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.Ethics for Auditors: Understanding Current Issues in Financial Integrity

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Webinar series from FraudResourceNet LLC on Preventing and Detecting Fraud in a High Crime Climate. Recordings of these Webinars are available for purchase from our Website fraudresourcenet.com …

Webinar series from FraudResourceNet LLC on Preventing and Detecting Fraud in a High Crime Climate. Recordings of these Webinars are available for purchase from our Website fraudresourcenet.com
This Webinar focused on the subject in the title
FraudResourceNet (FRN) is the only searchable portal of practical, expert fraud prevention, detection and audit information on the Web.
FRN combines the high quality, authoritative anti-fraud and audit content from the leading providers, AuditNet ® LLC and White-Collar Crime 101 LLC/FraudAware.

The two entities designed FRN as the “go-to”, easy-to-use source of “how-to” fraud prevention, detection, audit and investigation templates, guidelines, policies, training programs (recorded no CPE and live with CPE) and articles from leading subject matter experts.
FRN is a continuously expanding and improving resource, offering auditors, fraud examiners, controllers, investigators and accountants a content-rich source of cutting-edge anti-fraud tools and techniques they will want to refer to again and again.

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  • 1. Ethics for Auditors: Understanding Current Issues in Financial Integrity" June 26, 2013 Special Guest Presenter: Michael Palmer, JD 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. 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 About Michael Palmer About Mike Palmer  Founder, Ethics By Design  Lawyer since 1980  Consultant to large and small companies  Author  Educator Copyright © 2013 FraudResourceNet™ LLC
  • 3. About Michael Palmer About Mike Palmer Copyright © 2013 FraudResourceNet™ LLC Webinar Housekeeping This webinar and its material are the property of FraudResourceNet 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 5-7 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. Unless you are participating in a group that is viewing this Webinar on a common computer screen, 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
  • 4. 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 6 Today’s Agenda  Introduction: Fraud Statistics: The Growing Fraud Threat  Auditing for Fraud: Standards & Essentials  Ethics vs. Fraud  Your Questions  Conclusion Copyright © 2013 FraudResourceNet™ LLC
  • 5. 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 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
  • 6. Paul, Marta, & Paul’s Mother Copyright © 2013 FraudResourceNet™ LLC Paul’s Deception Copyright © 2013 FraudResourceNet™ LLC
  • 7. Paul’s Mother Chases Marta Copyright © 2013 FraudResourceNet™ LLC Paul Eats the Tuber Copyright © 2013 FraudResourceNet™ LLC
  • 8. Moral: The Talent to Deceive is in Our DNA Copyright © 2013 FraudResourceNet™ LLC The Hebrew Myth of Adam, Eve, and the Serpent Copyright © 2013 FraudResourceNet™ LLC
  • 9. Lead Us Not Into Temptation Copyright © 2013 FraudResourceNet™ LLC Keeping us Honest “If men were angels, no  government would be necessary. “ Federalist # 51. Copyright © 2013 FraudResourceNet™ LLC
  • 10. The Cheating Culture Copyright © 2013 FraudResourceNet™ LLC Lying Copyright © 2013 FraudResourceNet™ LLC
  • 11. Government Procurement “There is no kind of dishonesty into which otherwise good people more easily and frequently fall than that of defrauding the government.” Benjamin Franklin Copyright © 2013 FraudResourceNet™ LLC Our Challenge Copyright © 2013 FraudResourceNet™ LLC
