1 TASSCUBO Summer Workshop Prevalence & Prevention of Fraud Presented by Carolyn Conn Associate...

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TASSCUBO Summer WorkshopTASSCUBO Summer Workshop

Prevalence & Prevention of Fraud

Presented by

Carolyn ConnAssociate Professor of Accounting

St. Edward’s Universitycaroltc@stedwards.edu

June 11, 2007

© 2007 – All rights reserved

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TODAY’S TOPICSTODAY’S TOPICS DEFINE FRAUD & WHY

PREVALENCE OF FRAUD TASSCUBO Survey Results

PREVENTION “Red Flags” Fraud Policy

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ASSOCIATION OF CFEsASSOCIATION OF CFEs

www.acfe.com

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FRAUD DEFINITIONFRAUD DEFINITION

INTENTIONAL

MISREPRESENTATION

UNFAIR ADVANTAGE

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PREVALENCEPREVALENCE OF FRAUD OF FRAUD

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2006 ACFE Report to Nation2006 ACFE Report to Nation

FRAUD REPORTED IN SURVEY12% Govt./Public & 7% Education

AMOUNT OF LOSS ~30% $100,000-$499,999

COMMITTED BY 61% Male 41% Managers

42% NO Recovery of Losses

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WHO COMMITS FRAUD?WHO COMMITS FRAUD?

ANYBODY

ALL WALKS OF LIFE

NO TYPICAL FRAUDSTER

Video Clip of

Barry Minkow, ZZ Best

From ACFE DVD

“Cooking the Books”

WHY PEOPLE COMMIT FRAUDWHY PEOPLE COMMIT FRAUD

OPPORTUNITY

MOTIVE

RATIONALIZATION

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SAMPLE FRAUDS SAMPLE FRAUDS IN IN

HIGHER EDUCATION HIGHER EDUCATION

DEPARTMENT OF TRANSPORTATIONOffice of Inspector General

Title: Former Professor Ordered to Reimburse George Washington University for Embezzlement of Fund From DOT-funded Research CenterDate: December 19, 2006Type: Investigation SummaryFormer deputy director of the DOT-funded National Crash Analysis Center and a former adjunct professor at George Washington University (GWU), was sentenced to serve 5 months in prison and ordered to pay $80,440 in restitution. He pled guilty to one felony count of theft from programs receiving federal funds. He was charged with embezzling $78,602 in DOT & GWU research funds between August 2002 & June 2004 through illegal stipends and unallowable purchases. Our investigation found that Bedewi caused the Center to issue $36,150 in unauthorized and fraudulent GA stipends to his wife. He also used a university purchase card to make $42,452 in unauthorized purchases.

Paul Bedewi is the cousin of Nabih Bedewi, a former GWU engineering professor and former director of the Center, who was sentenced in June 2005 to over 3 years in prison and ordered to pay $872,221 in restitution for embezzling nearly $1 million in DOT and GWU research funds.

http://www.oig.dot.gov/item.jsp?id=1954

Three charged with embezzling in Ann Arbor Originally published in Current, March 20, 2006 By Mike Janssen

Three former employees of Michigan Public Media... were charged March 15 [2006] with embezzling goods & services including meals, money, massages, airline tickets, a pool table & Persian rugs.… ~$20,000 each …felony with a 5-year sentence & fine of $10,000.

Attorney for one of the three: “The Univ. of Michigan had almost no clear direction for the sales force in public radio as to what they could or could not do.”

http://www.current.org/ethics/ethics0605embezzle.shtml

N.C.A.A. Puts Notre Dame Football on ProbationDec. 18, 1999By FRANK LITSKY (NYT); Sports Desk

NCAA puts Notre Dame on probation following investigation into series of events; main one involves actions of booster, Kim Dunbar, who lavished gifts on football players with money she later pleaded guilty to embezzling; football player is also accused of trying to sell tickets he received free to game and of using tickets he received free for three games as repayment of loan…

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““UNIQUE”UNIQUE”CHALLENGES IN CHALLENGES IN HIGHER EDUCATION HIGHER EDUCATION &/or PUBLIC SECTOR &/or PUBLIC SECTOR and OTHER CONCERNSand OTHER CONCERNS

Let’s name some…

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RISK FACTORSRISK FACTORS

Internal Controls

Accounting System

Management’s Attitude

Administration & Operations

Few Individuals with Control

“Watch the guy with the big ego…” -- Barry Minkow, ZZ Best

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RED RED FLAGSFLAGS

SHAKESPEAREAN ACTORS“Me thinks he/she doth protest too much.”

Screamers

Drama Queen

Personal Appearances

(Picks up vendor &/or employee checks.)

Always a RUSH, always a PROBLEM

(Vendor Set-up, Payments, Bids, etc.)

