wwe eee eee vueveseveesuewweweuewwwewvwuwwnwnwwwwwe e GrantThornton An instinct for growth Fraud master class PT Lippo Karawaci Tbk September 2017Outline Organizations lose an estimated 5% of their annual revenues to fraud, according to the ACFE Report to the Nations, and are exposed to fraud risks in any process where human involvement is present. Some industries have higher exposures to fraud risk than others, while small businesses are more vulnerable. Despite the serious risk posed by fraud to businesses, many organizations do not have formal systems and. Procedures in place to prevent, detect and respond to fraud. Statistics tell us to be proactive against fraud and, as internal auditors, we have a crtical role in the prevention and detection of fraud, An effective fraud management rogram contributes to providing assurance to the board and management that governance, risk management, and Control processes on fraud is present and functioning, This one-day fraud master class is designed for the intemal audit team and anti~fraud professionals of PT Lippo Karawaci Tbk who are involved in the design, development, and continuing evaluation of the company's fraud governance, prevention, and detection practices, Wednesday, 06 September 2017 08,30 Registration and morning coffee 08.50 Opening remarks 09.00 |. Foundations on fraud 1. Definition and elements 2. The many faces of fraud: Profiling fraudsters 3. Theories of crime causation 11.00 I. Fraud prevention and detection 1. Fraud detection 2. Warning signs and red flags 3. Fraud schemes 4, Fraud prevention 15.00 lll, Fraud response 1. Fraud management program 2. Investigation protocols and conducting investigations 3. The Code of ethics for anti-fraud professionals 17.00 Closing remarks ©2017 Punongbayan & Araullo. All rights reserved, PRHRHDHHHHRHDHOH TOD~w ere ewe ew wwe wrwrwewwewewvowewewww5we Facilitators Michael C. Gallego CPA CIA, COSA CRISC, MPM, CMC, CRMA Partner and Head of Knowledge Management, PRA Grant Thornton (Philippines) Asia Pacific Lead for Business Risk Services, Grant Thornton international td Past president, Insitute of Internal Autos Philppines mhycke.gallego@ph.gt.com Raul 8, Tomas MA.CIA ¥ Director for Advisory Services, Grant Thornton Indonesia raul.tomas@id.gt.com ‘Maria Luisa |. Tindog CMA, CICA, CrFA Managing Consultant, P&A Grant Thornton (Philippines) Member, Association of Certified Fraud Examiners (Philippines) lui.tindog@ph.gt.com This presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before itis issued in final form, All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters. addressed in this presentation. The views and interpretations expressed in the presentation are those of the presenters and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered. 17 Punengbayan & Araullo, All rights reservede@ GrantThornton An instinct for growth 1. Foundation on fraud Fraud master class PT Lippo Karawaci Tbk September 2017 \ © Fraud master class framework —— 7 — | Fraud prevention and detection 4 Fraud investigation Law on fraud Interview the and application Evidence handling Investigation report writing SL © Gammon so -tns sere Fraud managementWe are Grant Thornton © Grant Thorton An instinct for growth Operational advisory Business risk services Helps to comply with operational regulations, laws and requirements. Business consulting Helps improve operational performance, efficiency and services effectiveness, Business process services Helps provide operational transaction support and process improvements, ‘Transactional advisory ‘Transaction services Advises and supports in all aspects ofa transaction (eg sale, acquisition, fundraising / debt or equity / private or public) Recovery and Assists companies and individuals in financial distress or reorganisation to their creditors and stakeholders. Forensic advisory Forensic investigation ‘Support in dispute resolution, fraud prevention and. detection, insurance claims and other situations deman Wg detailed investigation, O47 Purorgpayen & Fa © care meetton We are Grant Thornton Value proposition Build a foundation Embed smart Strengthen governance for growth through processes, information and controls to prepare oversight, intelligence, technology and for and overcome and disciplines focused methods to comply barriers to growth. on effective and quickly with new measured risk regulations and manage management risk in growth. @Q carememion onDefining fraud Fraud will be the crime of choice for the 21st century. = Your views? = The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets* Defining fraud Fraud will be the crime of choice for the 21st century. Fraud encompasses a range of irregularities and illegal acts characterized by intentional deception or misrepresentation, which an individual knows to be false or does not believe to be true. (IIA) Fraud is defined as “all multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprise, trick, or cunning or dissembiing and any unfair way by which another is cheated.” (Blacks Law Dictionary) Occupational fraud is the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets. It has four key elements; the activity is (1) clandestine; (2) violates the perpetrator’s fiduciary duties to the victim organization; (3) is committed for the purpose of direct or indirect financial benefit to the perpetrator; and (4) costs the employing organization assets, revenues or resources. (ACFE Fraud Examiners Manual) _—— “ A Gee THEEMON Hontnsse poe TPHRHOHHRHHHHHHDHDHMHHHOHMH HOH Hoon onyThe fraud continuum Fraud occurs when all of the following elements exist ... = an individual or an organization intentionally makes an untrue representation about an important fact or event; = the untrue representation is believed by the victim (the person or organization to whom the representation has been made); = the victim relies upon and acts upon the untrue representation; and = the victim suffers loss of money and/or property as a result of relying upon and acting upon the untrue representation. Fraud scale. Developed by Dr, Steve Albrecht. "When situational pressures and perceived opportunities are HIGH and personal integrity is LOWY, occupational fraud is much more likely to occur than when the opposite is true.” ———— a © Gare Moenton HrontmElements of fraud Pressure Rationalization Capability Pressure isaneed | Rationalization is the reconciliation of a person's | Opportunity opens the that an individual behavior with the commonly accepted notions of | doorway to fraud, and attempts to satisfy by | decency and trust. Some excuse or validation | incentive [i.e. committing fraud. for actions, such as: pressure] and Often, pressure comes | « “/'m just borrowing the money and will pay it rationalization can from a significant back; it’s only temporary until | get over this | draw a person toward financial need or financial difficulty. it. But the person must problem: College + ‘Ineed it more than they do, and they will __| have the capability to tuition, Hospital bills, never miss it recognize the open Child support, = “Everybody else is doing it. doorway as an Gambling debts, = ‘No one will get hurt. ‘opportunity and to Drugs, Illicit affairs, " ‘Its for a good purpose. , take advantage of it and a high lifestyle * "I deserve it because I've been treated by walking through, unfairly - the organization owes me.” not just once, but time and time again. Elements of fraud Opportunity Opportunity is the ability to commit fraud and not be detected. Caused by circumventing internal controls or by internal controls weaknesses. * Nobody counts inventory or checks deviations from specifications, so losses are not known. * People are given authority, but their work is not reviewed. * Too much trust and responsibility placed in one employee - improper ‘separation of duties. = The petty cash box is left unattended. Laptops and digital cameras are left out in the open unlock offices. + Employees that are caught get fired, but aren't prosecuted, * Supervisors set a bad example by taking supplies home, borrowing equipment for personal use, padding their expense reimbursements, not paying for personal long distance phone calls, not recording leave. + Monthly financial reports are not reviewed by managers. * There is no internal audit function. A perceived opportunity arises from = Absence of, of improper oversight by, the BOD or audit committee + Weak or nonexistent internal controls * Unusual or complex transactions = Accounting estimates requiring significant subjective judgment by company management + Ineffective internal audit staff on € ® on D f TOO HH TTT RHHHA © a aGroup work. Identify fraud elements Description of facts Pressure ID tevaramen Quonemt 7iign Ofe rye Motivation | Sua vey welaiaian Opportunity [O Histon willy yy sepa RAT Feewsed he pal 2 eae © GoaveTeton tonserenne Agenda Fraud master class v= 1 Foundation on fraud v= I= = Definition and elements of fraud = The many faces of fraud: profile * Theories of crime causation 2 Fraud prevention and detection 3 Fraud response Sa017 Puvergbayan & halo, Algae Q GamEMEEMO Fontasse neton Profiling a fraudster Are you a potential fraudster? . e ~ € e e e e oe TS e e no é on A TT e Profiling a fraudster Are you a potential fraudster? nnn rnnenanne as ® eee ma Mecan ince 9 Petetel Cares atéaaaProfiling a fraudster Are you a potential fraudster? 