  • 12. Our Challenge Copyright © 2013 FraudResourceNet™ LLC Internal Auditors Watch the Watching System Copyright © 2013 FraudResourceNet™ LLC
  • 13. Internal Auditors Watch the Watching System Copyright © 2013 FraudResourceNet™ LLC Three Lines of Defense Copyright © 2013 FraudResourceNet™ LLC
  • 14. Can We Make it Better? Copyright © 2013 FraudResourceNet™ LLC Can We Make it Better? Copyright © 2013 FraudResourceNet™ LLC
  • 15. Copyright © 2013 FraudResourceNet™ LLC What We’ve Learned Copyright © 2013 FraudResourceNet™ LLC
  • 16. What We’ll Go Over Next  We Are Group  The Importance Creatures: Lessons of Reminders from Social  Implications for Psychology Governance,  The role of Internal Risk Auditors is to Management, Watch the Watch and Control System  Discussion Copyright © 2013 FraudResourceNet™ LLC Polling Question 1 According to the IIA the 3rd Line of Defense in defending against fraud, theft and other ethical misconduct is A. Internal controls B. Risk management C. Internal audit D. Copyright © 2013 FraudResourceNet™ LLC
  • 17. We Are Group Creatures Copyright © 2013 FraudResourceNet™ LLC Obedience to Perceived Authority Copyright © 2013 FraudResourceNet™ LLC
  • 18. Obedience to Perceived Authority Copyright © 2013 FraudResourceNet™ LLC Obedience to Perceived Authority Copyright © 2013 FraudResourceNet™ LLC
  • 19. Few Thought Others Would Do It Copyright © 2013 FraudResourceNet™ LLC Milgram Experiment Results Copyright © 2013 FraudResourceNet™ LLC
  • 20. Lessons for GRC Design Copyright © 2013 FraudResourceNet™ LLC Diffusion of Responsibility: The Bystander Effect Copyright © 2013 FraudResourceNet™ LLC
  • 21. Diffusion of Responsibility: The Bystander Effect Copyright © 2013 FraudResourceNet™ LLC Diffusion of Responsibility: The Bystander Effect Copyright © 2013 FraudResourceNet™ LLC
  • 22. Diffusion of Responsibility: The Bystander Effect Copyright © 2013 FraudResourceNet™ LLC Diffusion of Responsibility: The Bystander Effect Copyright © 2013 FraudResourceNet™ LLC
  • 23. Diffusion of Responsibility: The Bystander Effect Copyright © 2013 FraudResourceNet™ LLC Diffusion of Responsibility: The Bystander Effect Copyright © 2013 FraudResourceNet™ LLC
  • 24. Lessons for GRC Design Copyright © 2013 FraudResourceNet™ LLC Seeing What Others See Copyright © 2013 FraudResourceNet™ LLC
  • 25. Seeing What Others See Copyright © 2013 FraudResourceNet™ LLC Seeing What Others See Copyright © 2013 FraudResourceNet™ LLC
  • 26. Seeing What Others See Copyright © 2013 FraudResourceNet™ LLC Me or Your Lying Eyes? Copyright © 2013 FraudResourceNet™ LLC
  • 27. Lessons for GRC Design Copyright © 2013 FraudResourceNet™ LLC Copyright © 2013 FraudResourceNet™ LLC
  • 28. The Fraud Triangle Opportunity ‐$ Motivation Rationalization Copyright © 2013 FraudResourceNet™ LLC Copyright © 2013 FraudResourceNet™ LLC
  • 29. Average of 4 Correct Answers Copyright © 2013 FraudResourceNet™ LLC But They Reported Six (6) Correct Answers Copyright © 2013 FraudResourceNet™ LLC
  • 30. The Fudge Factory Copyright © 2013 FraudResourceNet™ LLC Lessons for GRC Design Copyright © 2013 FraudResourceNet™ LLC
  • 31. Willpower is Finite Copyright © 2013 FraudResourceNet™ LLC Willpower Depletion Copyright © 2013 FraudResourceNet™ LLC
  • 32. Self-Control is a Like Neurological Muscle Copyright © 2013 FraudResourceNet™ LLC Polling Question 2 Another term for Rationalization in the context of ethics and fraud is: A. B. C. D. Absence of willpower Illegal behavior The fudge factory None of the above E. Copyright © 2013 FraudResourceNet™ LLC
  • 33. Self-Control is a Like Neurological Muscle Copyright © 2013 FraudResourceNet™ LLC Meet With Your Parole Board in the Morning or Just After Lunch Copyright © 2013 FraudResourceNet™ LLC
