° € 3. Financial statement fraud ¢ Categories - é Fictitious a) impropet Concealed Improper € revenues fy vanet | | Manuites and | | iscioaure ‘ & = Recording of revenue and/or expenses in Red flags € improper periods. = Unusually rapid growth = Cash flow problems € Timing Differences Issues = Significant, unusual, or highly complex: = Premature Revenue Recognition transactions & = Long-Term Contracts = Unusual increase in gross margin € = Channel Stuffing (Trade Loading) = Unusual growth in the number of days sales = Recording Expenses in the Wrong Period in receivables é « Anunusual decline in the number of days ~ purchases in accounts payable « é £ @Qcoretornor « 3. Financial statement fraud Categories JB improper Fictitious Timing Improper revenues differences Shersce | | disclosure Manipulation of accounting estimates Red flags = ‘Window dressing” = Improper inventory valuation + Improper accounts receivables valuation = Improper asset valuation in business combinations = Improper fixed assets valuation * Understatement of assets = Misclassification of assets Cash flow problems Significant dectine in customer demand Significant accounting estimates Excessive involvement of nonfinancial management with the accounting process Unusual increase in gross margin Unusual growth in the number of days sales in receivables or days purchases in inventory Shrinking percentage of contra-asset accounts Unusual change in the relationship of fixed assets and depreciation Unusual increase in investment in fixed aclnnnornemnomnanann assetswwuwwww ww ww 5 2 © www 3 3. Financial statement fraud Categories = = Improper Fictitious Timing coe || ame || EE Improper disclosure Liability or expense omissions Capitalized expenses Expensing capital expenditures Nondisclosure of warranty costs and liabilities Red flags = Cash flow problems * Significant decline in customer demand = Significant accounting estimates = Excessive involvement of nonfinancial management with the accounting process «Unusual increase in gross margin = Unusual growth in the number of days sales in receivables or days purchases in inventory * Shrinking percentage of contra-asset accounts = Unusual change in the relationship of fixed assets and depreciation "Unusual increase in investment in fixed assets — “ 3. Financial statement fraud Categories ] Improper Concealed Fietitious Timing jae ioe oc revenues aiforoncos | | attation eee oe Ereepet All information necessary to prevent a Red flags reasonably discerning user of the financial statements from being misled were not properly or completely disclosed. Improper disclosure issues Liability Omissions Subsequent Events Management Fraud Related Party Transactions Accounting Changes Backdating Stock Options + Domination of control = Ineffective oversight = Ineffective inculcation of the entity's values or ethical standards = Unusually rapid growth "Significant, unusual, or highly complex transactions * Significant bank accounts or subsidiary or branch operations in tax- haven jurisdictions = Overly complex organizational structure + Known history of violations = Recurring attempts by management to justify ‘marginal or inappropriate accounting on basis of materiality Formal or informal restrictions on the auditor - a —-Other fraud schemes Pilfering boxes/cases of merchandise and replacing with empties. Stealing tools, supplies, and other items of equipment. Removing small amounts from cash funds and registers. Failing to record sales of merchandise and pocketing the cash. Creating overages in cash funds and registers by under-recording. Overloading expense accounts or diverting advances to personal use. Lapping collections on customer’ accounts. Pocketing payments on customers’ accounts, issuing receipts on scraps of paper or in self-designed receipt books. Collecting an account, pocketing the money, and charging it off; collecting charged-off accounts and not reporting Charging customers’ accounts with cash stolen Grane The Other fraud schemes Issuing credit for false customer claims and returns. Failing to make bank deposits daily or depositing only part of the money. Altering dates on deposit slips to cover stealing. Making round sum deposits and attempting to catch-up by the end of the month. Carrying fictitious extra employees on payrolls or increasing rates or hours. Carrying employees on payroll beyond actual severance dates. Making deliberate mathematical computation errors on payrolls. Destroying, altering, or voiding cash sales tickets and pocketing the cash. Withholding cash sales receipts by using false charge accounts. Recording unwarranted cash discounts. RPM HOH HDD OHH OH OHHH HHH # ennmleannnannen3 3 3 3 > y wwwww 2 a 2 2 s 2 ’ 2 2 s Other fraud schemes Using canceled bank checks to agree with fictitious entries. Inserting fictitious ledger sheets. Causing erroneous footings of cash receipts and disbursement books. Deliberately confusing postings to control and detail accounts. Selling waste and scrap materials and pocketing proceeds. “Selling” door keys or the combination to safes and vaults. Creating credit balances on ledgers and converting to cash. Falsifying bills of lading and splitting with the carrier. Obtaining blank checks (unprotected) and forging the signature. Permitting special prices or privileges to customers, friends, relatives, or granting business to favored suppliers, for “kickbacks”. Converting checks payable to the employer or to suppliers. Duration of fraud schemes The longer fraud remains undetected, the more harm it may cause. 