9900 tawcanon level Of ferperater Profiling a fraudster Are you a potential fraudster? = Intelligent (challenged by “secure” systems, bored with the JOD FOUtINE) © nersgi stem, toran dangao LueIEAN cuniters = Egotistical (scornful of "obvious" control flaws, "dumb" managers, etc.) = Inquisitive (tempted by the discovery of a computer vulnerability, for example) = Arisk taker (willing to bend the rules, take chances) = Abig spender (expensive hobbies, living beyond means)Profiling a fraudster Are you a potential fraudster? = Arule breaker (takes short cuts, self-justifies infractions of law, rules, etc.) = Ahard worker (first to arrive in the morning, last to leave at night, takes few vacations) = Under stress (suffering from a personal crisis, such as a financial problem, bad marriage, etc.) = Greedy or has a genuine financial need (illness, drugs. gambling, etc.) . bes itattan nha dane feat Jom Shewhed OE = Disgruntled at work or a complainer (may try to "get even", or take what he/she "really deserves") “At risk” employee checklist Survey of external auditors = An employee with unusual work habits. = Employees who are the only people who can authorize certain types of transactions, transactions in restricted accounts, or transactions in excess of certain levels. = An employee whose payroll/compensation deductions are unreasonable given their living circumstances. = An employee whose spouse or significant other has recently lost a job. POPE MAMRHMHHH HHH HO HHO HOHE =a eae _ 0 conn str Beret nw v“At risk” employee checklist Survey of external auditors = Employees who are living beyond their means. = Employees who have high debt, such as those who are avoiding creditors that frequently call them at the office. = Employees who spend more money taking the staff to lunch than they make on the job. = Employees who brag about recent gambling winnings or family inheritances. = Employees who have a life style or pattern of gambling. = Employees who “act out of character”. © coremenion « “At risk” employee checklist Survey of external auditors = Cashiers who always balance and are never over or short. = Cashiers who do not follow the organization’s standard cash handling policies and procedures. = Employees who are always behind in their work and are content to exist in a “messy” work area. = Employees who are secretive on the job and are unwilling to let others review their work. = Employees who are subject of complaints. = “Ultra-religious” employees.A clean record A fraud suspect might not be easy to pick out of a crowd or from a rap sheet. = Most fraudsters (88.3%) had never been previously charged or convicted for a fraud-related offense. = Almost eleven percent of perpetrators had been previously convicted of a fraud offense. « é 6 é 6 e 6 6 6 é é e é e Pe a © GraveMMorMOD Horsey Agenda Fraud master class v= 1 Foundation on fraud i) = Definition and elements of fraud = The many faces of fraud: profile * Theories of crime causation 2 Fraud prevention and detection 3 Fraud response ee © GoreMomtor enimBiological theories Criminal behavior is caused by the physical traits, and not the result of choice. Cesare Lambroso, an Italian doctor, proposed + Hernnstein & Murray, authors of Bell Curve that some people are "born criminals" who are _ proposed that “low intelligence and crime are physiologically distinct from non-criminals. intimately connected’. © GeareteeaI09 H- wee ee ee eee evvueewe wees erweuwvuwwwe ewww svwwew Routine activities theory There will always be a certain number of people motivated by greed, lust and other forces inclining towards law breaking. motivation to commit supply of offenders © GeareMmoeMOn Hoctro enOnn Social process theories ne = Criminality is a function of individual socialization and the social-psychological i oe, interactions people have with the various io organization, institutions, and processes of society (eg their neighborhood experiences, the peer group, and family). = All people regardless of their race, class, | or gender have the potential to become delinquents or criminals. = Social structure theory concentrate on the On ® jociat\ 9 (Theory of Social \y/ piterontal process )D( frosts) \ Assocation Diferenia Reinforeeme Theory ow (Social Conat | “eons kinds of societies that generate particular € € c € levels of crime. e Qc £ Sant Tromion e e € Strain theory e Why do people engage in crime? e e People experience strain or stress, they become upset, and they e sometimes engage in crime or become delinquent as a result (ie. to reduce e or escape from the strain they are experiencing). Z e Others prevent you from achieving your Others take things you value or present you goals. with negative or noxious stimuli. e Failure to achieve three related goals: Money, _| Range of negative events and conditions « status/respect, and (for adolescents) autonomy from adults. increase the likelihood of crime (eg child abuse and neglect, criminal victimization, physical punishment by parents, negative relations with parents / teachers / peers, negative school experiences, neighborhood problems, divorce, parental unemployment, and changing schools) eaainananeveweeeevvevevee ev ve ev ww Social learning theory Why do people engage in crime? People learn to