Fraud Awareness, Detection, and Deterrence Corporation for Public - PowerPoint PPT Presentation

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

Purpose 1. Become aware of the fraud threat to your organization 2. Learn ways to detect it 3. Learn methods to deter it CPB/OIG June 2016 2

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 3

1. Fraud threat CPB/OIG June 2016 4

Fraud threat/definition What is fraud? “Fraud involves obtaining something of value through willful misrepresentation” Government Auditing Standards, § 6.30. CPB/OIG June 2016 5

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 6

Fraud threat/frequency How much fraud is there? No one knows Estimate: 5% (ACFE) CPB/OIG June 2016 7

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 8

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 9

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 10

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 11

Fraud threat/schemes 1) Asset misappropriation 2) Corruption 3) Financial statement fraud Source: ACFE CPB/OIG June 2016 12

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 13

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 14

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 15

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 16

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 17

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 18

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 19

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 20

Fraud threat/fraudsters Who commits fraud? Can be anybody CPB/OIG June 2016 21

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 22

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%) or criminally charged (87%) Source: ACFE CPB/OIG June 2016 23

2. Fraud Detection CPB/OIG June 2016 24

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 25

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 26

Fraud detection Proactive measures – shortest fraud duration/lowest loss • Hotlines – tips from employees best source in both occupational and financial statement fraud • Employee monitoring • Account reconciliation • IT controls • Internal audits • Management reviews Sources: ACFE, AFC CPB/OIG June 2016 27

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 28

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 operating systems (e.g., membership or underwriting sub- systems) • Common practice to override controls CPB/OIG June 2016 29

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 30

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 31

3. Fraud deterrence CPB/OIG June 2016 32