Anti-Fraud Professional’s Guide to Building an Anti- Fraud Culture


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Anti-Fraud Professional’s Guide to Building an Anti- Fraud Culture

  1. 1. Anti-Fraud Professional’s Guide to Building an AntiFraud Culture April 23, 2013 Special Guest Presenter: Peter Goldmann, MSc., CFE Copyright © 2013 FraudResourceNet™ LLC About Peter Goldmann, MSc., CFE  President and Founder of White Collar Crime 101 Publisher of White‐Collar Crime Fighter Developer of FraudAware® Anti‐Fraud Training  Monthly Columnist, The Fraud Examiner,  ACFE Newsletter  Member of Editorial Advisory Board, ACFE  Author of “Fraud in the Markets” Explains how fraud fueled the financial crisis. Copyright © 2013 FraudResourceNet™ LLC
  2. 2. About Jim Kaplan, MSc, CIA, CFE  President and Founder of AuditNet®, the global resource for auditors   Auditor, Web Site Guru, Internet for Auditors Pioneer Recipient of the IIA’s 2007 Bradford Cadmus Memorial Award.  Author of “The Auditor’s Guide to Internet Resources” 2nd Edition  Copyright © 2013 FraudResourceNet™ LLC Webinar Housekeeping This webinar and its material are the property of FraudResouceNet LLC. Unauthorized usage or recording of this webinar or any of its material is strictly forbidden. We will be recording the webinar and you will be provided access to that recording within five business days after the webinar. Downloading or otherwise duplicating the webinar recording is expressly prohibited. Please complete the evaluation to help us continuously improve our Webinars. You must answer the polling questions to qualify for CPE per NASBA. Submit questions via the chat box on your screen and we will answer them either during or at the conclusion. If GTW stops working you may need to close and restart. You can always dial in and listen and follow along with the handout. Copyright © 2013 FraudResourceNet™ LLC
  3. 3. Disclaimers  The views expressed by the presenters do not necessarily represent the views, positions, or opinions of FraudResourceNet LLC (FRN) or the presenters’ respective organizations. These materials, and the oral presentation accompanying them, are for educational purposes only and do not constitute accounting or legal advice or create an accountant-client relationship. While FRN makes every effort to ensure information is accurate and complete, FRN makes no representations, guarantees, or warranties as to the accuracy or completeness of the information provided via this presentation. FRN specifically disclaims all liability for any claims or damages that may result from the information contained in this presentation, including any websites maintained by third parties and linked to the FRN website Any mention of commercial products is for information only; it does not imply recommendation or endorsement by FraudResourceNet LLC Copyright © 2013 FraudResourceNet™ LLC 4 Today’s Agenda  Introduction  The Auditor’s Role  Fraud Statistics  Why People Steal  Tone at the Top  Communicating Integrity  HR Policy: Compensation, Performance Reviews, Team Spirit, Career Opportunities  Ethics Policy, Compliance Policy and FRAUD POLICY  Training to Support Culture  Your Questions Copyright © 2013 FraudResourceNet™ LLC
  4. 4. The Auditor’s Role  1200: Proficiency and Due Professional Care  1220: Due Professional Care  2060: Reporting to Senior Management and the Board  2120: Risk Management  2210: Engagement Objectives Copyright © 2013 FraudResourceNet™ LLC Fraud: The Big Picture According to major accounting firms, professional fraud examiners and law enforcement:  Fraud jumps significantly during tough economic times  Business losses due to fraud increased 20% in last 12 months, from $1.4 million to $1.7 million per billion dollars of sales. (Kroll 2010/2011 Global Fraud Report)  Average cost to for each incident of fraud is $160,000 (ACFE) Of Financial Statement fraud: $2 million  Approx. 60% of corporate fraud committed by insiders (PwC)  Approx. 50% of employees who commit fraud have been with their employers for over 5 years (ACFE) Copyright © 2013 FraudResourceNet™ LLC 7
  5. 5. WHY INSIDERS STEAL The Fraud Triangle PRESSURE FRAUD OPPORTUNITY RATIONALIZATION Creating a Fraud Diamond: GREED! Copyright © 2013 FraudResourceNet™ LLC 8 Rationalization Rationalization often based on poor corporate culture: “I deserve the stolen money because my boss abuses me” “ I was unfairly passed over for a promotion” “ I haven’t gotten a pay increase in five years” “ I haven’t had a performance review in three years” “ The guys at the top are doing it, why shouldn’t I?” “ They just laid off half of my department. I’m probably next” Copyright © 2013 FraudResourceNet™ LLC
