Intellectual property rights are asserted by the presenter over the original content provided in this presentation. Fraud Control illustrations are Copyright to the Audit Office of NSW. Newspaper articles are Copyright to the publishers. Other illustrations are from the public domain. Identifying Corruption Opportunities

IAB Services works with public sector bodies and their service-delivery partners to: Manage their risks Improve their performance Develop operating policies and processes Assure their compliance Maintain their integrity Corruption resistance Fraud control Misconduct investigations What would I know?

IAB Services works with public sector bodies and their service-delivery partners to:

Manage their risks

Improve their performance

Develop operating policies and processes

Assure their compliance

Maintain their integrity

Corruption resistance

Fraud control

Misconduct investigations

Previously Assistant Auditor-General for NSW Created the fraud control framework for NSW Developed & published: Strategic Approach to Fraud Control (BPGuide) [AO] Fraud Control Improvement Kit [AO] Corruption Resistance Healthcheck [IAB] Transparency & Disclosure Handook [HB 405] Probity Assurance Handbook [HB 325: 2008] Co-founded Corruption Prevention Network ( www.corruptionprevention.net ) Other Perspectives

Previously Assistant Auditor-General for NSW

Created the fraud control framework for NSW

Developed & published:

Strategic Approach to Fraud Control (BPGuide) [AO]

Fraud Control Improvement Kit [AO]

Corruption Resistance Healthcheck [IAB]

Transparency & Disclosure Handook [HB 405]

Probity Assurance Handbook [HB 325: 2008]

Co-founded Corruption Prevention Network ( www.corruptionprevention.net )

No need to worry

Open your mind

Going Concern Customers Finance (credit squeeze / cost of capital / debtors) People (if get nervous) Service delivery & supply chain partners Investments & financial instruments Regulatory changes Compliance & QA (risk of corner cutting eg. environmental controls) Changed BCP & risk profile (but have you worked through it?) tension on ethical climate (who cares about that?) Thumbnail Risk Assessment for Tough Economic Times

Going Concern

Customers

Finance (credit squeeze / cost of capital / debtors)

People (if get nervous)

Service delivery & supply chain partners

Investments & financial instruments

Regulatory changes

Compliance & QA (risk of corner cutting eg. environmental controls)

Changed BCP & risk profile (but have you worked through it?)

tension on ethical climate (who cares about that?)

Conventional view – says yes Empirical studies – uncertain Many variables, and data issues Refer Clement, D “The Mystery of Crime”, Fedgazette Vol 21 No. 2, March 2009, Federal Reserve Bank of Minneapolis, ISSN 1045-3334 Law enforcement practitioners – mostly say yes Misconduct / fraud investigators – mostly say yes Current practitioner evidence – mostly says yes Will Corruption Rise in the Economic Downturn ?

Conventional view – says yes

Empirical studies – uncertain

Many variables, and data issues

Refer Clement, D “The Mystery of Crime”, Fedgazette Vol 21 No. 2, March 2009, Federal Reserve Bank of Minneapolis, ISSN 1045-3334

Law enforcement practitioners – mostly say yes

Misconduct / fraud investigators – mostly say yes

Current practitioner evidence – mostly says yes

Let us consider why corruption might increase, and review some specific forms of corruption that current practice suggests are on the increase. Let’s look more closely

Let us consider why corruption might increase, and review some specific forms of corruption that current practice suggests are on the increase.

A Perfect Storm?

Factor 1: the ethical climate shock news!! - staff have private lives, and these can over-ride corporate behaviours partners/family/ friends ; investments/super losses the “you owe me” syndrome can kick in, even for the good apples Factor 2: the ethical check & balances Restructures and cut-backs has the back-office taken the brunt? Have you weakened control? NSW Auditor-General has expressed concern Factor 3: leaky pipes under increased pressure some high-corruption-risk systems are having more expenditure forced through them at the very time that controls may be weaker (eg. Grants & capital programs for some Government agencies) A Perfect Storm?

Factor 1: the ethical climate

shock news!! - staff have private lives, and these can over-ride corporate behaviours

partners/family/ friends ; investments/super losses

the “you owe me” syndrome can kick in, even for the good apples

Factor 2: the ethical check & balances

Restructures and cut-backs

has the back-office taken the brunt? Have you weakened control?

NSW Auditor-General has expressed concern

Factor 3: leaky pipes under increased pressure

some high-corruption-risk systems are having more expenditure forced through them at the very time that controls may be weaker (eg. Grants & capital programs for some Government agencies)

Increased losses from fraud at a time you can least afford them reputation loss at a time you can least afford it could even be terminal, personally or corporately at the least, will significantly divert attention and effort (and in a negative way) The Consequences

Increased losses from fraud

at a time you can least afford them

reputation loss

at a time you can least afford it

could even be terminal, personally or corporately

at the least, will significantly divert attention and effort (and in a negative way)

Where might the pipes be leaking?