8 2 mE Mecan ose 6 Parent Coes J _ 7 © GaremromtonConcealment of fraud schemes Majority of fraudsters proactively attempted to conceal their schemes. Concealment method * Created fraudulent physical documents * Altered physical documents * Altered transactions in the accounting system * Created fraudulent transactions in the accounting system * Destroyed physical documents = Altered electronic documents or files * Created fraudulent electronic documents or files * Created fraudulent journal entries * Altered account balances in the accounting system * Altered account reconciliations = Deleted electronic documents or files ™ Deleted transactions in the accounting system * Altered journal entries = Deleted journal entries © GareTroemor + Fraud master class om 1 Foundation on fraud ~-_ ooo — v= 2 Fraud detection and prevention = How is fraud detected? = What are the warning signs? = What schemes are used to commit fraud? = How can we prevent fraud from happening? wo Fraud response © Contention DHAA HAHAH Onn e © € QManrrrer anew tronenmnmmwww ee we ww Prevention measures 1. Reduce situational pressures. * Avoid setting unachievable financial goals To the extent possible, eliminate external pressures that might tempt company personnel to manipulate financial statements Remove operational obstacles blocking effective financial performance such as working capital restraints, excess production volumes, or inventory restraints Establish clear and uniform accounting policies and procedures with no exception clauses. Prevention measures 2. Reduce rationalization. Officers and managers should set an example by promoting honesty in the accounting and other areas. Honest and dishonest acts should be defined in company policies. All dishonest acts, even if they are directed at someone outside the organization, should not be permitted as these will create a dishonest environment. Organizational policies should be clear with no gray areas. The consequences (sanctions and penalties) for violating rules and punishment of violators should be clear and implemented without exceptions.Prevention measures 3. Reduce opportunities. Divide important functions new employees policies and procedures Prevention measures Examples Establishment of code of ethics for the organization HR procedures Authority limits Transaction-level procedures Periodically reassess and continuously monitor fraud prevention techniques to ensure effectiveness = Proactive fraud policies = Use of analytical review = Fraud assessment questioning = Enforcement of mandatory vacations Maintain accurate and complete internal accounting'records Monitor related party and interpersonal business transactions Establish a physical security system to secure company assets Maintain accurate personnel records, including background checks on Establish a system for anonymous reporting of violations of company Job rotation Surprise audits where possible Management oversight Increasing the perception of detection Employee education Minimize employee pressures Open-Door Policies Employee Support Programs Management Climate Monitoring Systems Reporting Programs Rewards A. & earerone.0 ROD AD HHH OHO HM PM HF HOD H HH #H an anernne 2 aleewww Anti-fraud controls Frequently used anti-fraud controls in Asia-Pacific 3 2 TEEN Aretraus controts by region. rset Ad of Fi a7 Rigo {= Vatiations inthe implementation rates of anti-fraud contols provide en \ 2 interesting perspective on what organizations are doing to manage a: Rene nes Ee “fraud risk and helpful benchmarks for an organizations’ anti-fraud * wet see 8.2%. programs. For all regions, external audits of the financial statements, . oe code of conduct, and management certification of the financial a o 745% Statements were among the five most common controls. Job rotation / ae ne ‘mandatory vacations and rewards for whistleblowers were at the very. > see "23% bottom ofthe list for every region. » ae [5% While small businesses do not have the resources to invest in the od Ting fr Soa More expensive internal controls, several controls—such as a code of y ne E22 conduct, management review procedures, and fraud training for stat : - . 