June 17, 2009 Gary Moulton Forensic & Dispute Services Leader Toronto Values, Ethics & Fraud Confronting Fraud and Unethical Behaviour in Government

June 17, 2009Gary MoultonForensic & Dispute Services LeaderToronto

Values, Ethics &FraudConfronting Fraud and Unethical Behaviour in Government

Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 2

EX-BUREAUCRAT TO BE JAILED FOR DEFRAUDING GOVERNMENT

A former assistant deputy minister with Health Canada is going to jail for a year, after admitting that he got more than $200,000 in kickbacks for channeling millions of dollars to an addictions treatment centre. He pleaded guilty in an Ottawa court to charges of fraud and breach of trust. The kickbacks included travel to Florida and the Caribbean, several SUVs and cash, which he used to buy condominiums in Mont Tremblant.

CBC News March 11, 2005


MASTERMIND OF DND FRAUD PLEADS GUILTY

The great invoicing heist perpetrated on the Department of National Defence took a surprise turn yesterday as the man accused of orchestrating it pleaded guilty to fraud and breach of trust.

The Ottawa CitizenJuly 24, 2007


What is Fraud?

According to the CICA:

“The term fraud refers to an intentional act by one or more individuals among management, other employees, those charged with governance, or third parties, involving the use of deception to obtain an unjust or illegal advantage.”


Fraud: Common Misperceptions

Fraudsters are geniuses who mastermind highly sophisticated crimes.


WOMAN ARRESTED IN CHARITY SCAM

A Cambridge women has been charged with fraud in a charity scam. Police allege that the women canvassed neighbourhoods last week to collect for a charity event that had taken place a month earlier. At least 16 people gave cash donations of $100 or more.

The Toronto Sun October 26, 2001


Fraud: Common Misperceptions

Fraud is usually committed by unstable, lazy, outcasts of the community.


FORMER CHARITABLE ORGANIZATION PRESIDENT SENTENCED IN CHARITY FRAUD

The former president and chief executive of the nonprofit Millennium Charity Plus pleaded guilty to using money from the charity to buy real estate for himself in Southern California. The Minnesota Gambling Control Board has revoked Millennium’s charitable gaming license as a result of the former president’s actions.

KSTP Eyewitness NewsMinnesota March 5, 2005


“At any given moment, there is a certain percentage of the

population that’s up to no good.”

J. Edgar Hoover

Factors That Lead To Fraud


Fraud in Government

• Transparency and accountability often challenged by the

media, opposition parties and citizens

• Financial transgressions are magnified, because taxpayer

dollars are at stake

• Elections are often held because of issues of accountabilty,

ethics and the misuse of public funds

• Canadian government scandals have been reported in the

annual Global Corruption Report, published by Transparency

International


Fraud in government

• Governments must make efficient use of taxpayer money while delivering maximum value to communities and citizens

• Governments also are expected to adhere to the highest standards of ethical conduct

• Heavily scrutinized areas in government include:– Procurement and purchasing practices– Contract management– Use of grant monies– Hiring practices– Expense accounts


• Recent examples include cronyism, bid rigging and other unethical behavior

• Many headlines about hiring or contracting with friends, political associates and supporters

• Need for hiring and contracting policies and practices to be non-partisan, fair, open, driven by business needs and competency based

• Senior leadership must demonstrate the highest standards of conduct of compliance

Fraud in government


• Need to avoid accusations that normal procurement procedures were bypassed to reward “friends” of the governing party

• A well designed procurement function is essential, including:

– Proper competitive tendering

– Sole source justifications

Fraud in government


Findings of Justice Gomery re: Sponsorship Scandal• Evidence of political involvement in the administration of

the program

• Insufficient oversight at the very senior levels of the public service which allowed program managers to circumvent proper contracting procedures and reporting lines

• Secrecy in the administration of the program and an absence of transparency in the contracting process

• Fear of reprisal on the part of public servants to challenge a manager who was circumventing established policies and who had access to senior public officials


