Essentials of a Highly Effective Employee Fraud Awareness Program


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Essentials of a Highly Effective Employee Fraud Awareness Program

  1. 1. Essentials of a Highly Effective Employee Fraud Awareness Program February 13, 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 AuditNet® and FraudAware®. Unauthorized usage or recording of this webinar or any of its material is strictly forbidden. We will be recording the webinar and if you paid the registration fee you will be provided access to that recording within two business days after the webinar. Downloading or otherwise duplicating the webinar recording is expressly prohibited. Webinar will be recorded and will be made available within 48 hours. 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. Today’s Agenda  Introduction: Fraud Statistics: The Growing Fraud Threat  Why It is Important to Train  Policy Problems and Tone at the Top  Building Your Awareness Training Program  Whistleblower Hotlines  Your Questions  Conclusion 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
  4. 4. Financial Statement Fraud: The Big Picture  Victims of financial fraud are stakeholders with claims against the entity: shareholders, lenders, regulators.  Financial fraud occurs less frequently than asset misappropriation but the losses are substantially higher. Source: ACFE 2012 Report to the Nation Copyright © 2013 FraudResourceNet™ LLC Fraud Training: Statistical Overview Source: ACFE 2010 Report to the Nation Copyright © 2013 FraudResourceNet™ LLC
  5. 5. AWARENESS TRAINING: EXPERTS SPEAK  “Employee education is the foundation of preventing and detecting occupational fraud. Employees must be trained in what constitutes fraud, how it hurts everyone in the company and how to report any questionable activity”. (2010 ACFE “Report to the Nations”)  “…education, such as frequent communication or even formal classroom training, could be a remedy … and in fact might accelerate the …adoption of a more ethical corporate culture in an organization.” (Crowe Horwath LLP) Copyright © 2013 FraudResourceNet™ LLC Policy Problems…And Solutions Ethics Policy, Compliance Policy and FRAUD POLICY Myth: Ethics, Compliance, Code of Conduct policies cover fraud detection and prevention Reality: Most 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. For example… Copyright © 2013 FraudResourceNet™ LLC
  6. 6. ETHICS/COMPLIANCE TRAINING VS. FRAUD TRAINING CODE OF CONDUCT: “All Directors, Officers and Associates should protect the Company’s assets and ensure their efficient use. Theft, carelessness and waste have a direct impact on the Company’s profitability. All Company assets should be used for legitimate business purposes.” But what about:  Bribery?  Kickbacks?  Bid-rigging?  Identity fraud  Financial statement fraud?  Cyber-sabotage?  Etc., etc. Copyright © 2013 FraudResourceNet™ LLC Policy Problems…And Solutions Formal anti-fraud policies call for: Formal training of all employees in fraud schemes, red flags and responsibility for reporting wrongdoing Copyright © 2013 FraudResourceNet™ LLC
  7. 7. Step One: Tone at the Top Top management must:  Set standard of “zero tolerance” through actions (no bribepaying, no book-cooking, no embezzlement, no conflict of interest, etc)  Emphasize integrity in key communications….  Annual reports  Press releases  Internal communications with employees  Emphasize responsibility to detect and report fraud  Implement regular anti-fraud training for all staff … Copyright © 2013 FraudResourceNet™ LLC Polling Question 1 Most corporate codes of conduct do cover anti-fraud matters A. True B. False C. Copyright © 2013 FraudResourceNet™ LLC
  8. 8. WHO, WHAT, HOW AND WHEN TO TRAIN BUILDING YOUR FRAUD AWARENESS TRAINING PROGRAM: WHY, WHOM, WHAT, HOW AND WHEN Copyright © 2013 FraudResourceNet™ LLC WHY TRAIN: SPECIFIC AWARENESS TRAINING OBJECTIVES Main objectives of fraud awareness training: 1) Teach employees about the responsibility to fight fraud 2) Educate employees at all levels to recognize red flags of main types of fraud. 3) Provide employees with the knowledge needed to report fraud and suspicious behavior via your hotline or other reporting channel. 4) Serve as management’s “eyes and ears”. 5) Support management’s “Tone at the Top”. 6) Cut losses (together w/ hotline) 7) Deter by creating perception of risk of getting caught 8) Support morale by making employees “part of the solution” (continued) Copyright © 2013 FraudResourceNet™ LLC