Procurement Simple stuff: false invoicing Over-invoicing (the “two coats of paint” scam) Duplicate or phantom vendors “ Directory scams” and other creative schemes values under the usual checking limits More Complex (collusion) Phantom transactions False certifications Refer to ICAC reports on Railcorp & Fire Brigades Current Indications of Increased Corruption Risks

Procurement

Simple stuff: false invoicing

Over-invoicing (the “two coats of paint” scam)

Duplicate or phantom vendors

“ Directory scams” and other creative schemes

values under the usual checking limits

More Complex (collusion)

Phantom transactions

False certifications

Refer to ICAC reports on Railcorp & Fire Brigades

Simple theft cash /assets that are poorly controlled/accounted for revenue or funds diversion to private accounts Payroll False timesheets variations (eg. overtime, allowances) ghosting Credit cards dodgy or inflated expenses and cash withdrawls deliberate frauds or skimming attacks (collusion) Current Indications of Increased Corruption Risks

Simple theft

cash /assets that are poorly controlled/accounted for

revenue or funds diversion to private accounts

Payroll

False timesheets

variations (eg. overtime, allowances)

ghosting

Credit cards

dodgy or inflated expenses and cash withdrawls

deliberate frauds or skimming attacks (collusion)

Acceptance of bribes / facilitation payments to favour decisions to avoid regulatory scrutiny/penalty (at a much lower level than might normally be expected) Balance sheet fraud to protect individuals at risk, and also the organisation. Most of the very major frauds have involved this) Current Indications of Increased Corruption Risks

Acceptance of bribes / facilitation payments

to favour decisions

to avoid regulatory scrutiny/penalty (at a much lower level than might normally be expected)

Balance sheet fraud

to protect individuals at risk, and also the organisation. Most of the very major frauds have involved this)

Misuse Information or Intellectual property physical assets mobile phones internet Grants Bogus applications False acquittals Current Indications of Increased Corruption Risks

Misuse

Information or Intellectual property

physical assets

mobile phones

internet

Grants

Bogus applications

False acquittals

Outsourcing and service delivery partners concealed failure to perform/deliver failure to commit promised resources over-servicing or over-invoicing Generally more and heightened conflicts of interest situations generally increased number and significance of conflict of interest situations eg. bias in recruitment and procurement decisions Current Indications of Increased Corruption Risks

Outsourcing and service delivery partners

concealed failure to perform/deliver

failure to commit promised resources

over-servicing or over-invoicing Generally more and heightened conflicts of interest situations

generally increased number and significance of conflict of interest situations

eg. bias in recruitment and procurement decisions

No pressure

Most problems can be anticipated and many can be either avoided/prevented or minimised/mitigated it is worth stopping for moment to think, and develop a few proactive strategies, rather than being fantastic at responding to disasters! Review risk profile and action plans Review fraud risk assessment Review audit and assurance plans Review service-delivery KPIs (lead, not lag) Action points

Most problems can be anticipated

and many can be either avoided/prevented or minimised/mitigated

it is worth stopping for moment to think, and develop a few proactive strategies, rather than being fantastic at responding to disasters!

Review risk profile and action plans

Review fraud risk assessment

Review audit and assurance plans

Review service-delivery KPIs (lead, not lag)

Avoid Control Overconfidence

More than all of this, you MUST work on the single greatest control of all …………….. But wait, there is MUCH more!

More than all of this, you MUST work on the single greatest control of all ……………..

Policies and Controls Won’t Get You There

Fraud & Corruption is primarily an issue of People, and Culture. So your key responses need to include: making people aware of the problem Being clear on your values Talking about ethics Generating trust so that people will report things that they may see Cover staff, suppliers, service delivery partners etc PEOPLE might (but will they?)

Fraud & Corruption is primarily an issue of

People, and

Culture.

So your key responses need to include:

making people aware of the problem

Being clear on your values

Talking about ethics

Generating trust so that people will report things that they may see

Cover staff, suppliers, service delivery partners etc

The Big Picture – needs big solutions

Set the “Tone at the Top” Lead by example and practice what you preach. “Walk the talk”. Otherwise you can create a “rotten barrel” Executives need to weave the language of ethics into their conversations with staff Need to explain ethics in a meaningful way Highlight and communicate good examples Take tough action on the “rotten apples” Look at you website, corporate publications and Annual Report. What does it demonstrate about your organisation’s focus on integrity? Perhaps Most Important of All

Set the “Tone at the Top”

Lead by example and practice what you preach. “Walk the talk”. Otherwise you can create a “rotten barrel”

Executives need to weave the language of ethics into their conversations with staff

Need to explain ethics in a meaningful way

Highlight and communicate good examples

Take tough action on the “rotten apples”

Look at you website, corporate publications and Annual Report. What does it demonstrate about your organisation’s focus on integrity?

Working with Agencies to improve the Public Sector Stephen Horne Managing Director IAB Services is a NSW government trading enterprise operating since 1985 to assist State, Local and Commonwealth Government bodies in NSW and the ACT to improve their performance and manage their risks www.iab.nsw.gov.au Ph: 9261 9104 email: stephen.horne@iab.nsw.gov.au