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Fraud Awareness, Detection, and Deterrence Corporation for Public Broadcasting Office of Inspector General June 2016 The CPB/OIG was created by Congress in 1988 to promote the efficiency, effectiveness, and integrity of CPB by conducting audits,

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Fraud Awareness, Detection, and Deterrence Corporation for Public Broadcasting Office of Inspector General June 2016

The CPB/OIG was created by Congress in 1988 to promote the efficiency, effectiveness, and integrity of CPB by conducting audits, investigations, and other evaluations of CPB initiatives and operations. To report potential fraud, waste, or abuse in CPB initiatives and operations, please call 800-599-2170 or go to www.cpb.org/oig/contact.php

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Purpose

  • 1. Become aware of the fraud threat to your
  • rganization
  • 2. Learn ways to detect it
  • 3. Learn methods to deter it

CPB/OIG June 2016

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Sources

The Fraud Resistant Organization, Tools, Traits, and Techniques to Deter and Detect Financial reporting Fraud, Anti-Fraud Collaboration (AFC)

  • formed in 2010 by Center for Audit Quality, Financial Executives

International, Institute of Internal Auditors, and National Association of Corporate Directors

  • focuses on financial reporting fraud

Report to the Nations on Occupational Fraud and Abuse, 2014 Global Fraud Study, Association of Certified Fraud Examiners (ACFE)

  • focuses on fraud by employees against their employers as reported in

1483 cases Washington Post (WP), fall 2013, investigative series of fraud in nonprofits > 1000 form 990s from 2011 reporting diversions over $250,000

CPB/OIG June 2016

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  • 1. Fraud threat

CPB/OIG June 2016

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Fraud threat/definition

What is fraud? “Fraud involves obtaining something of value through willful misrepresentation”

Government Auditing Standards, § 6.30.

CPB/OIG June 2016

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Fraud threat/triangle

Fraud triangle

  • Opportunity

(lax internal controls, “rubber stamp” approvals, no oversight)

  • Rationalization

(undercompensated, not treated fairly)

  • Pressure

(personal debt, family issues, unrealistic performance expectations)

Sources: AFC, ACFE

CPB/OIG June 2016

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Fraud threat/frequency How much fraud is there? No one knows Estimate: 5% (ACFE)

CPB/OIG June 2016

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Fraud threat/non-profits How much fraud in non-profits?

  • Diversions reported to IRS: 285 nonprofits, $170 m. loss (2009)

>1000 nonprofits (2011)

  • 11% of occupational fraud cases reported to ACFE (2014)
  • Destroys public’s trust & support

Source: WP, ACFE

CPB/OIG June 2016

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Fraud threat/non-profits

  • Oral Suer, former chief of National Capital

Area United Way (local United Way)

– Pleaded guilty to defrauding almost $500,000 over 6-7 year period – Charged for personal expenses & travel – Paid himself $333,000 for annual leave he had already used – Siphoned $94,000 extra from pension plan – Sentenced to 27 months

CPB/OIG June 2016

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Fraud threat/non-profits

  • Impact on organization

– 2001 revenue: $90,000,000 – 2002 revenue: $19,000,000 (Suer was caught in 2002)

CPB/OIG June 2016

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Fraud threat/non-profits

Specific nonprofit vulnerabilities

  • Oversight thinner, staff limited
  • Control structures weaker
  • Supervisors more trusting of staff committed to mission

Small entities (<100 employees) more vulnerable 30% of cases reported to ACFE, $154,000 median loss

Sources: ACFE, WP

CPB/OIG June 2016

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Fraud threat/schemes

1) Asset misappropriation 2) Corruption 3) Financial statement fraud

Source: ACFE

CPB/OIG June 2016

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Fraud threat/schemes

1) Asset misappropriation (85%) most frequent in occupational fraud; results in lowest loss, $130,000 Cash – theft of cash receipts (skimming) – fraudulent disbursements (billing/payroll/expense reimbursement schemes, check tampering) Inventory/equipment – misuse – larceny (false requisitions/transfers, sales/shipping, purchasing/receiving)