7 members—can be implemented with minimal investment (ACFE). > 1 Fea se . estcaread Traual Departinen, Funcshon un ‘HOW SMALL BUSINESSES DETECT FRAUD y SON : an nes wy (om) (m) Ow 2 we Poa Sonning nua * - ah : a | y ocan’Munity Va 26 el 1m 5 ©2077 F be i 8 Aral, Al , 2 3 ’ Anti-fraud controls z Change in implementation rates of anti-fraud controls. a 3 [tt oon tae SE ‘Trends in the implementation of antifraud controls. _ BAL The general implementation rates of anti-fraud controls have y : remained notably consistent. The most notable changes have on been in the implementation rates of hotlines and fraud training for Bina iG tn. employees, which have increased approximately 9% and 8%, Gide a ia fespectively, since 2010, On the other end of the spectrum, the ’ : ue £2 percentage of organizations that undergo external audits of ther : an financial statements has remained relatively flat, with less than a 2 . =n “*S 49% increase over the same period (ACFE). ; wa yas s Indepentew os aus , ead oe eT y 7 tess veya , one mad , sosAnti-fraud controls Median loss based on presence of anti-fraud controls LOWER LOSSES AND simucy QUICKER FRAUD yma DETECTION sin $ Group work. Developing anti-fraud measures Pressure Rationalization ‘Opportunity Product People Policy t € € e & € Process e e e e t € é © GanToentoni : 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 it is 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. © Gort tortore GrantThornton ‘An instinct for growth € € € € € 3. Fraud response Fraud master class Jakarta August 2017 =< ) Learning objectives Understand how a Understand protocols fraud management in conducting fraud program promotes an __ investigations. anti-fraud culture within the organization. Ww oe eywwevwwewwwvwuwvwye w © 2 a 2 2 2 a i Agenda Fraud master class = 1 Foundation on fraud ame Fraud prevention and detection w|r Fraud response Fraud management program Investigation protocols and conducting investigations Code of Ethics for anti-fraud professionals Tha ana © Gareteion insersene Fraud management program Proactively managing the risk of fraud before they occur Fraud Governance Fraud Fisk Fraud Intelligence Management Fraud Fraud monet prevention investigation = me and detection “<< and response —~ Sy 7 . a Pe Se i. 1. Anti-fraud culture 8. Fraud risk 7. Fraud investigation 2. Anti-fraud policy assessment and response 3.Fraud awareness | | |6, Fraud prevention training and detection 4, Fraud hotline controls, © care Mmomon eninsenenae 1. Anti-fraud culture The nature and threat of occupational fraud is truly universal. However, many trends and characteristics are similar regardless of where the fraud occurred. Small businesses are particularly vulnerable to fraud. These organizations typically have fewer resources which often translates to fewer and less-effective anti-fraud controls. The board should ensure that its own governance practices set the tone for fraud risk management (eg behave ethically and openly communicate expectations to employees, zero tolerance). Create a positive workplace environment. Focus on employee morale, empower employees, and communicate. DHDOEHHHHAHHHA HK H © coretoron = . Anti-fraud culture Hire and promote appropriate employee. Measures include conducting background investigation, continuous and objective evaluation of compliance with company values, and address violations immediately. Establish a code of conduct and discipline based on integrity and values which defines acceptable employee behavior, is communicated to all employees, and where they are held accountable for compliance. Develop appropriate oversight processes and governance mechanisms. Preventive Detective & Corrective Roles & responsibilities + Reporting procedures & whistleblower protection Commitment + Investigation process Fraud awareness + Corrective action anne neem nme eee Affirmation process Quality assurance Conflict disclosure Continuous reporting Fraud risk assessment FT 7 erew ow ow ow ow 2. Anti-fraud policy Stopping fraud before it happens is the ultimate goal of a successful prevention and awareness program. Awritten ethics policy by management Awwritten fraud policy spells out who in an objectively communicates its philosophy to organization handles varying fraud matters develop a successful ethics program. under differing circumstances. Fair competion Policy statement Conflicts of interest Scope of policy Gifts and Entertainment Management's responsibilty for fraud Outside Employment Communicating the fraud policy Relationship with Suppliers and Customers ‘Anonymity and confidentiality Employment of Relatives ‘Actions constituting fraud and non-fraud regularities. Reporting process and procedures Confidential Information Investigation responsibilities, process and procedures Use of Company assets ‘Authorization for investigation Employee conduct Orientation, memoranda, posters Reporting of Violations Legal considerations Sanctions and disciplinary actions Employee morale — Consequences and termination =>. Reviewed and updated regularly. Approved by the Board and senior management. —— ae ~ 3. Fraud awareness training " Targeted fraud awareness training for employees and managers is a critical component of a well-rounded program for preventing and detecting fraud. = Ata minimum, staff members should be educated regarding what actions constitute fraud, how fraud harms everyone in the organization and how to report questionable activity. = Training should include duty to communicate certain matters, a list of matters to communicated along with examples, how to communicate those matters, and affirmation from senior