engage in crime, primarily through their association with others. They are reinforced for crime, they learn beliefs that are favorable to crime, and they are exposed to criminal models. Effect: they come to view crime as something that is desirable or justifiable in certain situations. Juveniles lear to engage in crime in the same way they learn to engage in conforming behavior: through association or exposure to others. People living in equivalent social environments seems to behave in a similar, predictable fashion. One ‘does not need to be in direct contact with others, eg, they may learn to engage in violence from observing others in the media, Differential reinforcement. Crime is most likely to occur when it (1) is frequently reinforced and infrequently punished, (2) results in large amounts of reinforcement and litle punishment, and (3) is more likely to be reinforced than alternative behaviors. Beliefs. Teaching or learning beliefs favorable to crime. (1) some approve of minor forms of crime, (2) some conditionally approve or justify certain forms of crime, or (3) some hold general values that are conducive to crime. Modeling. Individuals often imitate or model the behavior of those around them — esp when they like or respect these others and that imitating their behavior will result in reinforcement. z= Social control theory Why do people conform? Why people do not engage in crime? Because of the controls or restraints placed that prevent them from engaging in crime. Crime is less likely when others try to directly control the person's behavior, when the person has a lot to lose by engaging in crime, and when the person tries to control his or her own behavior. Direct control, ie. someone watching over people and sanctioning them for crime, has three components: setting rules, monitoring behavior, and sanctioning crime. Stake in conformity. Some are very responsive to controls while others commit deviant acts on a regular basis. They have a high ‘stake in conformity’ and which one loses by engaging in crime. Two components: emotional attachment to conventional others and their investment in Internal control. People are able to restrain from engaging in crime. Internal control is a function of their beliefs regarding crime and their level of self-control. They believe that crime is wrong.Labeling theory Official efforts to control crime often have the effect of increasing crime. Individuals who arrested, prosecuted, and punished as labeled as criminals. Labeled individuals may have trouble finding legitimate employment, which increases their level of strain and reduces their stake in conformity. They find that conventional people are reluctant to associate with them, and they may associate with other criminals as a result. This reduces their bond with conventional others and fosters the social learning of crime. Social disorganization theory Seeks to explain community differences in crime rates, for factors that reduce the ability or willingness of community residents to exercise effective social control, ie, to exercise direct control, provide people with stake in conformity, socialize people so they condemn delinquency, and develop self-control. Crime is said to be more likely in communities that are: = Economically deprived = Large in size = High in multi-unit housing (like apartments) = High is residential mobility (people frequently move into and out of the community) = High in family disruption (high rates of divorce, single-parent families) on OQ 2 OP © now THOR OHH rn nnnmnm m onemThank you. This presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before itis issued in final form. Alll relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this presentation. The views and interpretations ‘expressed in the presentation are those of the presenters and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered. Q Gian thereon Notese GrantThornton An instinct for growth 2. Fraud prevention and detection Fraud master class PT Lippo Karawaci Tbk September 2017 Learning objectives Inderstand the chemes used in Understand fraud detection and the warning signs and red committing fraud and the flags. approaches for fraud prevention. © *@ DONA AA A AH 7 mm QMraereeanereanrnaeanmnmnm®ACFE Report to the Nations 2e# 2008 2008 zoo ore 014 aoe CFES ESTIMATE THE TYPICAL ORGANIZATION idisaliiccremeo LOSES 5% OF ANNUAL REVENUES To FRAUD hau: THE STAGGERING COST OF FRAUD aus a $6.3 BILLION Fe STE 06281 OREATEST MEDIAN LOSS PER SCHEWE smn THE MEDIAN LOSS F084 a ‘SINGLE CASE OF OCCUPATIONAL 100 $125008 aa: sit , FRauo WAS $150,000 Sane = = worowesnocmomescumren ra NY oe Te OO tL Tne WER LOSSES TEND TOBE runes tee eres srt Mt szoe te suica ini ‘ttt sem = —_ = © GaneToIai0n tntneepsAgenda Fraud master class v= 1 Foundation on fraud em 2 Fraud prevention and detection = How is fraud detected? = What are the warning signs? = What schemes are used to commit fraud? = How can we prevent fraud from happening? 