  6. 6. Tone at the Top: Key to Corporate Culture ACFE Guideline: “Tone at the Top refers to the ethical atmosphere that is created in the workplace by the organization’s leadership. “Whatever tone management sets will have a trickle-down effect on employees of the company. If the tone set by managers upholds ethics and integrity, employees will be more inclined to uphold those same values. “However, if upper management appears unconcerned with ethics and focuses solely on the bottom line, employees will be more prone to commit fraud because they feel that ethical conduct is not a focus or priority within the organization.” Copyright © 2013 FraudResourceNet™ LLC Polling Question 1 Copyright © 2013 FraudResourceNet™ LLC
  7. 7. Speaking of The Bottom Line… … Long before Greg Smith quit and skewered GS in NYT and his book, there Was “Goldman Sachs Elevator Gossip” (Twitter Acct: @GSElevator): “The lottery is just a way of taxing poor people who don't know math.” “If you can only be good at one thing, be good at lying… Because if you're good at lying, you're good at everything” “The fact that most people are too stupid to know how dumb they really are is the fabric holding our society together.” “Without question, Michael Milken has done more for humanity than Mother Teresa” Copyright © 2013 FraudResourceNet™ LLC Back to Wall Street: July, 2010: GS pays $550 million to US Government for deceiving clients regarding subprime mortgagebacked “toxic” derivatives.  2011: Blankfein gets a 14.5% compensation boost. Copyright © 2013 FraudResourceNet™ LLC
  8. 8. On a Positive Note… Source: Ethisphere Copyright © 2013 FraudResourceNet™ LLC Polling Question 2 Copyright © 2013 FraudResourceNet™ LLC
  9. 9. Assessing Tone at the Top  Does management dismiss “minor” misconduct?  Does management monitor comments and criticism in social media and other online venues to identify views of the organization’s culture that could suggest poor tone at the top?  Does the organization use annual employee surveys to gather information on their employees’ engagement with the enterprise and to monitor trends. (These surveys can be conducted internally or performed with the assistance of an independent advisor)?  Is TATT a regular meeting agenda item for audit committee, risk management or compliance executives -to share observations and perspectives regarding management activities, communications, and style? continued… Copyright © 2013 FraudResourceNet™ LLC Assessing Tone at the Top  Does the organization conduct exit interviews? Some departing employees, concerned about burning bridges, may be unwilling to mention ethics and integrity issues that may have contributed to their departure. Others may welcome the opportunity to discuss their experiences, but may provide this information only if asked.  Does the organization assess customer complaints? Monitoring trends in customer feedback may provide insight into the entity’s culture. Example: The swift and open handling of grievances may indicate an entity is dedicated to compliance and ethics, while a pattern of inadequate responses to customer grievances could suggest characteristics among management that research has associated with anti-social activities such as fraud. Copyright © 2013 FraudResourceNet™ LLC
  10. 10. Assessing Tone at the Top Jonathan Macey, Yale University’s new book, “The Death of Reputation”: “Not a single US financial institution ranks among the world’s 20 most reputable institutions.” Macey’s point: Financial institutions have such a negative culture that they have destroyed their once-stellar reputations as ethical, trustworthy entities. The 2008 financial crisis is the most dramatic recent example of poor culture leading to widespread fraud (and destruction of reputation). Copyright © 2013 FraudResourceNet™ LLC How Bad Can Culture Get? According to one of thousands of civil and criminal cases against Bank of America, its subsidiary, “Countrywide in 2007 invented, and Bank of America continued, a scheme known as the "Hustle" to speed up processing of residential home loans. Operating under the motto ‘Loans Move Forward, Never Backward,’ mortgage executives tried to eliminate "toll gates" designed to ensure that loans were sound and not tainted by fraud” Source: U.S. ex rel. O'Donnell v. Bank of America Corp et al, U.S, District Court, Southern District of New York, No. 12-01422. Copyright © 2013 FraudResourceNet™ LLC
  11. 11. Can Reputation Be Repaired? According to Advertising Age, Bank of America switched ad agencies specifically to repair image: “WPP will now be responsible for the rollout of a new strategic positioning -- or what Bank of America was internally calling the development of a "North Star" that would signal to Wall Street and consumers that it's a new day at the bank, helping to repair the company's tarnished image.” Macey: “I’ll believe it (improved culture) when I see it” Copyright © 2013 FraudResourceNet™ LLC Getting Culture Right BEFORE It’s Too Late Copyright © 2013 FraudResourceNet™ LLC