management on employee expectations. = Managers, employees and auditors should be educated on these common behavioral patterns and encouraged to consider them and help . identify patterns that might indicate fraudulent activity. — “ SJ TZ. tt) tn tp a= € 4. Fraud hotline € & = Providing individuals a means to report suspicious activity is a critical part of an anti-fraud program. € = Fraud reporting mechanisms, such as hotlines, should be set up to € receive tips from both internal and external sources and should allow € anonymity and confidentiality. ‘é = Management should actively encourage employees to report € suspicious activity, as well as enact and emphasize an anti-retaliation policy. € € € é =e Faangiayan haa A € « € € . € 5. Fraud risk assessment ‘ e = Most fraudsters exhibit behavioral traits that can serve as warning € signs of their actions, and they may not be identified by traditional ‘ internal controls. € = Management should continually assess the organization's specific fraud risks to identify specific potential schemes and events that the e organization needs to mitigate and evaluate its fraud prevention € programs in light of those risks. e = Additionally, assessing the specific fraud schemes that pose the e greatest threat to the business can help identify those areas that merit additional investment in targeted anti-fraud controls. e & € ¢€ €wow a dented Froud nisks and Schemes | Likelihood Rlvende coon Backsauing srocmonss ‘hee ating ‘Skeeptmore produc than Mortal ‘dion rover sks Se inarance ‘eg dry n Faodlent np mm Sales pensar credit parent on eat ty Addivnal essmater Disdonures 2 = ew ow Iusppropration af assets Cashicheck Point of ale Accounts receivable appatic| process Master voor file cntols ovenide Adana ks Inventory Thal by customers The by empoyecs + Othor asses at sk Cexraption Brey Aiding and abeting Risks OQ GamTroenon +.6. Fraud prevention and detection controls = The potential of being caught most often persuades likely perpetrators not to commit fraud. Hence, the existence of a thorough fraud control system is essential to fraud prevention = Managers and owners of small businesses should focus their anti-fraud efforts on the most cost-effective control mechanisms, such as hotlines, employee education and setting a proper ethical tone within the organization. = While external audits serve an important purpose and can have a strong preventive effect on potential fraud, their usefulness as a means of uncovering fraud is limited. 6. Fraud prevention and detection controls = Prevention encompasses policies, procedures, training, and communication that stop fraud from occurring, whereas, detection focuses on activities and techniques that promptly recognize timely whether fraud has occurred or is occurring. = Combined with preventive controls, detective controls enhance the effectiveness of a fraud risk management program by demonstrating that preventive controls are working as intended and by identifying fraud if it does occur. ‘ € é é € € & € € € € € € € « ‘ é € é € e e e € e e € e e € e e € €Measurable criteria Measuring the effectiveness of a fraud management program. Number and status of fraud allegations Number of fraud investigations resolved Number of fraud audits performed by internal auditors Number of whistleblower allegations received via hotline Number of fraud specialists employed by the organization Number of allegations that have been raised by other means Number of employees who have/have not completed ethics training Number of customers and/or vendors who have/have not signed the organization's ethical behavior requirements Number of known fraud schemes committed against the organization Results of employee or stakeholder surveys concerning integrity or culture Benchmarks with global fraud surveys, including type of fraud and average losses Number of employees who have/have not signed the corporate ethics statement Number of messages supporting ethical behavior delivered to employees by =~ executives =~ Measurement techniques Measuring the effectiveness of a fraud management program. The recurrence of frauds uncovered The timeliness of implementation of remediation plans Timeliness in implementing additional controls to prevent new fraud Comparison of fraud versus complaints, grievances, etc... via hotline calls Comparison of the number of frauds discovered versus the number of fraud audits performed Assessment of the likelihood that frauds perpetrated against other organizations in the same industry will occur in the organization Ratios of problems revealed in background checks versus the number of checks performedAgenda Fraud master class v= 1 Foundation on fraud v= Se - dim 2 Fraud prevention and detection 3 Fraud response « Fraud management program Investigation protocols and conducting investigations = Code of Ethics for anti-fraud professionals TO HHH & € € € € € & € responsible. © GaeMoe0IO ene ie ew € é : € € . . . € 7. Fraud investigation and response é € = Analytical process and legally based gathering of information in order to € determine whether a fraud occurred and, if so, the