3 Fraud response A, Gear TeMOr ooarsenm Fraud detection Strongest deterrent to fraudulent behavior. Should be established to uncover fraud events when preventive measures fail or unmitigated risks are realized. Whistleblower hotlines — one of the more effective measures organizations can implement under fraud risk assessment program Process controls — specifically designed to detect fraudulent activity, as well as errors, include reconciliations, independent reviews, physical inspections/counts, analyses, and audits Proactive fraud detection procedures — use data analysis, continuous auditing techniques, and other technology tools effectively to detect fraudulent activity. Periodic assessment and continuously monitoring fraud detection techniques to ensure effectiveness. @ Cortrenion » cin ncna, . @ rwowke records 1 akan fetes , Detection methods Centar 7 (ual Shon eps Bite G Prong nas 5 rise blaane opat share fenkany Tips remain the most common detection met od tion Methoit hy Ragen. Managements Reve big ) 6 pron "a ‘m fy fo roait Rétentitiabon cS yu htt Manel bs los exer a Je exam )ebbed bylaws "arm enbyecentent ByoAecident Marston, AF " Seeccsehabcrintten , Coohasons Snes Wienbvsts Totes ' Gatestor os } Detection mathods varied substantially between small and argo organizations. The controls and procedures an erganizaton has in place afocthow fraue schemes are ‘caught. Most small organizations do not havea reporting hotine while the maior oflrger organizations do. Intaral audit departments are also less tkely o exit at “smaller organizations than a larger anes In place a ips, smal oigaizations ten to detect more fraud thvough management review, acco ‘extemal ud, and document examinston (ACFE), © Grane Moet somes ee meee ‘Loss and duration by detection method y Active detection methods helps reduce duration and cost of fraud. , Organizations might bo able to reduce the duration and cast of fraud by implementing contos or processes , {hat incressa the kelhnood of active {etecton, such as active management , vi altenlve account reconciliation, ‘nd srvellnce or monitoring techniques, ) , , ' , ' , een ,Tips and formal reportin The presence of hotlines can have a substantial impact on reporting. a MORE THAN 40% OF ALL TIPS CAME FROM NON-EMPLOYEES, g mechanism ‘Asa major source fr detecting fraud, tps ome from employees (51.5%), customers (17.8%), vendors (8%), and other partes. Ths, organizations might feulvate more tps by prometing aud PERCENT CASES UETLCIED BYP ‘epoting mecnansms to multiple sudences, QOD OH OH OH He ‘The presence of hones can have a aN % Smee & hie 202% eves mere oad Trentadonweuthoanes ‘ eo ‘Gowimtcemoumne, WHISTLEBLOWERS REPORT —Rfuecaacterepotn rat g FRAUDTHROUGHANUMBEROF DIFFERENT CHANNELS, hehehe ns € tersmawelte € is ors é acre = SJ : . (er - e e € Who should receive reports about fraud? e Whistleblower reports vary based on department where fraud occurs. e e Fay wo whemvepones | % [Paryiowhomreroned [| ttaty rece mul iestgnion eons an tera su sparen Die sper as | cower 3a] Those cauny de hanenrsarcevar be ower er 188 Law enercomertr reader | 7 | yo pay i wtom ustebloners ert tes erase onthe pereraars =n Tat | Bontoraudicomminee [ea] Semmes grea dre supers perpetrate are excess Wialeowets pate tert err austconmtee along Fraud instanton | 101 | Edema 2 | kntcomen posto a eee orn reste kg mes ena 123 [ rows coet CE ee ee ee ea e ie One: Sip wit Iamal udt Pine Superson ——Exseutve Coworser conan | Law Enorcement € wee OY at ae cory Su adi Fraud ® tts e e € @ GanMoenion « etuo CZAR —* (Comppance in neguiarer 7 , ' » Agenda ) y ) Fraud master class ’ = 1 Foundation on fraud -_ f) —— 2 Fraud prevention and detection , = How is fraud detected? ) = What are the warning signs? = What schemes are used to commit fraud? , . How can we prevent fraud from happening? _ , 3 Fraud response ) } ’ , — Puscgan Bata Agha © canemomion « ’ i ——— ss Warning signs and red flags The most common personal behavior displayed by perpetrators. Pressure Rationalization Opportunity iving beyond one’s means | = Wheeler-dealer attitude * Unusually close *Severe personal financial _ | «Not compensated fairly association with difficulties, losses or high | * No recent raises / cost of vendoricustomer debts living adjustments = Control issues / unwilling to *Divorce or family problems | * Everyone else does it share duties * Conveying dissatisfaction with | «Intended to pay it back * Inadequate internal controls the job to fellow employees _| * Needed the money * Ineffective or no internal audit * Addiction to drugs, alcohol or | *Felt cheated and wanted = Weak management or gambling revenge excessive turnover | "Job frustration * Bribe / kickbacks too tempting | = No rotation of job duties * Social isolation Developing outside