Dawn Williford, Partner, Risk Advisory ServicesJesse Daves, Managing Director, Forensic Accounting &Investigations
Fraud Investigation: Do You Have aClue?
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PRESENTERS
713-407-3867 | [email protected]
Dawn Williford, CIA, CRMAPartner, Risk Advisory Services
Dawn has over 20 years of internal audit, vendor construction audit and SOXcompliance and other consulting experience. Dawn has been heavily involved in allaspects of business process evaluation and documentation, corporate governance,SOX readiness and ongoing SOX compliance, risk assessments, root-cause analysisand internal audit outsourcing and co-sourcing. Dawn assists clients with thedevelopment of their internal audit department and serves as the Chief AuditExecutive for her outsourced Internal Audit clients. Dawn has managedconstruction audits, vendor audits, joint venture audits, franchise audits, and largescale multi-vendor audit programs that have identified millions of dollars in costrecoveries for her clients. Dawn has participated in fraud investigations, identifiedroot causes and internal control breakdowns that led to the fraud and hasredesigned processes and controls to help clients prevent future instances offraud.
Jesse Daves, CPA/CFF, CFEManaging Director, Forensic Accounting & Investigations
Jesse Daves has over 20 years of experience providing audit, forensic accountingand investigative services to clients across a wide range of industries. Mr. Daveshas conducted fraud-related investigations involving numerous issues, includingalleged violations of the Foreign Corrupt Practices Act (FCPA), embezzlement,kickbacks, Ponzi schemes, conflicts of interest and employment matters. He hasworked directly with all levels of management, general and outside counsel as wellas the Harris County District Attorney’s Office, the United States Attorney’s Office,the Federal Bureau of Investigation and the Securities and Exchange Commission.
713-407-3209 | [email protected]
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u Fraud stats and schemes
u Building the “perfect” perp
u Anti-fraud tips
u Learning from the lessons ofothers
u The impact of fraud oncompany culture
DISCUSSION THEMES
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u Occupational frauds are thoseschemes in which a persondefrauds his or her employer.
OCCUPATIONAL FRAUD DEFINED
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RATIONALIZATION
u “The company owes me.”u “It’s only a loan; I’ll pay it back.”u “It’s for a good cause.”u “No one will notice.”
COMMON ELEMENTS OF FRAUD
MOTIVE/PRESSURE
u Financial pressuresu Unrealistic expectationsu Addictionu Greed
OPPORTUNITYu Lack or circumvention of internal
controlsu Turnover at key positionsu Related party transactionsu Significant use of estimates
Source: Donald R. Cressey, Other People's Money (Montclair: Patterson Smith, 1973)
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u 5% of annual revenue lost to fraud
u Median loss of $130,000 per scheme
u Median duration of 16 months
THE COST OF FRAUD
Source: ACFE’s 2018 Report To The Nations On Occupational Fraud and AbuseCopyright 2018 by the Association of Certified Fraud Examiners, Inc.
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83.5%
35.4%
9.6%
0% 20% 40% 60% 80% 100%
Asset Misappropriation
Corruption
Financial Statement Fraud
Occupational Frauds by Category - Frequency
201420162018
HOW FRAUD IS COMMITTED
89.0%
85.4%
38.0%
36.8%
10.0%
9.0%
Source: ACFE’s 2016 and 2018 Report To The Nations On Occupational Fraud and AbuseCopyright 2016 and 2018 by the Association of Certified Fraud Examiners, Inc.
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$114,000
$250,000
$800,000
$125,000
$200,000
$975,000
$130,000
$200,000
$1,000,000
$0 $2,000,000
Asset Misappropriation
Corruption
Financial Statement Fraud
Occupational Frauds by Category - Median Loss
201420162018
HOW FRAUD IS COMMITTED
Source: ACFE’s 2016 and 2018 Report To The Nations On Occupational Fraud and AbuseCopyright 2016 and 2018 by the Association of Certified Fraud Examiners, Inc.
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COMMITTING MORE THAN ONE SCHEME
Source: ACFE’s 2018 Report To The Nations On Occupational Fraud and AbuseCopyright 2018 by the Association of Certified Fraud Examiners, Inc.
Asset misappropriation only 57%
Asset misappropriation and corruption 23%
Corruption only 9%
Corruption, asset misappropriation, and financial statement fraud 4%
Asset misappropriation and financial statement fraud 3%
Financial statement fraud only 1%
Corruption and financial statement fraud 1%
Assetmisappropriation
Corruption
Financialstatement fraud
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0%
10%
20%
30%
40%
50%
Initial Detection of Occupational Frauds
201420162018
DETECTION OF FRAUD SCHEMES
Source: ACFE’s 2016 and 2018 Report To The Nations On Occupational Fraud and AbuseCopyright 2016 and 2018 by the Association of Certified Fraud Examiners, Inc.
