fraud investigation: do you have a clue...u“the company owes me.” u“it’s only a loan; i’ll...

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


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COMMITTING MORE THAN ONE SCHEME


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

10

0%

10%

20%

30%

40%

50%

Initial Detection of Occupational Frauds

201420162018

DETECTION OF FRAUD SCHEMES


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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


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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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1

BUILDING THE “PERFECT” PERP

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Who Could it be?

1

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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


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Male66.8%

Female33.2%

2014

Male69.0%

Female31.0%

2016

GENDER

Male69.0%

Female31.0%

2018

Gender Of Perpetrator - Frequency


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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


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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


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0%2%4%6%8%

10%12%14%16%18%

Department of Perpetrator - Frequency

2014

2016

2018

DEPARTMENT


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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


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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


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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?

2

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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


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?

fraud investigation: do you have a clue...u“the company owes me.” u“it’s only a loan; i’ll...

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