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Scouting For Fraud - Parag Deodhar


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Presentation at CII-KPMG seminar on Fraud as Strategic Risk at Bangalore - 27 July 2012

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Scouting For Fraud - Parag Deodhar

  1. 1. SCOUTING FOR FRAUD SCOUTING FOR FRAUD IN YOUR BUSINESS IN YOUR BUSINESS Seminar on Fraud as a Strategic Risk g “What CFOs and CEOs don’t notice, but should” Parag Deodhar Parag Deodhar BANGALORE – 27 July 2012
  2. 2. FRAUD RISK FRAUD RISK • Fraud is now so common that its occurrence is Fraud is now so common that its occurrence is  no longer remarkable, only its scale. • If f d If fraud were a disease, almost all companies  di l t ll i would have a slight temperature… • What’s @ Risk? – The typical organization loses an estimated 5% of  yp g its annual revenues to fraud – Regulatory sanctions g y – Reputation / Brand image – Company closure! Company closure!27 July 2012 Parag Deodhar 2
  4. 4. ASSET MISAPPROPRIATION SCHEMES ASSET MISAPPROPRIATION SCHEMES Category Description Examples SCHEMES INVOLVING THEFT OF CASH RECEIPTS Skimming Cash is stolen from an organization before it is recorded on Employee accepts payment from a customer but does not the organization’s books and records record the sale and instead pockets the money Cash Larceny Cash is stolen from an organization after it has been Employee steals cash and checks from daily receipts before recorded on the organization’s books and records they can be deposited in the bank SCHEMES INVOLVING FRAUDULENT DISBURSEMENTS OF CASH Billing Person causes his or her employer to issue a payment by Employee creates a shell company and bills employer for submitting invoices for fictitious goods or services, inflated services not actually rendered invoices or invoices for personal purchases Employee purchases personal items and submits an invoice to employer for payment Expense An employee makes a claim for reimbursement of fictitious Employee files fraudulent expense report, claiming personal Reimbursements or inflated business expenses travel, nonexistent meals, etc. Check Tampering A person steals his or her employer’s funds by intercepting, Employee steals blank company checks and makes them out to forging or altering a check drawn on one of the g g g himself or an accomplice p organization’s bank accounts Employee steals an outgoing check to a vendor and deposits it into his or her own bank account Payroll An employee causes his or her employer to issue a Employee claims overtime for hours not worked payment by making false claims for compensation Employee adds ghost employees to the payroll Cash Register C hR i t An A employee makes f l entries on a cash register t l k false t i h i t to Employee f d l tl voids a sale on hi or h cash register E l fraudulently id l his her h i t Disbursements conceal the fraudulent removal of cash and steals the cash OTHER ASSET MISAPPROPRIATION SCHEMES Misappropriation of The perpetrator misappropriates cash kept on hand at the Employee steals cash from a company vault Cash on Hand victim organization’s premises organization s Non-Cash An employee steals or misuses non-cash assets of the Employee steals inventory from a warehouse or storeroom Misappropriations victim organization Employee steals or misuses confidential customer financial information27 July 2012 Parag Deodhar 4
  9. 9. WHISTLE‐BLOWER MECHANISM WHISTLE BLOWER MECHANISM KEY ELEMENTS FOR SUCCESS Who Who decides Wh d id receives the the actions? High  complaints? Availability  Anonymous  &  & Secure Accessibility Who Who takes investigates? i ti t ? actions? ti ? Independent  Credible &  &  Impartial transparent Who reports?27 July 2012 Parag Deodhar 9
  10. 10. RED FLAGS FLAGS  SOURCE: ACFE 2012 GLOBAL FRAUD STUDY 87% First timers 87% First timers 35% Cases never reported  to police t li27 July 2012 Parag Deodhar 49% No recovery  10
  11. 11. BEHAVIORAL RED FLAGS BEHAVIORAL RED FLAGS • Excessive Family/Peer Excessive Family/Peer  • Irritability, Suspiciousness Irritability, Suspiciousness  Pressure for Success or Defensiveness • Complained About Lack  • Wheeler‐Dealer Attitude of Authority f A th it • Divorce/Family Problems • Past Legal Problems • Control Issues,  • Excessive Pressure from Excessive Pressure from  Unwillingness to Share  Unwillingness to Share Within Organization Duties • Refusal to Take Vacations • Unusually Close  y • Complained About  Association with  Inadequate Pay Vendor/Customer • Past Employment‐Related  • Financial Difficulties / Financial Difficulties /  Problems High Debt • Addiction Problems Addiction Problems • Living Beyond Means Living Beyond Means27 July 2012 Parag Deodhar 11