business | among employees : * Change in personal interests * Procedures not well circumstances understood i: * Excessive family / peer «Large amounts of cash on pressure for success hand or processed s = Instability in life Rarely take vacations or sick ) circumstances time = *No behavioral red flags 4 Panorgoayan ai ae _ © GarTeMMIO Homie neQe Warning signs and red flags The most common corporate behavior displayed by perpetrators. é€ Pressure Rationalization Opportunity € Customer complaints about Overrides of controls by é delivery management ‘6 Consistently exceeding * Irregular or poorly explained goals/objectives regardless of management activities é changing business conditions = Preponderance of non-routine and/or competition transactions or journal entries € = Undue emphasis on meeting * Problems or delays in earnings projection providing requested € * Substantial portion of information é« management compensation * Significant or unusual depends on meeting changes in customers or € quantified targets suppliers. * Resentment of superiors = Transactions that lack € documentation or normal "Excessive pressure from approval € ithin the organization *Employees or management — |_ hand-delivering checks ce «Poor IT access controls € 2017 Punongheyan. wane A” GeawrTrornion € € € Warning signs and red flags € What internal auditors may have missed. € e = Inadequate attention to details e = No frequent reviews by auditors € = Placing too much trust in key employees _ = Lack of independent checks on performance e = Inadequate disclosures of personal investments and income e * = Lack of clear lines of authority and responsibility = Lack of proper procedures for authorization of transactions = No separation of authorization of transactions and custody of assets = No separation of custody of assets from accounting for those assets = No separation of duties between accounting functions emananneeWarning signs and red flags What external auditors may have missed. = Frequent disputes with auditors = Disrespect for regulatory bodies = Company engages in opinion shopping = Experience with management indicates a degree of dishonesty = Managers have lied to the auditors or have been overly evasive in responding to inquiries = Weak control environment ® Attitude toward financial reporting is unduly aggressive = Operating and financial decisions are dominated by a single person or a few persons acting in concert. @ GarcTroeaion toner Warning signs and red flags Non-fraud related misconduct and human resource related red flag nshurary Cs vata casanne . Deebae SPE Re set ce am 80 eS nee eS ce a Sm nm eS TS we © Geoeetemion mtn nse a»Warning signs and red flags Creating the perfect storm. = Big spenders = Rule breakers = People with (financial) problems + = Poor controls = Accounting irregularities = Bad management / company culture € € € € é é€ é é € € € € € € @Q carmen sooreriene Warning signs and red flags Internal control weaknesses that contribute to fraud. , Itcan be dificult to pinpoint the exact iad ee system breakdowns that allowed 2 Vs fraud to occur. However, past incidents of fraud point . to the following internal contro! weaknesses al the victim organization ‘that contributed to the fraudster's ability to perpetrate fraud (ACFE) ama arama mnneannnmnnmm @ GaneToraion se ntassermeeAgenda et Fraud master class 1 Foundation on fraud ee 2 Fraud prevention and detection = How is fraud detected? = What are the warning signs? * What schemes are used to commit fraud? = How can we prevent fraud from happening? 3 Fraud response Fraud tree How occupational fraud is committed? Perri bln aun q at] oy {B27 Panedbayan& hauio AGRE oT SFraud tree How occupational fraud is committed? oe ioe GES | ese! ee ‘Felve Refune ios Sie Ant Ber z WARNE) Fothestia ‘ae Revue at Fraud schemes Loss and frequency ‘Asset misappropriation (83.5%) is the most common of the three primary categories of occupational fraud, but tend to cause the lowest losses with a median loss of $125,000 per scheme. Financial statement fraud (9.6%) caused the highest median loss at $975,000, Many fraudsters do not limit themselves to a single type of fraud; they steal from their employers wherever, ‘the opportunity presents itself. 