Source: ACFE

CPB/OIG June 2016

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Fraud threat/schemes

Gail Waymire, finance manager, public TV station

  • Created false invoices
  • Recorded payments for equipment not purchased
  • Inflated payroll amounts & sales commissions
  • Created false ledger items for supplies and building maintenance

Take: > $130,000 over 4 yrs. Sentence: 14 months prison, 2 years supervised release, + $141,469 restitution

CPB/OIG June 2016

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Fraud threat/schemes

2) Corruption (37%)

  • conflicts of interest (purchasing/sales schemes)
  • bribery (invoice kickbacks, bid rigging)
  • illegal gratuities

Source: ACFE

CPB/OIG June 2016

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Fraud threat/schemes

3) Financial statement fraud (9%) (least frequent occupational fraud; in highest loss, $1 m.)

  • Overstatement or understatement of assets/revenues/liabilities

(improper valuations/disclosures, fictitious revenues, concealed/understated liabilities)

Source: ACFE

CPB/OIG June 2016

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Fraud threat/penalties

Federal criminal penalties (title 18 U.S.C.)

  • false claims and conspiracy to defraud re claims (§§ 286-87)
  • conspiracy (§ 371)
  • theft of public funds (§ 641)
  • false statements (§ 1001)
  • mail and wire fraud (§§ 1241/43)

CPB/OIG June 2016

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Fraud threat/penalties

Federal civil penalties False Claims Act (31 U.S.C. §§ 3729-33)

  • knowingly presenting false claims to the government
  • deliberate ignorance or reckless disregard of the truth
  • treble damages plus $5-11,000 penalty for each false claim

CPB/OIG June 2016

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Fraud threat/penalties

False Claims Act applies to CSG certifications to CPB

Grantee must annually certify its compliance with the General Provisions and Eligibility Criteria and “improper certification may result in penalties under the False Claims Act.” CPB Annual General Provisions and Eligibility Criteria for Radio and Television, § 4.C.

CPB/OIG June 2016

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Fraud threat/penalties

CSG applicant “represents and warrants:”

(1) That the information contained in this Application, Certification of Eligibility, and its financial report for FY 2013 are true and accurate. (2) That Applicant recognizes any false information may subject Applicant to penalties under the Federal False Claims Act,… CPB FY2015 TV CSG Legal Agreement, II.E.

Station and licensee officials sign this document

CPB/OIG June 2016

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Fraud threat/fraudsters Who commits fraud? Can be anybody

CPB/OIG June 2016

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Fraud threat/fraudsters

John Valenta, college public radio station engineer

  • internal audit revealed abnormally large number of invoices from

Valenta’s company

  • submitted false invoices for work not performed and merchandise

not delivered

  • previously pled guilty to similar activity at another college radio

station & sentenced to 2 yrs. probation + $11,270 restitution

  • now charged with felony theft

Take: allegedly >$200,000 over 7 years

CPB/OIG June 2016

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Fraud threat/fraudsters

Most frequent occupational fraudsters

  • Men (67%)
  • Employees (42%)
  • Age 31-45 (52%)
  • In the accounting department (17%)
  • 1-5 years with employer (41%)
  • Never previously punished or terminated (82%)
  • r criminally charged (87%)

Source: ACFE

CPB/OIG June 2016

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  • 2. Fraud Detection

CPB/OIG June 2016

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Fraud detection

How was occupational fraud detected?

  • Most often: tips (42%)

(management review was second at 16%)

  • Less often: external audits (3%)

(even worse than by accident at 7%)

Source: ACFE

CPB/OIG June 2016

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Fraud detection

You cannot rely on external audit to detect fraud

  • Auditor must plan and perform audit to obtain “reasonable

assurance” whether financial statements are “free of material misstatement.” AU 316.01

  • However, such an audit “provides no assurance that illegal

acts will be detected.” AU 317.07

CPB/OIG June 2016

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Fraud detection

Proactive measures – shortest fraud duration/lowest loss

  • Hotlines – tips from employees best source in both
  • ccupational and financial statement fraud
  • Employee monitoring
  • Account reconciliation
  • IT controls
  • Internal audits
  • Management reviews

Sources: ACFE, AFC

CPB/OIG June 2016

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Fraud detection

Employee red flags

  • Living beyond means (44%)
  • Financial difficulties (33%)
  • Unusually close relationship with vendor (21%)
  • Control issues/unwilling to share duties (21%)
  • Wheeler-dealer attitude (18%)

Source: ACFE

CPB/OIG June 2016

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Fraud detection

Organizational red flags

  • Lax tone “tone at the top”
  • Lack of policies and procedures
  • Lack of internal controls, e.g.

