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R. A. (Andy) Wilson, CFE, CPP
Managing Director
Wilson & Turner Incorporated
25th AFCE Global Fraud Conference
June 15-20, 2014
San Antonio, Texas
Tracy K. Webb, CSCP
Compliance Officer
State of New York Office of Comptroller
R. A. (Andy) Wilson, CFE, CPP Tracy K. Webb, CSCP
Wilson & Turner Incorporated ◦ Managing Director
◦ Fraud Practitioner for 28 years
Faculty Appointments: ◦ The University of Memphis
◦ Utica College of Syracuse University
Previous: ◦ Attorney General
◦ Southland Corporation
◦ Germantown Police
Department
State of New York Comptroller ◦ Compliance Officer
◦ Pension Investments & Cash Management
Boards: ◦ Economic Crime and Cybersecurity
Institute
◦ National Society of Compliance Professionals
Previous: ◦ INTECH
◦ GenSpring Family Offices
Certifications: ◦ CSCP, Certified Securities
Compliance Professional
An Introduction to Fraud
Fraud Theories
The Main Sources Fraudsters Use
A Fraudster’s Method of Approach
Fraud Symptoms Used to ID
Ethical Decisions People Make
Preventing Good People from Doing Bad Things
Identifying Fraud through Detection
Questions & Answers
R. A. (Andy) Wilson, CFE, CPP
Managing Director
Wilson & Turner Incorporated
25th AFCE Global Fraud Conference
June 15-20, 2014
San Antonio, Texas
Tracy K. Webb, CSCP
Compliance Officer
State of New York Office of Comptroller
- An Introduction to Fraud -
Is a generic term, and embraces all the multifarious means which human ingenuity can devise, which are resorted to by an individual, to get an advantage over another by false representations. No definite and invariable rule can be laid down as a general proposition in defining fraud as it includes surprise, trickery, cunning and unfair ways by which another is cheated. The only boundaries defining it are those which limit human imagination.
Webster’s New World Dictionary
College Edition
A representation
About a material point,
Which is false,
And intentionally or reckless,
Which is believed
And acted upon by the victim
To the victim’s damage
Fraud is different from unintentional errors.
There must be intent!
Fraud Triangle Fraud Elements
Opportunity Concealment
Asset Misappropriation
Classifications of Fraud
Typical organizations loose ◦ 5% of revenues to fraud (globally, $3.7 trillion)
Median fraud loss $145,000 Median duration 18 months Fraud types ◦ Asset misappropriations 85%, median loss $130,000 ◦ Financial statement 9%, median loss $1,000,000 ◦ Corruption 37%, median loss $200,000
One third of the cases involved two or more types Tips are the main detection method at 40% (2x others) ◦ Employees ID fraud more than half the time
Hotlines work! ◦ Identify frauds quicker (50% faster) ◦ Less costly (by 41%)
Industry ◦ Banking and financial services, manufacturing, government
Higher the authority level, the greater the losses 77% of fraud committed by persons in these departments ◦ Accounting ◦ Operations ◦ Sales ◦ Executive ◦ Customer service ◦ Purchasing ◦ Finance
Sources of Attack
- Fraud Theories: What is Past is Prologue -
R. A. (Andy) Wilson, CFE, CPP
Managing Director
Wilson & Turner Incorporated
25th AFCE Global Fraud Conference
June 15-20, 2014
San Antonio, Texas
Tracy K. Webb, CSCP
Compliance Officer
State of New York Office of Comptroller
Edwin Sutherland, Ph.D.
Defined White Collar Crime (1913)
Criminal behavior is learned through the interactions with other deviant persons
Learnings include: ◦ Techniques
◦ Rationale
◦ Motives
Peer relationships influence deviant
behavior
Donald Cressey, Ph.D.
Types: ◦ Independent businessmen
◦ Long-term violators
◦ Absconders
Three elements: ◦ Pressure
◦ Opportunity
◦ Rationalization
Non-shareable financial pressure
Steve Albrecht, Ph.D.