  • 34. Willpower Depletion Also Reduces Honesty Copyright © 2013 FraudResourceNet™ LLC Willpower Depletion Also Reduces Honesty Copyright © 2013 FraudResourceNet™ LLC
  • 35. Lessons for GRC Design Copyright © 2013 FraudResourceNet™ LLC We Are Group Creatures Part B Copyright © 2013 FraudResourceNet™ LLC
  • 36. Was the Challenger Launch Decision a Failure of Governance, Risk Management, and Control Systems? Copyright © 2013 FraudResourceNet™ LLC Copyright © 2013 FraudResourceNet™ LLC
  • 37. Copyright © 2013 FraudResourceNet™ LLC Copyright © 2013 FraudResourceNet™ LLC
  • 38. Copyright © 2013 FraudResourceNet™ LLC Copyright © 2013 FraudResourceNet™ LLC
  • 39. Copyright © 2013 FraudResourceNet™ LLC Copyright © 2013 FraudResourceNet™ LLC
  • 40. Copyright © 2013 FraudResourceNet™ LLC Copyright © 2013 FraudResourceNet™ LLC
  • 41. Copyright © 2013 FraudResourceNet™ LLC Copyright © 2013 FraudResourceNet™ LLC
  • 42. Copyright © 2013 FraudResourceNet™ LLC Copyright © 2013 FraudResourceNet™ LLC
  • 43. Copyright © 2013 FraudResourceNet™ LLC Copyright © 2013 FraudResourceNet™ LLC
  • 44. Copyright © 2013 FraudResourceNet™ LLC Copyright © 2013 FraudResourceNet™ LLC
  • 45. NASA Headquarters Washington, D.C. Morton-Thiokol Utah Marshall Space Flight Center Alabama Johnson Space Center Texas Copyright © 2013 FraudResourceNet™ LLC The Decision to Launch Copyright © 2013 FraudResourceNet™ LLC
  • 46. Icicles on the Launch Pad Copyright © 2013 FraudResourceNet™ LLC Copyright © 2013 FraudResourceNet™ LLC
  • 47. Copyright © 2013 FraudResourceNet™ LLC Copyright © 2013 FraudResourceNet™ LLC
  • 48. Copyright © 2013 FraudResourceNet™ LLC Huntsville Alabama Ogden Utah Copyright © 2013 FraudResourceNet™ LLC
  • 49. Copyright © 2013 FraudResourceNet™ LLC Roger Boisjoly Copyright © 2013 FraudResourceNet™ LLC
  • 50. Copyright © 2013 FraudResourceNet™ LLC “My God, Thiokol,'' Mulloy says. ''When do you want me to launch, next April?'' Copyright © 2013 FraudResourceNet™ LLC
  • 51. Copyright © 2013 FraudResourceNet™ LLC Copyright © 2013 FraudResourceNet™ LLC
  • 52. Copyright © 2013 FraudResourceNet™ LLC A Management Decision? Copyright © 2013 FraudResourceNet™ LLC
  • 53. Copyright © 2013 FraudResourceNet™ LLC Copyright © 2013 FraudResourceNet™ LLC
  • 54. Copyright © 2013 FraudResourceNet™ LLC Copyright © 2013 FraudResourceNet™ LLC
  • 55. Copyright © 2013 FraudResourceNet™ LLC Copyright © 2013 FraudResourceNet™ LLC
  • 56. Copyright © 2013 FraudResourceNet™ LLC As Feared, The O-rings Failed Copyright © 2013 FraudResourceNet™ LLC
  • 57. Copyright © 2013 FraudResourceNet™ LLC Polling Question 3 The Challenger disaster is a dangerous example of groupthink A. True B. False Copyright © 2013 FraudResourceNet™ LLC
  • 58. Copyright © 2013 FraudResourceNet™ LLC Managers NASA Morton-Thiokol Engineers Copyright © 2013 FraudResourceNet™ LLC
  • 59. Copyright © 2013 FraudResourceNet™ LLC Copyright © 2013 FraudResourceNet™ LLC
  • 60. Disorganized Decision Making  No hierarchy of values  No explicit mention of pressures that could distort judgment  Engineering expertise subordinated to “management” concerns  No one objected to Mason’s direction to put on management hat.  The question was poorly framed  Intuitive expertise was disregarded Copyright © 2013 FraudResourceNet™ LLC Organizational Integrity Failure Safety Criticality 1 Diffusion of Task Force Responsibility Copyright © 2013 FraudResourceNet™ LLC
  • 61. Corporate Integrity Copyright © 2013 FraudResourceNet™ LLC Copyright © 2013 FraudResourceNet™ LLC
  • 62. Copyright © 2013 FraudResourceNet™ LLC Copyright © 2013 FraudResourceNet™ LLC