31.8% involved more than one major fraud category with the most common combination bing asset misappropriation and corruption (23.6% of cases) (ACFE). amemainaimamamamananann emeaeanerane anne QGaeEMoeIon sowwwe w www ww ww w wwww Fraud schemes Scheme types for Asia-Pacific {In every region, corruption was one of the two most ‘common scheme types, with either billing schemes or non- we 88% cash misappropriations taking the other top spot. 8 nr ishing 6 ‘ane, Cotruption is a global problem. itis not limited to any "particular region, and i affects organizations of all sizes, Expense Reimbanenent 0 18" types, and industries, regardless of whether their operations, Foaaval Stacineat Fat a 10% Gf0ss jurisdictional ines. Nonetheless, there are certain ‘Calin Far a jg. Places in the world where corruption is a greater risk than in ash on Hand ee (ACFE) Check Tanapsring 2 ro Sboraming 30% Cash Larceny 17% Regiver Dsbunvement 10 45% avn 5 2 Dar Paraben tas © coretert68 tention we ee ee we eww wwe wwe Fraud schemes Scheme types by type of organization . Compton was move TTT 7 prevalent in larger a cxgarizatons 40.2%) . tron smet osineses ee (29.9%). In contrast, Sheek ampenng. oy skimming, payroll, and a Se eee met occurred over twice as. ans Gembercret frequently in small iets entre businesses as in larger ot exgunzaione Ace) . one i nau Soon Ba cores Ree oun S16 ep ‘DZ0TT Purongbeyan & Aree, Ahi © Grane Moenton totes sem1. Corruption Categories ae Een egal | Conticts of Breach of eg Sa ies interest fiduciary duty Corruption: A scheme in which an employee misuses his or her influence in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect benefit. Bribery is the offering, giving, receiving or soliciting of anything of value to influence an act or a decision, ~ Fash igouan arta buts ds vender Economic extortion is the obtaining of property from another with the other party's "consent" having been induced by wrongful use of actual or threatened force or fear. Illegal gratuities is the offering, giving, or receiving of anything of value after a decision has been made. 1. Corruption Categories Corruption: A scheme in which an employee misuses his or her influence in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect beni ROOD DDOMHH MDH HM DHMH MH HO OHHH HH FH Conflict of interest happens when an employee has an undisclosed economic or personal interest in a transaction that adversely affects his or her employer. Breach of fiduciary duty happens when a person does not act in the best interest of his/her principal or employer. ea win ane @QCoretomion +1. Corruption Loss and frequency Eastern Europe a Western Cental Asia ste fore stl ws iat >) tra or Aiea asin ?arie ange Guioca Sub Saharan Alnic a =~ Tanipremee nau Aroma Op ee r $ ' 2. Asset misappropriation ) Categories , Theft of cash [Theft of cash dulent i , | mene ‘arceny ’ , Asset misappropriation: A scheme in which an employee steals or misuses the employing organization’s resources. y Fraudulent disbursement happens when an employee makes a distribution of company funds for a dishonest purpose (eg. false billing schemes, payroll schemes, expense reimbursement schemes, inflated expense reports, check tampering, registe disbursements). rongbayan & Fra, Age © GareMoenton 102. Asset misappropriation Categories ‘Theft of cash | | Theft of cash Fraudulent ee eee on hand receipts disbursement eee Asset misappropriation: The illegal taking of another's person property without that person’s freely-given consent or using another person's property without his or her consent. Misuse happens when an employee uses company property for purposes other than its intended use (eg. misuse of company property, theft of trade secrets). Larceny is the intentional taking of an employer's cash or property without the consent or against the will of the employer (eg. asset requisition and transfers false sales and shipping, purchasing and receiving, unconcealed larceny, cash larceny from the it) register or de © GCearetroemtor 2. Asset misappropriation Loss and frequency __— Lese Risk More Risk © Coretrorton » 82RD A HMM BDH HD AHH AH HM HAHAH AOH® OH © HH5 5 3 wwwww wwwe w > www w www weewewewewewe 3. Financial statement fraud Categories = i Improper Concealed . Feciioas ||| Tae asset fables and | | Improper asad valuation expenses ee Financial statement fraud: A scheme in which an employee intentionally causes a misstatement or omission of material information in the organization’s financial reports (e.g., recording fictitious revenues, understating reported expenses, or artificially inflating reported assets) Most costly form of occupational fraud. Involves concealment of material fact (ie. the nondisclosure of material facts with the intent to deceive) and/or misrepresentation of material fact (ie. the fabrication or falsification of material facts with the intent to deceive). © coamernon tn 3. Financial statement fraud Categories titious Timing Improper Improper differences ae, pela disclosure = Recording of sales of goods or services that | Red flags did not occur = Unusually rapid growth * Transactions with fake or phantom = Cash flow problems customers * Significant transactions with related parties, * Fake transactions with legitimate customers | * Significant, unusual, or highly complex * Sales with conditions transactions "Unusual growth in the number of days sales in receivables * Asignificant volume of sales to entities whose substance and ownership is not known = Anunusual surge in sales © caremenior »