Expanded on Sutherland and Cressey
Theory: ◦ Situational pressure
◦ Perceived opportunity
◦ Personal integrity
When pressure and opportunities are
high and personal integrity is low, fraud
will likely occur
Red flags of fraud
Living beyond means
Overwhelming desire for personal gain
High personal debt
Close association with customers
Pay not commensurate with job
Wheeler-dealer
Strong challenge to beat the system
Excessive gambling
Family/peer pressure
Hollinger-Clark Study (1983) Survey of 10,000 workers ◦ Job dissatisfaction caused theft ◦ Identified the cost of fraud was drastically under stated
Two categories: ◦ Theft & actions against property ◦ Production violations [goldbricking]
Very strong relationship between theft and concern over individuals financial pressure Age vs. Theft
Policy Employee selection Inventory control
Security Punishment
Fraudsters feel justified Concept of wages-in-kind ◦ Hire the right people ◦ Treat employees fairly ◦ Have reasonable expectations
Controls must pose a visible and highly likely threat of detection ◦ Perception of detection is the greatest deterrent
Hidden controls do not deter Controls cannot be predicable
R. A. (Andy) Wilson, CFE, CPP
Managing Director
Wilson & Turner Incorporated
25th AFCE Global Fraud Conference
June 15-20, 2014
San Antonio, Texas
Tracy K. Webb, CSCP
Compliance Officer
State of New York Office of Comptroller
- The Main Sources Fraudsters Use -
Holes in the “corporate armor” ◦ These are the opportunity elements
Ways to (Fraud Elements): ◦ Steal
◦ Conceal
◦ Convert
Money, money, money
Main five sources of attack: ◦ Accounting
◦ Operations
◦ Sales
◦ Customer service
◦ Purchasing
R. A. (Andy) Wilson, CFE, CPP
Managing Director
Wilson & Turner Incorporated
25th AFCE Global Fraud Conference
June 15-20, 2014
San Antonio, Texas
Tracy K. Webb, CSCP
Compliance Officer
State of New York Office of Comptroller
- A Fraudster’s Method of Approach -
Fraudsters take advantage of sloppy practices ◦ Poor accounting system
◦ Lack or records accountability
◦ Little or no physical security
◦ Lack of management supervision
Too much responsibility & authority ◦ Little or no segregation of duties and responsibilities
◦ Override policies, procedures and controls
COMPLIANCE!!!
Fraudsters steal assets by ◦ Decreasing revenue ◦ Increasing expenses
Creation and posting of fraudulent journal entries and the manipulation of ledgers
Disrupt the normal process of records ◦ Late receipt ◦ Modified ◦ Misplaced (stolen)
Irregularities develop ◦ AP ◦ AR ◦ Inventory, etc.
R. A. (Andy) Wilson, CFE, CPP
Managing Director
Wilson & Turner Incorporated
25th AFCE Global Fraud Conference
June 15-20, 2014
San Antonio, Texas
Tracy K. Webb, CSCP
Compliance Officer
State of New York Office of Comptroller
- Fraud Symptoms Used to ID Sources & Methods -
Symptoms are just symptoms; not proof!
There may be an explanation for the existence
Six main groups of Fraud Symptoms:
◦ Accounting Anomalies - Unusual processes & procedures
◦ Internal Control Weaknesses - Overridden controls, absent
◦ Analytical Anomalies - Unrealistic relationships, odd occurrences
◦ Extravagant Lifestyles - Starts as need; exceeds to greed
◦ Unusual Behavior - 1st as fear | guilt; then stress - patterns develop
◦ Tips and Complaints - Usually from employees; categorized as a
Fraud Symptom because many turn out to be unjustified
Fraud by nature is HIDDEN
There is NO TECHNIQUE to absolutely ensure that fraud does not exist in an organization
To prove that fraud has NOT occurred, one must endeavor to prove it HAS occurred.
To prove that fraud HAS occurred, one must endeavor to prove it has NOT occurred.
“Silver Blaze”
Curious incident
One of the 56 Sherlock Holmes short stories
Sir Arthur Conan Doyle
About “Silver Blaze” a famous race horse ◦ Disappearance on the eve of an important race
◦ Apparent murder of the horse’s trainer
Plot focused on: ◦ “The curious incident of the dog in the night-time.”