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RED RED FLAGS FLAGS (cont’d)(cont’d)

TOO GOOD, TOO BAD, TOO UGLY

Bad or Missing Records

Perfect Records

Little or No Vacations

Employee(s) with Criminal Record(s)

Trust Your & Your Employees’ Instincts

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RED RED FLAGS FLAGS (cont’d)(cont’d)

WINE, WOMEN & SONG

Extravagant Lifestyle

Living beyond “visible means”

Big houses, jewelry, vacations

Race cars, race horses

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TASSCUBO SURVEYTASSCUBO SURVEY84% - FRAUD OCCURRED

FRAUD AMOUNTS 36% $1-$999 28% $1,000-$49,999

48% CLASSIFIED EMPLOYEES

74% <$50,000 INCOME-LEVEL

55/45 MALE vs. FEMALE

40% PERPS–in ACADEMIC DEPT.

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TASSCUBO SURVEY TASSCUBO SURVEY (cont’d)(cont’d)

OUT OF THE TOTAL RESPONSES * 72% Assets * 8% Corruptn. *4% Finls (of the Asset Missappr., 61% - CASH)

DISBURSEMENT FRAUD* 33% – P-Cards * 17% – Exp. Reimb. * 17% – Payroll

NON CASH FRAUD * 80% – Inventory * 20% – Information

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TASSCUBO SURVEY TASSCUBO SURVEY (cont’d)(cont’d)

LEARNED ABOUT THE FRAUD* 40% – Internal Controls

* 30% – Tip * 20% – By Accident

PREVENTIVE MEASURES* 30% – All (Int & Ext Audits, Training, Internal Controls, Hotline & Surprise Aud)

NON-CASH FRAUD * 80% – Inventory * 20% – Information

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TASSCUBO SURVEY TASSCUBO SURVEY (cont’d)(cont’d)

ETHICS POLICY 100%

FRAUD POLICY 96%

FRAUD TRAINING 50%

IN CHARGE – INT.AUDIT 60%

CONFESS to INT.AUDIT85% >”3” (“3” was “Moderate” success getting confession)

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FRAUD PREVENTIONFRAUD PREVENTION

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PREVENT OPPORTUNITYPREVENT OPPORTUNITY

SEPARATION OF DUTIES

SURPRISE CHECKS – Inventory, Travel & P- Cards, “Real” Employees

“SECRET SHOPPERS” - Cashiering

BACKGROUND & CREDIT CHECKS

MANDATORY VACATIONS

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PREVENT MOTIVE for FRAUDPREVENT MOTIVE for FRAUD

TRAINING RE: FRAUD POLICY

REWARD GOOD EMPLOYEES

AUDIT &/OR REVIEW

PUNISH FRAUD OFFENDERS

OTHER IDEAS?

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PREVENT RATIONALIZATIONPREVENT RATIONALIZATION

HOW DO WE DO THIS?

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FRAUD POLICY FRAUD POLICY BEST PRACTICES BEST PRACTICES

ON-GOING TRAINING

FRAUD DEFINITION

WHO TO CONTACT

WHAT TO DO & NOT DO

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FRAUD POLICY FRAUD POLICY BEST PRACTICES BEST PRACTICES

“TEAM” TO INVESTIGATE

WHO REPORTS TO SAO

CONFIDENTIAL – “REPORTER”

AND INVESTIGATION

WHO PAYS COST OF FRAUD

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HOMEWORKHOMEWORK TONE AT THE TOP

COMMUNICATION

PREVENTIVE MEASURES

WEB SITE

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HOMEWORK HOMEWORK (cont’d)(cont’d)

PRE- & POST-EMPLOYMENT BACKGROUND & CREDIT CHECKS

AUDITORS (Internal & External)

REVIEW INSURANCE POLICY & FIDELITY BOND

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THANK-YOU !THANK-YOU !

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UNIQUE to HIGHER ED.UNIQUE to HIGHER ED.

[per earlier discussion, slide 16]

My own notes…

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UNIQUE to HIGHER ED.UNIQUE to HIGHER ED.Diverse (& distributed) Operations

Academics, Field Trips, Continuing Education, Athletics, Fundraising, etc.

Distant Depts. Billing & Collecting Non-business Departments collecting funds Off-site Operations (field schools, etc.)

Large volume of “One of a kind” payments (e.g., lecturers, stipends)

Diverse Revenues & Expenses(Difficult to identify abnormal patterns.)

“Loan” of Equipment (internal & external)

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HIGHER EDUCATION HIGHER EDUCATION (cont’d)(cont’d)

ENTERTAINERS (Must be paid when they step off the stage.)

F-1, J-1, H-1, etc. individuals(who come/go quickly; interact only w/dept.) STUDENTS(with too much “time on their hands”)

ABDICATION OF RESPONSIBILITY“That’s not my job…”ACADEMIC FREEDOM (influences the culture of the organization)

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UNIQUE to Public SectorUNIQUE to Public SectorLow Pay (relative to private sector)

High Turnover (in many areas)

“Career” Employees (have done the same job “for 20 years”)

Low Staffing Levels Overworked staff Resentful staff Wearing “many hats

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OTHER CONCERNSOTHER CONCERNSEXTERNAL AUDITORS - Not used frequently (especially not as compared to private sector)

MINIMAL SAO AUDITS [unlike “old days”]

CLEARING ACCOUNTS (easy to hide fraud)

ORGANIZATIONAL CHANGES DUE TO ERP SYSTEMS (e.g., A/P & Purchasing combined)

TECHNOLOGY (ACH, wires, etc.) Higher level skillset needed for employees

* THE END *