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Median Loss Based on Presence of Anti-Fraud Controls
Control Percent ofCases
Control inPlace
Control Notin Place
PercentReduction
Code of Conduct 80% $110,000 $250,000 56%
Proactive Data Monitoring/Analysis 37% $80,000 $165,000 52%
Surprise Audits 37% $75,000 $152,000 51%
External Audit of ICOFR 67% $100,000 $200,000 50%
Management Review 66% $100,000 $200,000 50%
Hotline 63% $100,000 $200,000 50%
Anti-Fraud Policy 54% $100,000 $190,000 47%
Internal Audit Department 73% $108,000 $200,000 46%
Management Certification of Financial Statements 72% $109,000 $192,000 43%
Fraud Training for Employees 53% $100,000 $169,000 41%
Formal Fraud Risk Assessments 41% $100,000 $162,000 38%
ANTI-FRAUD CONTROLS AT THE VICTIM ORGANIZATION
Source: ACFE’s 2018 Report To The Nations On Occupational Fraud and AbuseCopyright 2018 by the Association of Certified Fraud Examiners, Inc.
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u Prepare a comprehensive fraud riskassessment
u Perform proactive data analyticsu Educate management, employees, vendors
and customersu Remember: Trust is NOT an internal control
ANTI-FRAUD TIPS
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BUILDING THE “PERFECT” PERP
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Who Could it be?
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Number of Perpetrators – Frequency and Median Loss
NUMBER OF PERPETRATORS
$74,000
$150,000
$339,00052%
19%
30%
0%
10%
20%
30%
40%
50%
60%
$-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
One Two Three or More
PERC
ENT
OF
CASE
S
MED
IAN
LOSS
Source: ACFE’s 2018 Report To The Nations On Occupational Fraud and AbuseCopyright 2018 by the Association of Certified Fraud Examiners, Inc.
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Male66.8%
Female33.2%
2014
Male69.0%
Female31.0%
2016
GENDER
Male69.0%
Female31.0%
2018
Gender Of Perpetrator - Frequency
Source: ACFE’s 2016 and 2018 Report To The Nations On Occupational Fraud and AbuseCopyright 2016 and 2018 by the Association of Certified Fraud Examiners, Inc.
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0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
<26 26-30 31-35 36-40 41-45 46-50 51-55 56-60 >60
Age of Perpetrator - Frequency
201420162018
AGE
Source: ACFE’s 2014, 2016 and 2018 Report To The Nations On Occupational Fraud and AbuseCopyright 2014, 2016 and 2018 by the Association of Certified Fraud Examiners, Inc.
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$0 $100,000 $200,000 $300,000 $400,000
Postgraduate Degree
University Degree
Some University
High School Graduate or Less
Education Level of Perpetrator - Median Loss
201420162018
EDUCATION LEVEL
Source: ACFE’s 2014, 2016 and 2018 Report To The Nations On Occupational Fraud and AbuseCopyright 2014, 2016 and 2018 by the Association of Certified Fraud Examiners, Inc.
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0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Employee
Manager
Owner/Executive
Other
Position of Perpetrator - Frequency
201420162018
POSITION
Source: ACFE’s 2014, 2016 and 2018 Report To The Nations On Occupational Fraud and AbuseCopyright 2014, 2016 and 2018 by the Association of Certified Fraud Examiners, Inc.
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0%2%4%6%8%
10%12%14%16%18%
Department of Perpetrator - Frequency
2014
2016
2018
DEPARTMENT
Source: ACFE’s 2014, 2016 and 2018 Report To The Nations On Occupational Fraud and AbuseCopyright 2014, 2016 and 2018 by the Association of Certified Fraud Examiners, Inc.
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0% 10% 20% 30% 40% 50%
Less than 1 year
1 - 5 years
6 - 10 years
More than 10 years
Tenure of Perpetrator - Frequency
201420162018
TENURE
Source: ACFE’s 2014, 2016 and 2018 Report To The Nations On Occupational Fraud and AbuseCopyright 2014, 2016 and 2018 by the Association of Certified Fraud Examiners, Inc.
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89%
6%4% 1%
Criminal Background of Perpetrator – Fraud Related
Never charged or convictedCharged but not convictedHad prior convictionsOther
CRIMINAL BACKGROUND
Source: ACFE’s 2018 Report To The Nations On Occupational Fraud and AbuseCopyright 2018 by the Association of Certified Fraud Examiners, Inc.