Script: ◦ Gregory (Scotland Yard detective): "Is there any other point to which you would wish to draw my attention?“
◦ Holmes: "To the curious incident of the dog in the night-time.“
◦ Gregory: "The dog did nothing in the night-time.“
◦ Holmes: "That was the curious incident."
Irregularities in Source Documents JE & Ledgers
Missing documents
Photocopied documents
Stale item on bank reconciliations
Excessive voids or credits
Common names | addresses
Increasing “Past Due” accounts ◦ Payable
◦ Receivables
Alterations on documents
Duplicate payments
Second endorsements
Document sequences – no sense
Questionable handwriting
Faulty Journal Entries
◦ Accounting Language: D C
◦ Legal Expense ………… 500
◦ Cash …………………………………. 500
◦ Recognize Fraud Symptoms:
Assets (Cash | Inventory)
Liabilities (Nope: No one steals L) Inaccuracies in Ledgers
◦ Ledger = “Book of Accounts”
◦ Assets equal Liabilities
◦ Many involve manipulating
AR
AP
1
Folds
Staples
Copies
Holes
Invoice
Lack of segregation of duties
Lack of physical safeguards
Lack of independent checks
Lack of proper authorization
Lack of proper documents or records
Overriding existing controls (most common)
Inadequate accounting system (upgrades)
2
R. A. (Andy) Wilson, CFE, CPP
Managing Director
Wilson & Turner Incorporated
25th AFCE Global Fraud Conference
June 15-20, 2014
San Antonio, Texas
Tracy K. Webb, CSCP
Compliance Officer
State of New York Office of Comptroller
- Case Study 1: Brenda Stayton -
Time for an Old Time
Fraud History Lesson!
IBM ◦ Typewriter: “IBM Selectric III”
◦ Monster of a machine
◦ Characters on a ball
◦ Correcting tape (orange spool)
◦ Backspace key …
X
Old style AP check fraud ◦ Received approved invoice to pay vendor ◦ Prepared “manual check” using IBM Selectric III ◦ Coded in ledger to vendor ◦ Took to authorized signer ◦ Reinserted check into the IBM:
Backspaced the name of vendor off Typed in her name
◦ Deposited into her bank account (the same account for 7 years) ◦ Weeks later prepared another check to vendor
Didn’t send them for weeks Used increasing LOC of owner to cover her theft
◦ Destroyed cancelled checks upon receipt
$1 Million Check Fraud
9 Years
Depositary account (nothing there)
Operating account dry
LOC of owner maxed-out
And, the need by Stringer for more cash
She wrote a personal check to the Depositary account ◦ $4,000
◦ Deposited at bank
◦ Float to give her time to receive customer checks
X X X
Her check was
NSF!
Accounting Anomalies ◦ Missing documents
◦ Alteration of documents (unknown)
◦ Duplicate payments
◦ Document sequences that do not make sense
◦ Increasing LOC
◦ Increased “Past Due” accounts
Brenda Stayton $180,000 a year from a $1.2 Million organization!
For 9 years. … that is an impressive task!
Significant Increase or Decrease in Account Balances
Physical Anomalies
Cash Shortages or Overages
Excessive Late Charges
Unreasonable Expenses or Reimbursements
Unexplained Inventory Shortages or Adjustments
Deviations from Specifications
Increased Scrap
Excess Purchases
Too Many Debit or Credit Memos
3
R. A. (Andy) Wilson, CFE, CPP
Managing Director
Wilson & Turner Incorporated
25th AFCE Global Fraud Conference
June 15-20, 2014
San Antonio, Texas
Tracy K. Webb, CSCP
Compliance Officer
State of New York Office of Comptroller
- Case Study 2: Construction Fraud -
Invoices for Painting
were received before the
sheet rock was installed
Most people who steal are under financial pressure: ◦ Sometimes real
◦ Sometimes just “greed”
At first to fulfill their financial needs; then to improve their lifestyle
Fraudsters often live beyond their means, since their income does not support their lifestyle. Few save the money. Lifestyle changes are often easy
for friends, coworkers and managers
to spot.