  12. 12. Communicating “Culture” Top management must:  Set standard of “zero tolerance” through actions (no bribe-paying, no book-cooking, no embezzlement, no conflict of interest, etc)… Reinforce with:  Emphasizing integrity in key communications….  Annual reports  Press releases  Internal communications with employees  Implementing awareness training Copyright © 2013 FraudResourceNet™ LLC HR Policies Critical To Anti-fraud Policy  Competitive (or over-competitive) compensation  Regular, thoroughly researched and fair/unbiased performance reviews  Ample opportunity for career/professional advancement  Emphasis on an management implementation of team-based work processes  Frequent staff meetings with open exchange of ideas for process improvement, grievances and other suggestions  Regular fraud awareness training Copyright © 2013 FraudResourceNet™ LLC
  13. 13. Polling Question 3 Copyright © 2013 FraudResourceNet™ LLC Policy Problems…And Solutions Ethics Policy, Compliance Policy & FRAUD POLICY Organizations often have ethics and/or compliance policies … Myth: These policies cover fraud detection and prevention Reality: Most ethics and compliance policies cover only:  Harassment  Discrimination  Regulatory compliance (banking rules, safety regulations, employment regulations, etc  Conflict of interest/gifts policy  General dictate about complying with all laws and regulations MOST POLICIES NEVER MENTION “FRAUD” Copyright © 2013 FraudResourceNet™ LLC
  14. 14. Policy Problems…And Solutions Sample Anti-Fraud Policy Copyright © 2013 FraudResourceNet™ LLC Polling Question 4 Copyright © 2013 FraudResourceNet™ LLC
  15. 15. Policy Problems…And Solutions Formal anti-fraud policies also should call for: Formal training of all employees in fraud schemes, red flags and responsibility for reporting wrongdoing Aim: Not just to catch fraudsters, but to continuously underscore the culture of “Zero Tolerance” Copyright © 2013 FraudResourceNet™ LLC FRAUD AWARENESS TRAINING OPTIONS, FREQUENCY & FORMAT WHOM TO TRAIN … IDEALLY: Everyone in the organization 1) Managers to build sense of importance of the training and urgency of instill positive antifraud culture throughout 2) All others Note: Content for each group may vary: Example: Financial Statement Fraud for Managers Only Copyright © 2013 FraudResourceNet™ LLC
  16. 16. FRAUD AWARENESS TRAINING OPTIONS, FREQUENCY, FORMAT WHAT TO TRAIN: Create Detailed Outline. Example… Sample Fraud Awareness Training MODULE I: INTRODUCTION Objectives:  Present a foundation of awareness for Detecting, Preventing and Reporting fraud.  Educate ABC Bank employees that fraud is more than dollars stolen from the Bank: Fraud damages ABC Bank’s reputation which results in lost customers which directly impacts everyone directly. It can also draw unfavorable and potentially costly regulatory scrutiny/enforcement action. Continued…. Copyright © 2013 FraudResourceNet™ LLC FRAUD AWARENESS TRAINING OPTIONS, FREQUENCY, FORMAT WHAT TO TRAIN… Continued…. Fraud affects YOU: When fraud occurs it can result in:  Reduced pay increases  Reduced benefits  Limited promotion opportunities  Layoffs MODULE 2: How fraud is committed MODULE 3: How to recognize red flags MODULE 4: How to report tips MODULE 5: Consequences for committing fraud & Conclusion Copyright © 2013 FraudResourceNet™ LLC
  17. 17. FRAUD AWARENESS TRAINING OPTIONS, FREQUENCY & FORMAT HOW TO TRAIN?  In-house classroom instructor (from I/A, Legal or Compliance)  Outside classroom instructor (Fraud investigator, fraud expert, forensic accountant, university professor)  On-line (E-Learning)  On-line—Webinar  Intranet (Internal E-alerts)  In-house newsletter ALL TRAINING SHOULD BE CUSTOMIZED TO YOUR ORGANIZATION’S CULTURE, BUSINESS PROCESSES, ETC Copyright © 2013 FraudResourceNet™ LLC FRAUD AWARENESS TRAINING OPTIONS, FREQUENCY & FORMAT WHEN TO TRAIN?  Full training once per year  Quarterly or bi-monthly seminars or refresher Webinars  Monthly E-alerts  Full training for all new hires Copyright © 2013 FraudResourceNet™ LLC
  18. 18. Polling Question 5 Copyright © 2013 FraudResourceNet™ LLC Questions?  Any Questions? Don’t be Shy! Copyright © 2013 FraudResourceNet™ LLC
  19. 19. Coming Up Next Month  Fraud Detection and Prevention Techniques Using Excel May 8  Fraud Risk Assessment: Key to Highly Effective Anti-Fraud Controls, May 9  Fraudulent Documentation: Fraudsters’ Secret Weapon ... How to Disarm Them May 29  Copyright © 2013 FraudResourceNet™ LLC Thank You! Website: Jim Kaplan FraudResourceNet™ 800-385-1625 Peter Goldmann FraudResourceNet™ 800-440-2261 Copyright © 2013 FraudResourceNet™ LLC