RETAIL FRAUD – DETECTING AND CONDUCTING INTERNAL INVESTIGATIONS

Tom Bryan, Corporate Fraud ExaminerWal-Mart Stores, Inc.

October 2008 Save money. LiveBetter.

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TOPICS:

• Introduction

• The Problem

• The Solution

• Proactive Steps

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The Problem

• U.S. Corporations lose annual revenues every year due to fraud.

• Most companies are reactive to fraud -• Allegations from an internal whistleblower• Allegations from an external whistleblower• Discoveries by internal auditors

• Investigations when conducted often reveal –• Weaknesses in internal controls• A lack of corporate policies and enforcement of those policies• Inadequate employee training programs• Inability or lack of interest in identifying major areas of risk within the

company• Failure to adequately fund and conduct proactive measures

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Detection Methods for Million Dollar Fraud Schemes

42.3

22.8

18.6

16.7

15.8

6

46.2

20

19.4

23.3

9.1

3.2

0 5 10 15 20 25 30 35 40 45 50

Tip

By Accident

Internal Audit

Internal Controls

External Audit

Notified By Police

Det

ecti

on

Met

ho

d

Percent of Cases

All Cases

$1,000,000 +

Source: Association of Certified Fraud Examiners 2008 Report to the Nation

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The Solution

• Proactive measures could help avoid such issues

• Significant Steps• Establish and Enforce Corporate Policies• Establish a Global Ethics Office• Establish a Whistleblower Hotline• Establish a Corporate Investigations Team• Assess Fraud Risks within the Company• Conduct Proactive Measures and Training

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Establish Corporate Policies

• Wal-Mart Stores, Inc. currently has numerous corporate policies concerning the following selected categories:

• Accounting• Asset Protection• Corporate Affairs• Corporate Responsibility• Environmental• Ethics• Global Security• Information Systems• Legal• Marketing• Merchandising• Operations• People Division• Privacy• Risk Control

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Guiding Principles

• These principles help our Associates make the right decisions and act with integrity.

• Always act with integrity.• Lead with integrity, and expect others to work with integrity.• Follow the law at all times.• Be honest and fair.• Reveal and report all information truthfully, without manipulation or

misrepresentation.• Work, actions, and relationships outside of your position with the company

should be free of any conflicts of interest.• Respect and encourage diversity, and never discriminate against anyone.• Ask your manager or the Global Ethics Office for help if you have questions or if

you face an ethical problem. Never act or ask someone to act unethically.• Promptly report suspected violations of the Statement of Ethics.• Cooperate with and maintain the private nature of any investigation of a possible

ethics violation.• When involved in an ethics investigation, reveal and report all information

truthfully. Present all of the facts without personal opinion, bias, or judgment.

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Statement of Ethics

A Statement of Ethics identifies the attitudes and conduct expected to create an honest, fair, and ethical workplace. The Statement of Ethics defines who we are, what we value, and how we treat our customers, suppliers, and fellow Associates. The Statement of Ethics is the cornerstone upon which a company will build. Wal-Mart policies and procedures help guide decisions and activities on behalf of the company.

• Rules of conduct• Law• Policy• Procedures• Expectations

• Areas of Concern• Conflicts of interest• Gifts and gratuities• Handling company assets• Proper business relationships• Company documentation• Segregation of duties

• Expectations• Decisions are right for Wal-Mart business not personal benefit

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Statement of Ethics con’t

Conflicts of Interest

• Occurs when an Associate has an undisclosed personal interest in a transaction that negatively affects Wal-Mart

• You have a responsibility to avoid situations and relationships that involve actual or possible conflicts of interest

• The appearance of a conflict may be just as damaging to Wal-Mart’s reputation as an actual conflict

• A conflict situation can arise if you take actions or have interests that are inconsistent with the interests of Wal-Mart or that may interfere with your ability to perform your job effectively on behalf of the Company

• Situations or transactions that create the appearance or perception that you cannot carry out your duties and responsibilities with integrity and impartiality should be avoided

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Statement of Ethics con’t

Gifts and Gratuities

• Adds cost to a supplier’s products

• Influences Associates’ objectivity

• Gives the impression of favoritism

• Builds trust and relationships based on giving/receiving gifts instead of professional business dealings

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Statement of Ethics con’t

Company Assets

• Anything purchased by Wal-Mart• Samples• Phones, fax, copy paper, etc.• Airline tickets• Corporate credit card• Company cars• Laptops

•Assets are for business use only

• Never for personal use or gain

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Statement of Ethics con’t

Business Relationships

• Wal-Mart does not intend to determine/restrict friendships

• Business relationships should remain business

• While friendships exist in business, the friendships should not interfere with or influence Wal-Mart business • All relationships that could be perceived as inappropriate should be reported