4
R. A. (Andy) Wilson, CFE, CPP
Managing Director
Wilson & Turner Incorporated
25th AFCE Global Fraud Conference
June 15-20, 2014
San Antonio, Texas
Tracy K. Webb, CSCP
Compliance Officer
State of New York Office of Comptroller
- Case Study 3: Accountant Fraud -
Concrete floor coating company ◦ Installation
◦ Design
◦ Polishing
30 Employees
Southeastern US
Jay Thompson, Owner ◦ Matthew Cruse, Operations manager
◦ Michelle Nemeth, Accountant
$50,000 annual salary Company credit card misuse and abuse Excess of $120,000 Personal purchases ◦ El Porton ◦ Target ◦ ATT Uverse ◦ Fuel purchases ◦ Kirby Liquor/ The Winery ◦ Deangelus Jewelers ◦ Gymboree ◦ Vera Bradley ◦ Lane Bryant ◦ Others
$80,000 annual salary Company credit card misuse and abuse Excess of $100,000 Personal purchases ◦ Home Depot ◦ Lowes ◦ Costco ◦ Kroger ◦ AutoZone ◦ Fuel purchases ◦ Germantown Storage ◦ Internet purchases
Amazon Paypal
◦ Others
Cruse Nemeth
Opportunity ◦ Manager
◦ Not questioned
◦ Best friend of Nemeth (Boo)
Motivation ◦ Money, Money, Money
Rationalization ◦ Owed to him (Hard work)
Opportunity ◦ Accountant ◦ No Segregation ◦ Supervises CC Account ◦ Best friend of Cruse
Motivation ◦ Not paid enough ◦ Overworked (O = 3, H = 2)
Rationalization ◦ Owed to her
Jay just txt Michelle and wanted to know how to access Amex statements online Whaaaaatttttttt????? How do you know??? Can she tell when someone else logs in?? Oh F_ _ _ ! Did you talk to her What else What about my light box All he has to do is Google the name Can you look at previous months
She has over $2000 in charges this month More words carabas target ATT bills dog grooming elporton etc I just logged on And yes, can go back I don’t care if she knows F _ _ _ no Bella vita Sonic pier 1 mcDonalds That is back, I can say I order diamond samples
No particular behavior signals fraud
But, fraudsters exhibit a host of emotions: ◦ Guilt
◦ Fear
◦ Others
These express themselves as: ◦ Stress
Causes behavior changes
Behavior changes are recognizable
Changes in behavior are fraud symptoms
Guilt
Fear
Stress
Behavior Changes
5
Insomnia Sweats Increased ◦ Smoking ◦ Drinking ◦ Drugs ◦ Gambling
Suspicious nature Can’t relax Early in | Late out No vacation
Behavior Changes
Unexplained
wealth
Drugs, drinking
or other vices Disaffected
Life style
changes Mood swings
Unusually
friendly/distant
Overprotective of
turf Never absent
Complains of
“errors”
LOOK
OVER
HERE
Most frauds are reported
The persons best in position to spot fraud are: ◦ Employees
◦ Vendors
◦ Customers Fraud
Elements
Theft | Concealment | Conversion
Witness someone
taking
Altered records & miscounts can be
recognized
Lifestyle changes
are visible
6
R. A. (Andy) Wilson, CFE, CPP
Managing Director
Wilson & Turner Incorporated
25th AFCE Global Fraud Conference
June 15-20, 2014
San Antonio, Texas
Tracy K. Webb, CSCP
Compliance Officer
State of New York Office of Comptroller
- Case Study 3: Hevesi Case -
State Assemblyman 1971-1993
NYC Comptroller 1994-2001
NYS Comptroller 2002 - 2006
Discovered based on an unrelated tip
Pay to Play scandal
Sentenced to 1-4 years
Industry wide changes as a result
6
R. A. (Andy) Wilson, CFE, CPP
Managing Director
Wilson & Turner Incorporated
25th AFCE Global Fraud Conference
June 15-20, 2014
San Antonio, Texas
Tracy K. Webb, CSCP
Compliance Officer
State of New York Office of Comptroller
- Ethical Decisions People Make -
Reasons ◦ Rules outlining the responsibilities or proper practices