• Overcharging by suppliers to the program for goods and services provided and inflated commissions charged

• A lack of objectives, criteria and guidelines for the program

• Deliberate actions to avoid compliance with legislation and policies

• The existence of a “culture of entitlement” among political officials and bureaucrats involved with the program, including the receipt of benefits

Findings of Justice Gomery re: Sponsorship Scandal (cont’d)


• Important to have a robust effective anti-fraud program in

place

• Formal fraud risk assessment to evaluate risk factors, detect

possible fraudulent schemes and scenarios and prioritize fraud

risk

• Robust whistleblowing initiative should be in place to allow

employees, suppliers and others to report wrongdoing without

fear of reprisals

• Fraud surveys consistently indicate that fraud is usually

brought to light by tips

Anti-fraud measures


• Codes of conduct and ethics are obligatory

• Developers should be drawn from a cross section of

departments, titles and locations

• Code should include

– a clear statement of the organization’s antifraud position,

– consequences for breaching the policy

– Examples of acceptable and unacceptable behaviors

– Regular updates to reflect changes to the business and regulatory

environment

Anti-fraud measures


Fraud Risk Assessment

Fraud Schemes

• What would the fraud look like?

• What are the effects on the books and records?

• What type of fraud is the area susceptible to?

• Where could the fraud occur?

• Who has the ability to commit a fraud?

• What is the likelihood that it may occur?

Fraud Triangle

Source: Donald D. Cressey, “Other People’s Money: A Study in

the Social Psychology of Embezzlement

Pressure

Rationalization

Opportunity


Fraud Risk Assessment

• Formal/systematic process for assessing fraud risks– Brainstorming

• Consideration of internal and external factors– pressures & incentives,

rationalization, opportunity

• Consideration of frauds – types of fraud, past

occurrences

• Likelihood, significance, pervasiveness of fraud– resulting in misstatements

• Levels within organization– entity, significant business

units and significant processes/accounts

• Risk of management override of controls– journal entries, bias of

estimates, non-routine or unusual transactions

• Appropriate personnel involvement– management, business

process owners, audit committee, internal audit


Government Grant Abuse

•Pressure to “spend” government grant money prior to year end

•“Use it or lose it” mentality

– “we found ways to justify the spending of year-end allocations. If we didn’t use it, we’d lose it.”

(Former DND employee quoted in the Ottawa Citizen, July 24, 2007)


NPO grant

• $1 million grant provided by government to NPO to finance renovations to facilities

• Funds received January 2002, had to be spent by March 31, 2002

• NPO signed a Request for Funds form in late March 2002 claiming it had spent $1 million on 10 suppliers

• NPO cut cheques to the suppliers, based on invoices received

• Government agency paid the NPO $1 million


• In early April 2002 all suppliers returned funds to NPO, NPO recorded funds as “security deposits payable”

• April 2002 to November 2002, suppliers performed the services, invoiced the NPO and the NPO paid the invoices

• Scheme was uncovered during the year end audit

NPO grant (cont’d)


The Case of the Misspelled Words

•Walt Johnson was the Parks and Recreation Director of Large Municipality

•He and an accomplice set up dummy companies to defraud the municipality

•The accomplice created the phony invoices and Walt personally delivered them to the accounts payable department

•Walt also picked up the cheques for these suppliers

•Scheme unravelled when an arena official saw an invoice for washroom painting which he knew was not done


Acme Contracting Ltd ACL97-004P.O. Box 202Whitby, OntarioM7G 8J9(905) 975-3462 Jan 15, 1997

Sold to:Large Municipality200 Eglinton Ave. EastToronto, OntarioM8G 3E4

DescriptionDescription Unit PriceUnit Price AmountAmount

Painteing washroomsPainteing washrooms $435.00$435.00in Northwest Arenain Northwest Arena 30.4530.45GSTGST 465.45465.45



Bosstown Renovations Inc BOSS3425LP.O. Box 305Markham, OntarioM7G 8J9(905) 975-3564 May 15, 1997


DescriptionDescription AmountAmount

Paveing Civic CentrePaveing Civic Centre 1,985.001,985.00back-lotback-lot 138.95138.95GSTGST 2123.952123.95




Fenceing

Paveing

Installeing

painteing


SUPPLIER ORGANIZATION Product

Kickbacks and Corruption(1)


PURCHASINGAGENT

SUPPLIER ORGANIZATION



PURCHASINGAGENT

SUPPLIER ORGANIZATIONPurchasing action

Benefit Influence



What Happens?