– segregation of duties – management reviews – timely reconciliation of bank accounts and non-integrated

  • perating systems (e.g., membership or underwriting sub-

systems)

  • Common practice to override controls

CPB/OIG June 2016

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Fraud detection

More organizational red flags

  • Duplicate or out-of-sequence checks
  • Cancelled checks with different font or ink from normal
  • Non-payroll checks issued to employees
  • Unusual payments to vendors (amounts, timing, duplicate/over

payments)

  • Invoices for unusual goods/services
  • Invoices not professional or lack information (description of

goods/services, invoice no., contact information)

CPB/OIG June 2016

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Fraud detection

Christopher C. Morris, finance director, public video distribution entity

  • Forged company endorsement
  • Deposited into his personal account 200 checks

made out to entity from customers buying products

  • Company’s insurer suing bank for negligence

Take: allegedly > $2 m.

Source: Boston Globe, 9/25/14

CPB/OIG June 2016

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  • 3. Fraud deterrence

CPB/OIG June 2016

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Fraud deterrence

Threat of detection is one of the most powerful deterrents.

Source: AFC, ACFE

CPB/OIG June 2016

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Fraud deterrence

1) Exercise healthy skepticism 2) Establish culture of honesty and integrity 3) Ensure communication among all involved in financial chain

Source: AFC

CPB/OIG June 2016

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Fraud deterrence

1) Exercise healthy skepticism – balanced inquiry

  • Questioning mind – disposition to inquiry
  • Suspension of judgment – wait for the evidence
  • Search for knowledge – investigate beyond the obvious
  • Interpersonal understanding – recognizing peoples’ motivations &

perceptions can lead to biased information

  • Autonomy – self-direction, independence, conviction to decide for yourself
  • Self-esteem – self-confidence to challenge assumptions

Source: AFC

CPB/OIG June 2016

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Fraud deterrence

2) Establish a culture of honesty and integrity "tone at the top, mood in the middle, buzz at the bottom”

  • Establish and reinforce a code of conduct
  • Establish and reinforce internal controls
  • Provide fraud training for all employees and managers,

emphasize behavior and organizational red flags

  • Encourage reporting suspicious activities, establish hotline

Source: AFC

CPB/OIG June 2016

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Fraud deterrence

3) Ensure communication among all involved in financial chain

  • Communication between managers and employees
  • Keep board, audit committee, and auditors informed
  • Conduct a fraud risk assessment

Source: AFC

CPB/OIG June 2016

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  • 4. Lessons from cases

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Lessons from cases

  • Oral Suer, former chief of National Capital Area United Way

(local United Way) – Use a variety of expense & payroll schemes & claimed excessive leave – Pleaded guilty to defrauding almost $500,000 over 6-7 year period – Paid himself $333,000 for annual leave he had already used – Siphoned $94,000 extra from pension plan

CPB/OIG June 2016

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Lessons from cases

  • To detect/deter payroll schemes

– Review leave usage for compliance with policy – Supervisor review & approve time cards

  • To detect/deter expense schemes

– Review & analyze detailed expenses claimed against authorizations & supported by required receipts – Expenses claimed within specified limits (e.g., per diem, lodging, mileage) – Random authentication of receipts/invoices with vendor – Supervisory review & approval

CPB/OIG June 2016

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Lessons from cases

Gail Waymire, finance manager, public TV station

  • Used a variety of payroll, expense, and purchasing/billing schemes to steal

more than over $130,000 over 4 years:

  • Created false invoices
  • Recorded payments for equipment not purchased
  • Inflated payroll amounts & sales commissions
  • Created false ledger items for supplies and building maintenance