  • 63. Copyright © 2013 FraudResourceNet™ LLC VISION MISSION VALUES EFFECTIVE ETHICS PROGRAM Copyright © 2013 FraudResourceNet™ LLC
  • 64. Hierarchy of Values Copyright © 2013 FraudResourceNet™ LLC Summary  Obedience to Perceived Authority  Diffusion of Responsibility  Conformity to what we think others are doing  Focus theory of normative conduct  Normalization of deviance (Challenger) Copyright © 2013 FraudResourceNet™ LLC
  • 65. Polling Question 4 As the Challenger episode showed, a failure of organizational integrity can lead to a risky incident of…. A. B. C. D. Dishonesty Negligence Incompetence Rationalization E. Copyright © 2013 FraudResourceNet™ LLC Other Ways to Improve GRC Systems Copyright © 2013 FraudResourceNet™ LLC
  • 66. Two Areas to Start With Institute Smart Habit-building Programs Build Reminders Into the System Copyright © 2013 FraudResourceNet™ LLC Smart Habit-building Programs Copyright © 2013 FraudResourceNet™ LLC
  • 67. Make them Operational By Creating Checklists Copyright © 2013 FraudResourceNet™ LLC Nurture Relationship of Trust With The Checklist of Trustworthy Behavior™ 1. 2. 3. 4. 5. 6. 7. Is it our best? Is it the truth? Is it fair? Is it polite? Is it what we promised? Is it legal? Have we exercised due care? Copyright © 2013 FraudResourceNet™ LLC
  • 68. Create Your Own Checklists Will this violate our integrity? How does this put the customer first? Copyright © 2013 FraudResourceNet™ LLC Checklists Assist Thinking Copyright © 2013 FraudResourceNet™ LLC
  • 69. Auditors Know Checklists Copyright © 2013 FraudResourceNet™ LLC The Role of Reminders Copyright © 2013 FraudResourceNet™ LLC
  • 70. The Role of Reminders Copyright © 2013 FraudResourceNet™ LLC Build Moral Reminders Into the System Copyright © 2013 FraudResourceNet™ LLC
  • 71. The following report contains only my actual expenses. Copyright © 2013 FraudResourceNet™ LLC Financial and Sales Reports I will report only the truth in this financial statement. Copyright © 2013 FraudResourceNet™ LLC
  • 72. Performance Evaluations This evaluation is accurate to the best of my information and belief... Copyright © 2013 FraudResourceNet™ LLC Pressure Cooker Safety Valve Copyright © 2013 FraudResourceNet™ LLC
  • 73. Defective Pressure Cookers Can Explode Copyright © 2013 FraudResourceNet™ LLC A Safe Place to Talk Copyright © 2013 FraudResourceNet™ LLC
  • 74. A Safe Place to Talk Copyright © 2013 FraudResourceNet™ LLC Effective Ethics & Compliance Programs Have Many Parts Copyright © 2013 FraudResourceNet™ LLC
  • 75. Code of Conduct The Pieces Need to Come Together WORKFORCE Ombuds Office TRAINING Copyright © 2013 FraudResourceNet™ LLC Into A Comprehensive Program CORE VIRTUES TRAINING RECRUITING CODE OF  Ombuds Office CONDUCT FCPA FAR FSG Internal  Control  System SOX Copyright © 2013 FraudResourceNet™ LLC
  • 76. Polling Question 5 Reminding people to conduct themselves with integrity and honesty is pointless A. True B. False C. Copyright © 2013 FraudResourceNet™ LLC Other Possibilities Copyright © 2013 FraudResourceNet™ LLC
  • 77. Questions?  Any Questions? Don’t be Shy! Copyright © 2013 FraudResourceNet™ LLC Thank You! mp@ethicsbydesign.com www.ethicsbydesign.com 802 870 3450 Copyright © 2013 FraudResourceNet™ LLC
  • 78. Thank You! Website: http://www.fraudresourcenet.com Jim Kaplan FraudResourceNet™ 800-385-1625 jkaplan@fraudresourcenet.com Peter Goldmann FraudResourceNet™ 800-440-2261 pgoldmann@fraudresourcenet.com Copyright © 2013 FraudResourceNet™ LLC Coming Up…. Fraud Auditing versus Fraud Investigation: Important Distinctions July 10 Bribery, Corruption and the FCPA: What Auditors Need to Know July 24 Essentials of Effective Fraud Risk Assessments, July 26 Copyright © 2013 FraudResourceNet™ LLC