• Be transparent in all dealings with current and potential suppliers

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Statement of Ethics con’t

Company Documents

• There must be integrity and accuracy in the reporting, maintaining, and retention of all company documents• Violations include

• Incomplete reporting• Altered originals• Factual omissions• Unauthorized destruction of documents

• Purposely altering, omitting, or unauthorized destruction of company documents is a serious violation

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Statement of Ethics con’t

Segregation of Duties

• Certain duties or decisions should be separated to prevent and reduce opportunities for unauthorized modification or misuse of data or services

• You cannot make the final decision or approve items that you directly benefit from• Travel booking• Expense vouchers• Contracts• Procedural/policy changes

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Establish a Global Ethics Office

• Wal-Mart created a Global Ethics Office to promote ownership of Wal-Mart’s ethical culture to all stakeholders globally

• The Global Ethics Office seeks to emphasize the basic beliefs of the company• Respect for the Individual• Service to our Customers• Strive for Excellence

• The Global Ethics Office encourages Associates to WORK WITH INTEGRITY • The Responsibilities of the Global Ethics Office

• Guide for ethical decision making• Proactive education of the Company’s ethical culture• Thorough investigation and prevention of unethical conduct

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Establish a Whistleblower Hotline

• The Global Ethics Helpline process underscores our belief at Wal-Mart that acting ethically sometimes requires speaking up. Remaining silent is equivalent to condoning possible questionable behavior.

• The Global Ethics Helpline provides a way to raise questions or concerns about an individual’s actions anonymously and without fear of consequences.

• The actions or inactions of even one Associate who chooses to do the wrong thing can have an impact on the entire company.

• Nothing is more important to a company and its ability to lead than integrity. It is more important than sales or earning or stock growth.

• The toll free Global Ethics Helpline is available around the world – 24 hours a day, 7 days a week – and is equipped to handle most local languages. The Helpline is staffed by an organization not affiliated with Wal-Mart. The operator will relay the information to the Global Ethics Office.

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Percent of Tips by Source

Vendor13%

Anonymous9%

Employee60%

Customer18%

Source: Association of Certified Fraud Examiners 2008 Report to the Nation

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Establish a Corporate Investigations Team

• Responsible for –

• Planning, executing, and overseeing various investigations of asset misappropriation, corruption, and financial statement fraud,

• Identifying all relevant evidence to allow managers/attorneys the ability to make an informed decision based on unbiased facts,

• Gathering evidence, reviewing documents, and interviewing individuals that may have relevant information,

• Reviewing processes and procedures to identify weaknesses in controls,

• Reporting findings, deficiencies, and making recommendations to the appropriate levels of management.

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Corporate Investigations Organizational Structure

• Senior Director of Corporate Investigations

• Director of Corporate Investigations

• Corporate Investigations• 4 Special Investigators• 4 Senior Corporate Fraud Examiners• 4 Corporate Fraud Examiners

• Corporate Investigations Research• 1 Research Manager• 3 Fraud Researchers• 2 CMI Fraud Researchers

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Background of Fraud Examiners

Corporate Fraud Examiners

LAW ENFORCEMENT

INTERNAL AUDIT

ASSET PROTECTION

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What we do…

• Primary Fraud Investigations

• Three primary categories:• Corruption• Asset Misappropriation• Fraudulent Statements

• Investigative Arm• Legal• Internal Audit• Ethics

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Occupational Fraud and Abuse

The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets

Occupational Frauds by Category

Asset MisappropriationsCorruption

FraudulentStatements

Conflicts of Interest

Bribery

IllegalGratuities

Economic Extortion

Inventory & All Other Assets

Cash

Nonfinancial

Financial

Source: Association of Certified Fraud Examiners 2008 Report to the Nation

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Logistics

Merchandising

CMI

Wal-Mart and Sam’s .Com

Ethics Shared Services

Facilities Maintenance

ISD

Real Estate

Legal

Law Enforcement

Wal-Mart Foundation

Corporate Investigations Customers

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Assess Fraud Risks within the Company

• A thorough assessment of fraud risks should be conducted.

• Risks should be ranked according to their likelihood and significance.

• Proactive plans should be developed to address the risks identified.

• Companies should consider performing or hiring an outside firm to perform a self-diagnosis to identify current ongoing fraud involving both Associates and Vendors.

• Determine what will be the response to fraud – specify protocol and possible employee/vendor repercussions.

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Conduct Proactive Measures and Training

• Proactive Training

• Proactive Audits

• Monitoring of Antifraud Controls

• Hiring of an outside firm that specializes in identifying Associate and Vendor risks. The outside Vendor could help identify patterns of risk, inauthentic organizations, and fraudulent billing activity in both expense and merchandise payable vendors.

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