session c track 5

8/12/2019 Session C Track 5

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Auditing for Corruption in

Emerging Markets:Applying fraud detection skillsto reduce corruption

Bill PollardPartner, Deloitte FAS

Mark AlbersSr. Manager, Deloitte FAS

Elizabeth Truelove McDermottVP Audit, Ethics, and Compliance, DeVry Inc.


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At any givenmoment, there isa certainpercentage of

thats up to nogood.

J. Edgar Hoover


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Demonstrate the differences and similaritiesbetween auditing for fraud and auditing forcorruption in developing global markets

Provide real-life examples to highlight thechallen es of auditin for corru tion

Objectives

Learn strategies for detecting and investigatingfraud and corruption

Understand similarities and differences that mayaffect audit strategies in different countries


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Current Corruption Environment

Risk Areas and Red Flags of Corruption

Corruption Risks in Key Emerging Market

Discussion Contents

Internal Audit Procedure Considerations


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CURRENT GLOBAL


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Corruption vs. Fraud

Corrupt ion: Takes place in the form of providing illicit benefits; harder to find;

narrower scope than fraud.

Bribery

Embezzlement

Extortion

Influence Peddling Unlawful gratuity favor or commission

Nepotism

Illegal Political contribution

Fraud:

Deriving undue benefit by bypassing some controls or bending somerules. Fraud schemes are used to commit corrupt activities.

Asset Misappropriation

Financial statement irregularities

Corruption


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Where are the issues DOJ Enforcement Actions

Anti-Corruption Foundation

2009

2010

2011

Year

15 Companies

23 Companies

11 Companies

While 2011 was slower on the corporate side, it was busy forindividuals (38 in total) in all categories -- indictments, trials,sentences, dismissals, mistrials, and appeals

FCPA is likely not your only concern anymore

$- $500 $1,000 $1,500 $2,000

2008

Amount (In Millions)

11 Companies


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High Risk Markets for Corruption

2011


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Emerging Markets


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RISK AREAS AND RED FLAGS

OF CORRUPTION


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Emerging Markets:While emerging markets can present opportunities to access newcustomers and resources, they also bring significant integrity andcorruption risks

Agent /Dealer Payments (third-party intermediaries)

Consultant Payments

Corruption risks and red flags

mp oyee xpenses g ts an osp ta ty

Facilitation Payments

Contributions to charitable or political organizations

Direct payments or reimbursements to foreign officials

Logistics and shipping expenses (customs)

Others


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CORRUPTION RISKS IN KEY

EMERGING MARKET


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Critical success factorsKey Corruption

Risks

Tendera

ndcontracting

Customspaymentsto

minimizedutiesand

taxes

Expediti

nglicenses

andperm

its

Paymentsforservice

executio

n

Fictitiou

s

invoices

/paperwork

Freetrip

s/lavishgifts

Cash(lo

ans/slush

funds)

Hidden

interests/contract

Uniqu

ecorruption

me

chanisms

Country

1 Russia

Bribers to obtain services (medical/educational)

Payments to avoid confiscation of property bydistrict prosecutors

Use of shell companies to facilitate bribes

India

Slush funds

Excessive commissions Awarding lucrative contracts to relatives ofpublic officials

Charitable contributions to relatives of publicofficials

China

Red envelope (cash)

Wine, liquor , cigarettes. Baby formula (inexcessive quantities)

Loans Hidden interests of public officials in

contracts/vendor arrangements

Brazil

Vague contract definitions Bids rigged by public officials

Payments to customs / tax officials

Mexico

Mordida or bites low level bribes

Use of third-parties to funnel funds togovernment officials

Customs payments to facilitate import/export ofgoods (particularly raw materials)

12


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INTERNAL AUDIT -

PROCEDURAL

CONSIDERATIONS


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1. Proper Prevention Surveys Risk Assessments Prioritization Training

Isolating fraud and corruption IA tools and techniques

. r -par y ue gence Know-your vendor Business Intelligence

3. Data Collection and integration FCPA Analytics

4. Pinpoint Transaction Analysis


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Where to Audit:Analysis of High-Risk General