  9. 9. WHY TRAIN: FRAUD AWARENESS TRAINING OBJECTIVES WHY TRAIN (continued)… Latest incentive to train: Dodd-Frank will force companies to take a hard look at internal whistleblower systems and implement more robust reward programs and protection programs if they want to keep their problems in-house and out of the regulators hands. 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 2) All others Note: Content for each group may vary: Example: Financial Statement Fraud for Managers Only Copyright © 2013 FraudResourceNet™ LLC
  10. 10. FRAUD AWARENESS TRAINING OPTIONS, FREQUENCY & FORMAT REGARDLESS OF WHO YOUR TRAINEES ARE, IT SHOULD BE MANDATORY. OTHERWISE NO ONE WILL TAKE IT SERIOUSLY AND FRAUD WON’T BE REPORTED. Copyright © 2013 FraudResourceNet™ LLC Polling Question 2 One of the main objectives of fraud awareness training is to… A. B. C. D. Screen for potential fraudsters among your employees Compliance with state and local employment laws Help employees to serve as management’s “eyes and ears” Reduce employee turnover E. Copyright © 2013 FraudResourceNet™ LLC
  11. 11. FRAUD AWARENESS TRAINING OPTIONS, FREQUENCY & FORMAT WHAT TO TRAIN: FIVE KEY CATEGORIES…  Why it is essential to be aware of fraud risks (stats)  Why people commit fraud (Fraud Triangle)  Fraud risks affecting your organization  Red flags of most common frauds  How to report actual or suspected fraud (hotline) Copyright © 2013 FraudResourceNet™ LLC FRAUD AWARENESS TRAINING OPTIONS, FREQUENCY, FORMAT WHAT TO TRAIN: Create Detailed Outline. Example… Sample Fraud Awareness Training for ABC Bank 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
  12. 12. 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 Lesson 1: Statistics: Why we all must be aware of fraud  ACFE: 5%  24 months to detect  Most frauds detected by employee tip  Fraud losses reduced by 50% by fraud awareness training Continued…. Copyright © 2013 FraudResourceNet™ LLC FRAUD AWARENESS TRAINING OPTIONS, FREQUENCY, FORMAT WHAT TO TRAIN… Continued…. Lesson 2: Why People Commit Fraud Continued…. Copyright © 2013 FraudResourceNet™ LLC
  13. 13. FRAUD AWARENESS TRAINING OPTIONS, FREQUENCY, FORMAT WHAT TO TRAIN… Continued…. Lesson 3: Fraud in the Financial Services Industry  Check fraud stats  Credit card fraud stats  Insider trading (if applicable)]  Loan fraud Lesson 4: Fraud at ABC Bank  ABC Bank fraud loss stats MODULE 2: Learning to Detect, Prevent and Report Fraud  Introduction: Two main types of fraud: External and Internal. Majority of all frauds are internal. Continued…. Copyright © 2013 FraudResourceNet™ LLC FRAUD AWARENESS TRAINING OPTIONS, FREQUENCY & FORMAT WHAT TO TRAIN… Continued….  Lesson 1: Common types of External Fraud to be aware of  Credit card fraud Lesson 2: Common types of Internal Fraud to be aware of  Embezzlement (At all levels within the bank)  Cash and check theft/forgery  Loan fraud  T&E fraud/Misuse of company credit card Lesson 3: Red flags of Internal Fraud  Embezzlement red flags (Behavioral changes, accounting anomalies  Cash and check fraud red flags  T&E fraud red flags (Unusually high expense claims; photocopies of receipts, etc) Continued… Copyright © 2013 FraudResourceNet™ LLC
  14. 14. FRAUD AWARENESS TRAINING OPTIONS, FREQUENCY & FORMAT WHAT TO TRAIN… Continued…. Lesson 4: How to Report Fraud or Suspicious Activity (Hotline) Lesson 5: Summary and Review Lesson 6: Course Quiz (Optional) CONCLUSION and ABC Bank Certificate of Fraud Awareness Copyright © 2013 FraudResourceNet™ LLC Polling Question 3 When creating a fraud awareness training program, you should explain the reason for the training before teaching the fraud risks a. True b. False Copyright © 2013 FraudResourceNet™ LLC
  15. 15. 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
  16. 16. FRAUD HOTLINES HOTLINE HOW-TO’s Copyright © 2013 FraudResourceNet™ LLC Tips: Statistical Overview Source: 2010 Report to the Nations on Occupational Fraud and Abuse, Association of Certified Fraud Examiners Copyright © 2013 FraudResourceNet™ LLC