Individuals
Organizations
◦ Concepts: ethical, honor and moral codes
Best practices today ◦ Influence behavior
◦ Create standards for behavior
No Fraud
Fraud
Pressure Opportunity
Ethics
Ethics
Opportunity Pressure
R. A. (Andy) Wilson, CFE, CPP
Managing Director
Wilson & Turner Incorporated
25th AFCE Global Fraud Conference
June 15-20, 2014
San Antonio, Texas
Tracy K. Webb, CSCP
Compliance Officer
State of New York Office of Comptroller
- Preventing Good People from Doing Bad Things -
Training ◦ Awareness ◦ Reinforcement of policies & procedures
Compliance monitoring ◦ Management ◦ Compliance professionals
Policy Breach ◦ Response ◦ Document
Hiring Honest People and Providing
Fraud Awareness
Training
Providing an Employee Assistance Program
(EAP)
Creating a Positive Work Environment
Hiring Honest People and Providing Fraud Awareness Training ◦ Background investigation (Are all
backgrounds ~ backgrounds) Levels (Basic / Mid / Executive)
Criminal History
Civil Litigation
Financial History
Education
Former Employment
Drug Screens
◦ Solid verification process (always followed)
◦ Interview process (Train managers) “Our company … Is there any reason”
◦ Paper & pencil honest tests
Creating a Positive Work Environment
◦ Does not “just happen”
◦ This is hard work
Awareness programs
Education/training
Blurbs in company news about fraud – waste – abuse
Create expectations about honesty
Open-door policies
Positive operating procedures
Tone at the Top
Providing an Employee Assistance Program (EAP) ◦ Fraud Triangle = O M R
Formal Assistance Programs ◦ Un-sharable situation
Substance
Gambling
Money management
Health
Family
ROI: Touted by corporations
Managers Not Caring about Honesty
Inadequate Pay
Low Loyalty
Crisis Management
Rigid Rules
Repression of Differences
Poor Promotion Opportunities
Poor Communications
Lack of Recognition
Unreasonable Budget Expectations
Short-Term Focus
Reactive vs. Proactive
Hostile Work Environment
Poor Training
Lack of Clear Responsibilities
1. Install Internal Controls
• Control Procedures to Prevent and Detect Fraud
• Institute of Internal Auditors (to affect accountability):
• Does company foster control consciousness
• Realistic goals and objectives
• Written corporate policies (and Code of Conduct)
• Authorization levels
• Processes to monitor activities and safeguard assets
• Communication channels ~ open with adequate & reliable information
• Cost effective controls to deter fraud
No.: 1
71% Committed by Individuals
29% Collusion
2. Discourage Collusion
• Today’s market is Complex
• Crimes
• Individuals
• Collusion
• Supplier Alliances
• Purchase & Sales Fraud are common Kickback Frauds
No.: 2
3. Fraud Awareness Policy
• Establish a Company Policy
• Alert Venders and Contractors
• Document their Awareness
• Insist on their Compliance
• Develop a “Right to Audit” Clause
• Establishes the Process and Protocol to inspect the records of Vendors and Contractors
No.: 3
4. Monitor Employees
• Hoarding? Most don’t!
• Expensive habits – can these be seen?
• Spend conspicuously
• Develop the theory: “Others are watching”
• Watch for: Cruises, homes, limo, Rolex, parties, condos, art, remodel home
No.: 4
5. Tip line
• Whistleblower policy:
• Must be anonymous – employees must know they are free from retribution
• Independence
• Accessible – multiple method of reporting
• Follow-up is essential
No.: 5
What happens if we don’t follow -up on tips?