Ledger Accounts/Transactions Internal Commissions/bonus Travel Allowances Travel Expense Meals and Entertainment Expense

Gift Expense Contributions and Donations Employee Loans and Advances Vendor Pre-Payments Consulting Fees and Services Professional Fees and Services Licenses and Permits Excess Payment and Facilitation Expense Customs and Brokerage (Import\Export) Expense Promotional Expense Marketing and Advertising Expense


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Internal Audit Approach Integrating Leading Practices toReduce the Risk of Corruptionand Fraud

Dedicated and properly trained auditteam focused on FCPA

Structured risk assessment and gapanalysis

Compliance generally driving process withminimal or no internal audit input

Not doing stand-alone FCPA audits or FCPArisk assessments

Internal audit not trained to detect FCPAviolations

Proactive testing, if any, is not risk based andoften includes random selections

FCPA policies do not adequately identifyinternal audits role

Marriage of compliance, legal, andaudit

Stand-alone FCPA reviews

Testing of high-risk locations on atleast a rotating basis

Use of electronic data anomaly tools toidentify and test high risk transactions

Regular, open communication channelwith Legal an Compliance in order to

have timely information on potential

risk areas and to assist

Legal/Compliance and/or adjust

internal audit projects to address such

risk areas.


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When Does An Audit Become AnInvestigation?

Expand sample, expand scope, or perform additionalprocedures. Look for additional instances or patterns.

Ask additional questions framed in the context of the internalaudit (e.g., how could a situation like this occur?).

Any indication of potential perpetrators?

suspecting fraud Maintain copies of documents and data files that support the

indicators/red flags of fraud.


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Leading Todays Presentation

Bill Pollard

PartnerDeloitte Financial Advisory Services LLP+1 (312) 486 [email protected]

Bill is a partner in the Forensic & Dispute Services

Elizabeth Truelove McDermott

VP, Audit, Ethics and ComplianceDeVry Inc+1(630) 353-1496

[email protected] Truelove McDermott is Vice President,

Mark Albers

Senior ManagerDeloitte Financial Advisory Services LLP+1 (312) 486 2290

[email protected] has more than 14 years of experience and

prac ce o e o e nanc a v s ory erv c esin Chicago. He has managed and conducted abroad range of forensic accounting and corporateinvestigations for public and private companies,government agencies and private individuals. Hehas spent the past twelve years providing financialadvisory services to clients in the manufacturing,construction, governmental, insurance, and not-for-profit industries, among others. The engagementshave involved complex financial accounting related

matters, including corporate investigations,accounting restatements, SEC investigations, whitecollar crimes and litigation support, as well asconsulting with clients on FCPA compliance, fraudcontrols and anti-fraud programs.

Audit, Ethics and Compliance Services at DeVryInc. She began her career with DeVry inJanuary 1992 as the state licensing specialist.Elizabeth has extensive experience at DeVry,working across three divisions, including BeckerProfessional Review, before assuming hercurrent role. Most recently she has served assenior director of Internal Audit withresponsibility for planning, directing, andadministering a comprehensive risk-based

internal audit program. She has provided auditleadership in the development, operation andevaluation of the organization risk-managementprogram, as well as served as the organizationliaison to external audit and regulatory reviews.

Elizabeth earned her Master of BusinessAdministration from Keller Graduate School ofManagement. She also holds a bachelorsdegree in business from Bradley University. Inaddition, Elizabeth is a Certified PublicAccountant.

focuses on client matters involving financial/fraudinvestigations, Securities and ExchangeCommission (SEC) and other regulatory inquiriesand investigations. He provides consultingservices in the areas of proactive fraud riskmanagement, forensic accounting and litigationsupport with a focus on entities in the publicsector and manufacturing industries. Mark hasmanaged investigations in Canada, Mexico,Germany, United Kingdom, India, Australia,

Thailand, South Africa, and Korea, as well asnumerous states within the United States. Markjoined the Deloitte Chicago office in 1999 afterpracticing as an external auditor in the DeloitteDetroit office for three years, performing financialaudits for public and private companies of varyingsizes and industries, control reviews, andregulatory compliance audits.


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QUESTIONS

session c track 5

Documents