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u Number of Perpetrators: Oneu Gender: Maleu Age: 36-45u Education Level: Degreeu Position: Employee (staff)u Department: Accountingu Tenure: 1-5 Yearsu Criminal Background: Clean
BUILDING THE “PERFECT” PERP
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Who Could it be?
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MOST LIKELY PERPETRATOR
2
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Top 10 Behavioral Red Flags of Perpetrators
1. Living beyond means
2. Financial difficulties
3. Unusually close association withvendor/customer
4. No behavioral red flags
5. Control issues, unwillingness to share duties
6. Divorce/family problems
7. “Wheeler-dealer” attitude
8. Irritability, suspiciousness or defensiveness
9. Addiction problems
10. Complained about inadequate pay
RED FLAGS
Source: ACFE’s 2018 Report To The Nations On Occupational Fraud and AbuseCopyright 2018 by the Association of Certified Fraud Examiners, Inc.
28Miami IIA-ACFE
InternationalDivisionsCorporate
Office
Alteration ofAudit Evidence
Lies
Internal Audit Plan – “Survey on Culture”Lessons Learned
Appearance doesn’talways equal truth
Culture impactscan be felteverywhere
Bullying doesn’tjust take place on
the playground
Half Truths
Interviews /Surveys
Evaluation ofELCs
Tips
Finger Pointing
Cover - Ups
Review of keymetrics
Unhappyemployees
Lack of talent
SignificantPressure
Paranoia
SecrecyControlling
CEO
Errors/Mistakes
RestatementsInternal Control Breakdowns
ü ProperOversight
ü Policies andProcedures
ü Code ofConduct
Overly Critical
ü Hotline
STORY TIME: “A CEO IN CRISIS”
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Mobile PhoneProvider New York
Merchant
Accounts PayableDepartment
EmployeeFraudster
SubmitsAlteredInvoices
Submits Payment
SubmitsInvoice forPayment
“WHO’S WATCHING IT?”
30Miami IIA-ACFE
LET ME COUNT THE WAYS
Corporate Office
Paid $6M
Field Office A
Finance Director
Used dormant entity/ bank account
Fictitious vendor
President’ssignature
stampAsset insteadof expense
Changedregistration
docs
PerpetualInventorySystem
Separatecheck runs
Scheme & Concealmentmethods
Internationalcorporate office
US subsidiary
ReconciliationInventoryaccount
GeneralLedger
Periodic adjustment
Alteredvendor
transactiondetails
Superuser
rights
31Miami IIA-ACFE
ConsumerConfidence
Fraud =5% of
revenue
Reputation =$500m +
Market Value =$1b +
Productivity =$14k per
employee*
*Source: Science Daily
WHAT DOES A POOR CULTURE COST?
Fines/Settlements =
$150m +
32Miami IIA-ACFE
CULTURE:THE “MORAL FABRIC” OF AN ORGANIZATION
Organizational cultureencompasses values andbehaviors that "contribute tothe unique social andpsychological environment ofan organization".
33Miami IIA-ACFE
Formal policies, systemsand practices
Information practices andsymbolic actions
Beliefs, values &attitudes
Only 4% of problemsare known
to top managers
9% of problems areknown to
middle management
74% of problemsare known
to supervisors
100% of problemsare known
to front-lineemployees
CULTURE ORGANIZATION
34Miami IIA-ACFE
u Gain Support - Build the relationships, respect and support necessary todiscuss difficult concerns about culture
u Communicate - Discuss the importance of auditing culture withmanagement, the audit committee and throughout the organization
u Build an Approach - Be it small, focused audit areas or an overall,holistic review, decide how your department will undertake a cultureassessment
u Fact Find - Over time, gather information that can used to evaluate anorganization’s culture – look outside the traditional objective methodsthat are “comfortable” to us as auditors
INTERNAL AUDIT TO DOS
35Miami IIA-ACFE
GAINING TRACTION ON CULTURE CHANGE
Culture change isNOT like a
lightning strike
Culture change is more like planting a seed andnurturing it and watching it grow.
Time is measured in years before you get a fullyfunctional, aligned culture.
Year 1 Year 2 Year 3 Year 4?
36Miami IIA-ACFE
CHALLENGES & SOLUTIONS
Heart Transformation –people doing the right
things for the rightreasons
Drive and Manage Changevia Corrective Action
Structuring Very HighStandard Internal and
External Audits
Eliminate Learn/ForgetCycle – make change
sticky
Develop & ConductPeriodic & On-going
Verifications
Instill within allemployees on a daily
basis the OrganizationalVision
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WHAT CAN WE CLARIFY?