Don’t Have
Hotline
Have Hotline
48 % 52% Toll-FreeHotlines
Talk toManagers
Talk toSecurity
Other
16%
17% 38%
29%
6. Create an Expectation of Punishment
• Fear of punishment – does deter dishonesty
• Swift and Consistent Punishment
• NOT Just Termination
• Expensive and Time Consuming
• Unfavorable Publicity for the Company
No.: 6
7. Proactive Fraud Auditing
• Only a few organizations AUDIT for Fraud
• Fraud Audits create:
• Fraud awareness among employees
• Let’s everyone know their actions are subject to review
• Creates a fear of getting caught
No.: 7
Identify Risk
Exposures
3 Proactively
Look for Symptoms &
Exposures
1
Identify Fraud Symptoms for Each Exposure
2 Investigate Identified Symptoms
4
(a) (1) Hire Honest People & Provide Fraud Awareness Training
Eliminate
Opportunities
Create Culture of Honesty, Openness, & Assistance
(2) Discourage Collusion
(3) Alert Vendors & Contractors to Company Policies
(4) Monitor Employees
(e) (5) Provide Tip Hotlines
(6) Create an Expectation of Punishment (7) Audit
Proactively
(b) Create a Positive Work Environment
(c) Develop a Company Code of Ethics
(d) Implement Employee Assistance Programs
R. A. (Andy) Wilson, CFE, CPP
Managing Director
Wilson & Turner Incorporated
25th AFCE Global Fraud Conference
June 15-20, 2014
San Antonio, Texas
Tracy K. Webb, CSCP
Compliance Officer
State of New York Office of Comptroller
- Identifying Fraud through Detection -
Tools & Tolerance Responding to Fraud
Risk assessment tools: ◦ How might a fraud perpetrator
exploit weaknesses in the system of controls?
◦ How could a perpetrator override or circumvent controls?
◦ What could a perpetrator do to conceal the fraud?
Recognizes that management sets the fraud tolerance: ◦ Material loss
◦ “Zero-Tolerance”
Management sets response: ◦ Categorizing issues ◦ Allegation
Confirming validity Defining the severity
◦ Conducting Investigation and fact-finding
◦ Resolving or closing the investigation Criminal
Civil Insurance
◦ Reporting & Records Determining confidential documents Defining documentation method Deciding on document retention and
release of information
Named after Dr. Frank Benford, GE physicist
Noticed that the pages of a book: ◦ For the low numbers the pages were:
Dirtier
Worn
◦ Determined page numbers for the number 1 were the most heavily used of all, then 2, then 3
Intrigued Benford: ◦ Analyzed over 20 thousand sets of numbers
Areas of rivers
Street addresses in a phone book
Baseball statistics
Population statistics
Numbers used in magazine articles
The smaller that the first digit of the number was the more likely was that first digit to appear
Logically, what is a normal progression and flow of digits?
Examples: ◦ Book
◦ Elevator
◦ Addresses on a street
Examines the frequency of digits appearing in a database of: ◦ Invoice numbers ◦ Amounts
0-9 Do not appear ~ 10% each The first digit is expected to be: ◦ 1 more than 30% of time ◦ 2 = 17.6 % of time ◦ 3 = 12.7 and ◦ 4 = 9.7% ◦ 5 = 7.9%
Second and Thirds digits may be used too ◦ Just exclude the first digit; and, start with the
second digit. 2nd Digits ------- 4x29
3rd Digits ------- 43x9
Fraudsters don’t know this!
Used by Anti-fraud professionals to detect fraud in data sources: ◦ Check registers
◦ Tax returns
◦ More
Will not work on Pre-assigned Data: ◦ Telephone Numbers
◦ Postal Codes
What do you see? ◦ Small to large
◦ Just under $100,000
◦ Digit pattern opposite
of Benford’s Law
90% have first digit of
7, 9 or 9
R. A. (Andy) Wilson, CFE, CPP
Managing Director
Wilson & Turner Incorporated
25th AFCE Global Fraud Conference
June 15-20, 2014
San Antonio, Texas
Tracy K. Webb, CSCP
Compliance Officer
State of New York Office of Comptroller
- Questions & Answers -
R. A. (Andy) Wilson, CFE, CPP
Managing Director
Wilson & Turner Incorporated
2752 Mt. Moriah Parkway
Memphis, TN 38115
Office: (901) 546-8585
Facsimile: (901) 546-8584
Mobile: (901) 481-0367
eMail: [email protected]
Website: wilson-turner.com
Tracy K. Webb, CSCP
Compliance Officer
Office of the New York State Comptroller
110 State Street, 14th Floor Albany, NY 12236
Office: (518) 486-6998 Facsimile: (518) 474-9900
eMail: [email protected]