  12. 12. FRAUD DETECTION FRAUD DETECTION • Employee Background Checks Employee Background Checks – Not just during recruitment – Mystery Shopping Mystery Shopping • Mandatory Leave / Job Rotation, Transfers • Anti Bribery clause in Contracts Anti‐Bribery clause in Contracts • Review of Processes and Controls • Dedicated team for fraud detection /  Dedicated team for fraud detection / investigation • Clear reporting lines & Segregation of duties Clear reporting lines & Segregation of duties • Electronic / Digital surveillance • Over riding Controls!!! Over‐riding Controls!!!27 July 2012 Parag Deodhar 12
  13. 13. VENDOR / PARTNER DUE DILIGENCE VENDOR / PARTNER DUE DILIGENCE Organizations often operate in unfamiliar territories or with little knowledge of the background, reputation or ability to conduct business of their business associates and service providers. Many a times the track record and reputation can be overlooked, while focusing only on the potential gains. While positive impact is often expected, the potential negative impact from these associates normally ignored at the time of selection which might have significant impact.  Almost all organizations rely on  It is, therefore, in the interest of the third parties/ vendors to help them organizations to discover as much conduct their business information as possible about their  Each of these associates can have vendors a significant impact on y g p your  The focus should be on validation of business details provided as well discovery of  While the positive impact is often any undisclosed information expected, expected the potential negative  It is also important that the right impact, normally ignored at the time of selection of a vendor can partners are brought on board to have greater significance h t i ifi assist on the collation and validation of this information27 July 2012 Parag Deodhar 13
  14. 14. MIS & DATA ANALYTICS MIS & DATA ANALYTICS “BIG DATA”- 80% unstructured – emails / spreadsheets & other docs Red Flags can be visible in routine MIS as well: • Increased revenues without a  • Unusual increases in income or income  corresponding increase in cash flow,  in excess of industry peers especially over time i ll i • Significant unexplained increases in  • Significant, unusual or highly complex  fixed assets transactions, particularly those that are  • Recurring negative cash flows from  closed near the end of a financial  operations while reporting earnings and  operations while reporting earnings and reporting period earnings growth • Unusual growth in the number of days’  • Allowances for sales returns, warranty  sales in receivables claims, etc., that are shrinking in  • Strong revenue growth when peer  St th h percentage terms or are otherwise out  t t th i t companies are experiencing weak sales of line with those of industry peers • Recurring negative cash flows from  • Assets, liabilities, revenues or expenses p p g g operations while reporting earnings and  g based on significant estimates that  earnings growth involve subjective judgments or  • Significant declines in customer demand  uncertainties that are difficult to  and increasing business failures in either  corroborate the industry or the overall economy the industry or the overall economy27 July 2012 Parag Deodhar 14
  15. 15. PREDICTIVE MODELING PREDICTIVE MODELING Assimilate data from multiple Accepting, prioritizing Analysis and sources and apply predictive and distributing alerts visualization tool for uncovering previously analytics to accurately assess & determine if it is unknown relationships transactions, activities and actual fraud or among accounts or customer state in real time suspicious transaction entities27 July 2012 Parag Deodhar 15
  16. 16. DIGITAL SURVEILLANCE DIGITAL SURVEILLANCE • Most frauds leave a trail on the system Most frauds leave a trail on the system – emails, internet access, access control logs etc • Data Leakage is a major challenge • Tools are available to: Tools are available to: – Log events – Scan logs for suspicious events and alert – Correlate suspicious events across systems and  p y network – Digital forensics Digital forensics27 July 2012 Parag Deodhar 16
  17. 17. ETHICAL DILEMMA ETHICAL DILEMMA  Align the third party code of conduct to the employee code of conduct • Discrimination and harassment Demonstrate • Wages and benefits through actions • Work h W k hours and over ti d time • Health and safety • Any activity that you engage in with • Labor – forced labor / child labor / customers will be fair and defensible – abuse of employees NO EXCEPTIONS • Compliance to environmental laws • Approach your big and small customers/ and adherence to sustainable suppliers the same way. business • Let all your current and potential customers/ suppliers k t / li know th t everyone that • Anti-bribery and corruption policies gets a fair chance • Transparency in process • Take a stand against customer who g behave in a less than ethical manner • Be willing to miss revenue or earnings Key issues to targets if things are not done the right wayy address27 July 2012 Parag Deodhar 17
  18. 18. THANK YOU THANK YOU27 July 2012 Parag Deodhar 18