CPB/OIG June 2016

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Lessons from cases

  • To detect/deter payroll schemes

– Are personnel records independent from payroll & timekeeping – Compare personnel & payroll records to check for terminations – Are additional levels of management approval required for changes to employee salaries – Must overtime be approved by a supervisor – Are commission expenses compared to sales figures for verification (underwriting) – Does someone separate from sales/underwriting department calculate commissions

CPB/OIG June 2016

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Lessons from cases

  • To detect purchasing/billing schemes

– Are purchasing & payment departments separate – Management approval required for purchases (limits) – Purchase orders specific (e.g., items, quantities, prices, and dates) – Master vendor file reviewed for unusual vendors/addresses – Competitive bids required – Does receiving department report all items received, maintain a log, & provide receipts to accounting & purchasing departments – Are purchasing & receiving separated from invoice processing, acounts payable, & general ledger – Are controls in place to check for duplicate invoices & purchase orders

CPB/OIG June 2016

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Lessons from cases

John Valenta, college public radio station engineer

  • operated at the station for a number of years & used a number
  • f purchasing & expense schemes
  • undisclosed conflict of interest
  • allegedly stole over $200,000 over 7 years

CPB/OIG June 2016

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Lessons from cases

  • To detect/deter conflict of interest schemes

– Compare vendor info with employee info (e.g., addresses, phone numbers, email accounts) – Do employees file disclosure statements of their financial/business interests – Code of ethics requiring disclosure of potential conflicts – Code of ethics prohibiting business with former employees

CPB/OIG June 2016

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Lessons from cases

Christopher C. Morris, finance director, public video distribution entity

  • Allegedly stole more than $2 m. through a skimming scheme

CPB/OIG June 2016

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Lessons from cases

  • To detect/deter skimming schemes

– Is there segregation of duties for opening the mail, preparing deposit slips, making deposits, & recording receipts in the accounting system – Does employee who opens mail place restrictive endorsements on all checks received & record all receipts – Does employee who makes deposits reconcile deposit slips to receipts log – Are employees who handle funds bonded/insured – Is there job or assignment rotation for employees or volunteers who handle cash receipts & accounting responsibilities – Is there a policy/procedure for delinquent accounts – Supervisory review of write-offs

CPB/OIG June 2016

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Lessons from cases

  • Similar issues may arise at fundraising events, especially if

cash is handled

  • To detect/deter cash larceny schemes

– Are all contributions recorded (cash/checks/credit cards) & receipts given to donors – Are cash/check/credit cards receipts reconciled to receipt log and deposit slips – Are cash/check/credit card receipts counted & verified by 2 people – Is there separation of duties for depositing receipts, receiving cash/checks/credit cards, & recording receipts in accounting systems

CPB/OIG June 2016

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Take aways

  • Trust is important but not an internal control; establish controls &

procedures (checks & balances) rather than solely relying on trust

  • Clearly define who is responsible for what & write it down
  • Have segregation of duties & physical controls (lock it up)
  • Institute a fraud policy – no tolerance & prompt action
  • Establish a hotline for tips & protect those who provide info
  • Call CPB/OIG if you identify something suspicious

CPB/OIG June 2016

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How to contact OIG hotline

  • http://www.cpb.org/oig/contact.php – online complaint form
  • 202-879-9728 or 800-599-2170 – telephone
  • 202-879-9699 – fax
  • igemail@cpb.org – email
  • Corporation for Public Broadcasting

Office of Inspector General 401 Ninth Street, NW Washington, DC 20004-2129

CPB/OIG June 2016

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Other fraud resources

American Institute of Certified Public Accountants (AICPA) – www.aicpa.org sells publications on fraud & fraud investigations Institute of Internal Auditors Association of Certified Fraud Examiners (ACFE) – www.cfenet.com & www.fraudinfo.com ACFE Fraud Prevention Checkup, http://www.acfe.com/uploadedFiles/ACFE_Website/Content/documents/F raud_Prev_Checkup_DL.pdf

CPB/OIG June 2016

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How to contact OIG speakers

  • OIG Office – 202-879-9669
  • Mary Mitchelson

Inspector General mmitchelson@cpb.org

  • William Richardson

Deputy Inspector General brichardson@cpb.org

  • Helen Mollick

IG Counsel, Asst. IG for Investigations hmollick@cpb.org

CPB/OIG June 2016

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