  17. 17. Internal or External? IMPORTANT: In-House or Third Party? Copyright © 2013 FraudResourceNet™ LLC How to Establish and Manage a Hotline Regardless of Internal or External: Step #1 Establish an easily accessible channel.  Should be toll-free number as well as E-mail option, Web page, Intranet  Make sure it works…literally!  Make sure the line is functioning  Make sure callers aren’t getting busy signals  Ensure that the number actually goes to the intended recipient (Should be an actual person!) Copyright © 2013 FraudResourceNet™ LLC
  18. 18. How to Establish and Manage a Hotline Step # 2: Publicize the hotline.  Employees don’t use hotlines they don’t know about.  Remember: Enron had an anonymous tips hotline!  Posters; intranet notices; employee fraud awareness training; E-mails from management  Use efforts to publicize hotline to demonstrate “culture of compliance.”  Particularly important for in-house hotlines.  Encourage tips on fraud, ethics and compliance (The distinction isn’t always crystal clear). Copyright © 2013 FraudResourceNet™ LLC How to Establish and Manage a Hotline Step # 3: Provide Choice of Reporting Options  Hotlines are essential, but not sufficient for gathering all employee tips.  Include anonymous E-mail addresses, Web sites, dropboxes or anonymous P.O. boxes.  Encourage face-to-face tips to supervisors. Copyright © 2013 FraudResourceNet™ LLC
  19. 19. How to Establish and Manage a Hotline Step # 4: Staff hotline with independent personnel “Independent” does not necessarily mean third-party. May be in-house if this is a dedicated professional able to preserve anonymity. Copyright © 2013 FraudResourceNet™ LLC How to Establish and Manage a Hotline Step # 5: Properly Train Hotline Staff  Must be provided with detailed scripts to follow—including assurance that will be no retaliation.  Depending on size of organization and role of hotline personnel, additional training may be necessary.  Hotline personnel who are responsible for initial investigations/escalation decisions will require additional training.  May require hiring outside expert Copyright © 2013 FraudResourceNet™ LLC
  20. 20. How to Establish and Manage a Hotline Step # 6: Establish and Maintain a Claim Log  Upon receiving complaint, hotline personnel should immediately initiate an entry into claim log.  Claim logs are essential to preserving anonymity; each claim must receive unique claim number or other anonymous identifier.  Claim logs should also include other basic information about the claim/reported incident. Key: Claim logs serve as “hard copy” record for compliance purposes. Your third-party provider should maintain this log for you. Copyright © 2013 FraudResourceNet™ LLC How to Establish and Manage a Hotline Step # 7: Make hotline available to all stakeholders  Don’t limit hotline access to employees -- encourage vendors and customers to report wrongdoing too.  Include them and any other potential sources of tips in hotline communications.  Same principles apply to outsiders: Companies must publicize hotlines and preserve anonymity. Copyright © 2013 FraudResourceNet™ LLC
  21. 21. Claims Handling Essentials Step # 8: Establish Escalation Policies and Procedures  If complaint requires escalation, I/A, Legal or a Claims Screening Committee should prepare a report to audit committee.  At this stage, an additional interview with the whistleblower should be conducted by trained, independent interviewer and incorporated into the report. Copyright © 2013 FraudResourceNet™ LLC Polling Question 4 Full-staff fraud awareness training should be conducted: a. b. c. d. Quarterly Twice per year Once per year Every two years Copyright © 2013 FraudResourceNet™ LLC
  22. 22. Polling Question 5 Hotlines are essential but not adequate for capturing all employee tips. You should also have (choose all that apply) A. B. C. D. E-mail channel Web-based reporting option Employee questionnaire P.O. Box Copyright © 2013 FraudResourceNet™ LLC SUMMARIZING THE PROCESS Bottom line: Have clear protocol in place in advance . . . and enforce it!  This is a good outline for setting up and maintaining a whistleblower hotline.  Whatever plan you follow, you need some advance plan. Do not wait until crisis occurs.  Adherence to a pre-set plan is a strong defense against a retribution claim.  Without it your awareness training will be meaningless Copyright © 2013 FraudResourceNet™ LLC
  23. 23. Questions?  Any Questions? Don’t be Shy! Copyright © 2013 FraudResourceNet™ LLC Thank You! Website: Jim Kaplan FraudResourceNet™ 800-385-1625 Peter Goldmann FraudResourceNet™ 800-440-2261 Copyright © 2013 FraudResourceNet™ LLC