• Employee rigs tender to ensure corrupt supplier wins

• Corrupt supplier often not most economical, paid more quickly, offers no discounts

• Contract is worded loosely to allow for “extras”, “variations”, “change orders” over and above the fixed price

• Corrupt supplier almost always gets the kickback back

Bid Rigging


Red Flags:

•Specs only fit 1 contractor•Advance release of specs to 1 contractor•Unnecessary sole source justifications, usually stated to be for “technical” superiority•Exclusion of viable contractors from bid process•Splitting requirements•Vague specs•Limited time to submit bids•Sharing legitimate bidder information with favoured vendor•Inadequate shortlisting of qualified vendors

Corruption and Kickbacks: Bid Rigging


Red Flags (cont’d):

• Ownership interest in favoured vendor•Acceptance of late bids•Changes in vendor bid documents (especially if submitted electronically)•Improper disqualification of bids•Acceptance of non responsive bids•Unnecessary contacts with preferred vendor•Inappropriate evaluation criteria/scoring•Inappropriate weight between technical and financial criteria•Changes to contract shortly after award

Corruption and Kickbacks: Bid Rigging


Office Supplies Limited AS26374LP.O. Box 101Toronto, OntarioM7G 8J9(416) 975-3462 January 31, 1995


QuantityQuantity DescriptionDescription Unit PriceUnit Price AmountAmount

1 dozen1 dozen drafting padsdrafting pads 14.9514.95 $179.40$179.40taxtax 14.36 14.36

$193.76$193.76

The Case of the Phantom Supplier


Office Supplies Limited - Red flags

• no salesmen visits• no product catalogue• no Christmas card• telephone number was for an autobody shop• invoices always under $500• cheques always under $2,000• all invoices approved for payment by Mr. Jones• Mr. Smith also responsible for accounts payable


Professional Scepticism

• All signing authorities should adopt an attitude of professional

skepticism, recognizing that circumstances may exist that

causes the documents or representation to be improper.

• It means the a signing authority officer should make a critical

assessment, with a questioning mind, of the sufficiency and

appropriateness of supporting documents being provided and is

alert for evidence that contradicts or brings into question the

reliability of the documents or employees representations

• Professional skepticism does not mean a signing authority is

obsessively sceptical or suspicious.


Professional Scepticism (cont’d)

• The attitude of professional scepticism is necessary throughout

an approval process in order to reduce the risk of overlooking

suspicious circumstances.

• In those instances where the transaction data is inconsistent

with the source documentation supporting that transaction, the

general ledger should be updated to reflect the correct

information.

• Prior to make such adjustments these errors should be

monitored in order to ensure the appropriateness of the

adjustments and also be approved by the appropriate level of

management.


Public Accountability – A Sense of Belonging

“The absence of commitment to corporate cultural standards leads more easily to deviant forms of behaviour by individual employees, who may disregard the reputation of their employer or even their own if a quick profit is to be made.” Source:

Corporate Loyalty: A Trust Betrayed, Copyright Brian A. Grosman, 1988


Closing thoughts

•Fraud and unethical behavior are a drain on taxpayer resources

•Fraud risk can be minimized by:– Knowing who commits fraud and why– Strengthening internal controls and

oversight– Training auditors and investigators

Documents

June 17, 2009 Gary Moulton Forensic & Dispute Services Leader Toronto Values, Ethics & Fraud Confronting Fraud and Unethical Behaviour in Government