Fraud Prevention - St. Louis - March 6, 2015

Friday – March 6, 2015
6 CITYPLACE DR, SUITE 900│ ST. LOUIS, MISSOURI 63141│ 314.983.1200
1520 S. FIFTH ST., SUITE 309 │ ST. CHARLES, MISSOURI 63303 │ 636.255.3000
2220 S. STATE ROUTE 157, STE. 300 │ GLEN CARBON, ILLINOIS 62034 │ 618.654.3100
Ron Steinkamp
314.983.1238
rsteinkamp@bswllc.com
Public Sector Risk Briefing

• Introductions
• Definition of Occupational Fraud
• Fraud Categories
• 2014 ACFE Fraud Survey Results
• Red Flags of Fraud
• 7 Keys to Fraud Prevention
• Fraud Prevention Self Assessment
© 2015 All Rights Reserved Brown Smith Wallace LLC
Fraud Prevention Discussion

• Name
• Organization
• Title
• What do you hope to learn today?
Introductions

Definition of Occupational Fraud
The use of one’s occupation for personal enrichment
through the deliberate misuse or application of the
employing organization’s resources or assets.

Fraud Categories
• Asset Misappropriation
• Corruption
• Financial Statement

Fraud Categories – Asset Misappropriation
• Public official or employee steals or misuses an
organization’s assets/resources.
• What are some examples you can think of?
 Skimming cash receipts.
 Falsifying voids and refunds.
 Tampering with checks.
 Overstating expenses.
 Creating a ghost employee.
 Creating a fictitious vendor and false invoice.
 Borrowing City property and equipment.

Fraud Categories – Corruption
• Public official or employee’s use of influence in a
way that violates duty to the organization for the
purpose of obtaining benefit for self or someone
else.
 Conflicts of interest.
 Illegal gratuities.
 Bribery.

Fraud Categories – Financial Statement
• Intentional misstatement or omission of material
information in financial reports with the intent to
mislead.
 Inflating revenues on the financials.
 Concealing liabilities.
 Forcing actual expenditures to match budget by moving
expenses between accounts.
 Improperly accounting for revenues and expenditures.

1. 5% of annual revenue lost to fraud = $3.7+ trillion in Gross World Product.
2. Median loss of $145,000.
3. Fraud lasted 18 months.
4. Asset misappropriation was the most common - 85% of the cases at median
loss of $130,000.
5. Corruption schemes - 37% of cases at a median loss of $200,000.
6. Financial statement fraud was the least common - 9% of the cases at a median
loss of $1 million.
7. Frauds were most likely detected by tips (40%) followed by management
review (15%) and Internal Audit (14%).
2014 ACFE Fraud Survey Results

1. Public administration was one of the most commonly victimized industries.
2. Anti-fraud controls help reduce the cost and duration of occupational fraud.
3. High-level perpetrators cause the greatest damage to their organizations.
4. Perpetrators often display warning signs – most common behavioral red flags
reported were perpetrators living beyond their means (36%) or experiencing
financial difficulty (27%).
5. Half of victim organizations do not recover any losses due to fraud.
2014 ACFE Fraud Survey Results (Cont.)

Red Flags of Fraud

• Inadequate internal controls.
• Too “cozy” with suppliers.
• Annual vacation or sick days not taken.
• Weak management or excessive turnover.
• Ineffective or no internal audit.
• No rotation of job duties among employees.
• Procedures not well understood/always in crisis mode.
• Large amounts of cash on hand or processed.
Red Flags of Fraud - Opportunity

• High personal debts.
• Living beyond their means.
• Excessive investment speculation.
• Excessive gambling.
• Substance abuse.
• Extra-marital affairs.
• Job frustration.
• Resentment of superiors.
Red Flags of Fraud - Pressure

• Not compensated fairly.
• No recent raises/cost of living adjustments.
• Everyone else does it.
• Intended to pay it back.
• Needed the money.
• Felt cheated and wanted revenge.
• Bribe/kickback to tempting.
Red Flags of Fraud - Rationalization

7 Keys to Fraud Prevention
Anti-Fraud Culture
Fraud Policy
Fraud Awareness
Fraud Hotline
Fraud Risk
Assessment
Review/Investigation
Improved Controls

• Set the tone at the top – lead by example.
• Create a positive workplace environment.
• Hire and promote appropriate employees.
• Formalized code of conduct.
• Discipline.
• Strong oversight/governance process:
 Public Officials/Board/Council
 Management
 Internal Auditor
1. Anti-Fraud Culture

• Demonstrate commitment to fighting fraud.
• Apply to all public officials, management, employees, consultants, vendors,
contractors, etc.
• Should include:
 Statement of organization’s position on fraud
 Scope of the policy – who does it apply to
 Management’s responsibility for prevention and detection of fraud
 Definition of fraud
 Actions constituting fraud
 Fraud reporting process/procedures
 Fraud investigation process/procedures
 Unit responsible for administration of the policy and investigating fraud allegations
 Statement on anonymity/confidentiality
 Consequences
2. Fraud Policy

• Reviewed and updated regularly.
• Signed off and agreed to by Board/Council/Top Elected Official.
2. Fraud Policy (Continued)

• All new employees should be trained at time of hiring on the Code of Conduct
and Fraud Policy.
• Training should include:
 Duty to communicate certain matters.
 Discussion of types of matters to be communicated along with examples.
 How to communicate matters.
 Affirmation from senior management regarding employee expectations
and communication responsibilities.
• Refresher training periodically.
3. Fraud Awareness

• Enable employees, vendors, customers and others to communicate concerns
about known or suspected wrongdoing.
• Telephone, email, internet.
• Anonymous.
• Adequately publicized.
• Internal or External.
• Complaint monitoring and investigation/resolution.
4. Fraud Hotline

• Conduct an annual fraud risk assessment.
 Identify critical activities/processes to assess.
 Identify potential fraud schemes.
 Assess likelihood and significance of each scheme.
 Map existing anti-fraud controls to potential fraud schemes.
 Test operating effectiveness of anti-fraud controls.
 Identify any control gaps and/or deficiencies
• Mitigate fraud risks.
 Make changes to activities/processes = transfer or eliminate risks.
 Improve anti-fraud controls
• Monitor fraud risks.
 Develop data analytics to monitor fraud risks.
 Utilize Internal Audit to conduct audits of risk activities/processes.
5. Fraud Risk Assessment

• All concerns/suspicions of wrongdoing should be promptly reviewed and
determination made whether a fraud investigation is warranted.
• Develop a policy for fraud reviews and investigations that specifies:
 Who is responsible for the review/investigation.
 Roles of Legal Counsel, Human Resources, Internal Audit, others.
 Process for conducting the review/investigation.
 Documentation requirements.
 Reporting requirements.
 When to involve law enforcement.
6. Review/Investigation

• Gather sufficient information and perform procedures necessary to determine:
 Whether fraud has occurred.
 Loss or exposure associated with the fraud.
 Who was involved and how it happened.
• Must prepare, document and preserve evidence sufficient for potential legal
proceedings.
• Include experts = Certified Fraud Examiner (CFE).
6. Review/Investigation (Cont.)

• Use lessons learned from any risk assessment, fraud reviews or investigations
to improve anti-fraud controls.
• All risk assessments, fraud reviews and investigations should include a report
to management with recommendations for control improvement.
7. Improved Controls

Fraud Self Assessment

Questions/Answers

Fraud Prevention - St. Louis - March 6, 2015

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