistance

(2) Discourage Collusion

(3) Alert Vendors & Contractors to Company Policies

(4) Monitor Employees

(e) (5) Provide Tip Hotlines

(6) Create an Expectation of Punishment (7) Audit

Proactively

(b) Create a Positive Work Environment

(c) Develop a Company Code of Ethics

(d) Implement Employee Assistance Programs

Managing Director

June 15-20, 2014

San Antonio, Texas

Tracy K. Webb, CSCP

Compliance Officer

- Identifying Fraud through Detection -

Tools & Tolerance Responding to Fraud

Risk assessment tools: ◦ How might a fraud perpetrator

exploit weaknesses in the system of controls?

◦ How could a perpetrator override or circumvent controls?

◦ What could a perpetrator do to conceal the fraud?

Recognizes that management sets the fraud tolerance: ◦ Material loss

◦ “Zero-Tolerance”

Management sets response: ◦ Categorizing issues ◦ Allegation

Confirming validity Defining the severity

◦ Conducting Investigation and fact-finding

◦ Resolving or closing the investigation Criminal

Civil Insurance

◦ Reporting & Records Determining confidential documents Defining documentation method Deciding on document retention and

release of information

Named after Dr. Frank Benford, GE physicist

Noticed that the pages of a book: ◦ For the low numbers the pages were:

Dirtier

◦ Determined page numbers for the number 1 were the most heavily used of all, then 2, then 3

Intrigued Benford: ◦ Analyzed over 20 thousand sets of numbers

Areas of rivers

Street addresses in a phone book

Baseball statistics

Population statistics

Numbers used in magazine articles

The smaller that the first digit of the number was the more likely was that first digit to appear

Logically, what is a normal progression and flow of digits?

Examples: ◦ Book

◦ Elevator

◦ Addresses on a street

Examines the frequency of digits appearing in a database of: ◦ Invoice numbers ◦ Amounts

0-9 Do not appear ~ 10% each The first digit is expected to be: ◦ 1 more than 30% of time ◦ 2 = 17.6 % of time ◦ 3 = 12.7 and ◦ 4 = 9.7% ◦ 5 = 7.9%

Second and Thirds digits may be used too ◦ Just exclude the first digit; and, start with the

second digit. 2nd Digits ------- 4x29

3rd Digits ------- 43x9

Fraudsters don’t know this!

Used by Anti-fraud professionals to detect fraud in data sources: ◦ Check registers

◦ Tax returns

◦ More

Will not work on Pre-assigned Data: ◦ Telephone Numbers

◦ Postal Codes

What do you see? ◦ Small to large

◦ Just under $100,000

◦ Digit pattern opposite

of Benford’s Law

90% have first digit of

7, 9 or 9

Managing Director

June 15-20, 2014

San Antonio, Texas

Tracy K. Webb, CSCP

Compliance Officer

- Questions & Answers -

Managing Director

2752 Mt. Moriah Parkway

Memphis, TN 38115

Office: (901) 546-8585

Facsimile: (901) 546-8584

Mobile: (901) 481-0367

eMail: raw@wilson-turner.com

Website: wilson-turner.com

Tracy K. Webb, CSCP

Compliance Officer

Office of the New York State Comptroller

110 State Street, 14th Floor Albany, NY 12236

Office: (518) 486-6998 Facsimile: (518) 474-9900

eMail: twebb@osc.state.ny.us

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