persons or entities é€ : € = All concerned / suspicions of wrongdoing should be reviewed and a determination made whether a fraud investigation is warranted. € Important considerations: € a. Fraud investigation and response protocol & b. Conducting the investigation & c. Reporting the results d. Corrective actions S £ OQ GamMoMO Hapesdene 7 whe3 2 ww wo wwe a. Protocols Receiving allegations Evaluating allegations Investigation protocols = Categorizing issues + Responsibilities and * Confirming the validity of the allegation = Process of conducting the investigation and fact-finding participation * Defining the severity of the |= Resolving or closing the * Define the role of legal allegation investigation counsel, human resource, |= Escalating the issue or = Listing types of information internal audit, etc. investigation when that should be kept confidential Defining how the investigation will be documented Gather sufficient information and ® Managing and retaining asforin procedure necessary to documents and information appropriate Referring issues outside the scope of the program determine: whether fraud has occurred, the loss or exposure associated with the fraud, who was involved and haw to | Must prepare, document, and prepare ‘evidence sufficient for potential legal proceedings, respond, 2 we ewe wes b. Conducting the investigation Planning is essential to a thorough and competent investigation. The investigation team should establish the investigation tasks and assign each task to the appropriate team members. Activities include: = Interviewing * Evidence collection = Evidence analysis 7, QD Gaveterion wnConducting interviews General guidelines = Interviews should be done in the following succession: Neutral or Third Party aiwenee Witnesses, Co-Conspirators Suspects Cellphones should be turned off. Interviewers should be open and friendly. Interviewers should keep personal reactions to himself. Interviews should be handled by the appropriate people. Interviewers should be objective in mind and appearance. Questions should be phrased in a non-accusatory manner. © ceoeMaMOr honrerepe € € é é € € € € € € € € é € Admission-seeking interviews Admission-seeking interviews are interviews reserved specifically for individuals whose culpability is reasonably certain. Admission-seeking questions distinguish innocent from guilty people, obtain valid confession from culprits, and make the confessor sign a written statement acknowledging the facts. Things to consider when preparing for admission- seeking interview: = Interview room = Miranda warnings « «isie bes = Presence of outsiders © career « ZaOnnnnnmne ® mm eonn em - minDocumenting interviews General guidelines = Avoid using the third person. = Use clear and concise language. Document the interview immediately. Don't use stilted or pretentious wording. Prepare separate memoranda, if needed. Prepare an index, list of exhibits, and synopsis. Include all necessary items in the memorandum of interview. © © © Document the interview following a suggested format. Make sure to include all details required by the user of the report. Submit the interview form to the user of the report for the preparation of the affidavit. oe 2 © OQ GaneMreEAIO tomiersenw Evidence lifecycle 2s wo wo ww ew we ww © Geom MoeMIO Hons ee nothChain of custody The movement and location of physical evidence frorn the time it is obtained until the time it is presented in court. For the evidence to be accepted in the court, its chain of custody must be maintained. Preferably in memorandum form. é é € The memorandum should state é€ = What items were received € = When they were received é = From whom they were received = Where they are maintained € é€ € 7% corsrorn Collecting and handling evidences Obtain original documents where feasible. = Determine which document is relevant and which is not. All evidence received should be uniquely marked so that it can be identified later. Do not touch originals any more than necessary, they might later have to € undergo forensic analysis. é Arecord must be made when the item is received or when it leaves the care, custody, or control of the fraud examiner. € & € « Documents obtained should be properly organized early on in a fraud examination, and be continuously reorganized as the case progresses. Preserve fingerprints. If fingerprint examination are anticipated, use gloves to handle the documents. Charred or partially burned documents might contain valuable evidence if restored by experts, They are very fragile and should be han extreme care.wwuwe w wewwuuwe a Obtaining evidences Sources Particulars From the party under _| It is recommended that the consent be in writing. investigation From the party that If evidence is owned and in the control of the party requests the that requests the investigation, the documents can be investigation readily obtained as required. e.g. desk drawers in the office. Where evidence is held by other parties, or in uncontrolled locations, specific legal action is required before attempting to obtain it. e.g. subpoena or other order from the court Evidence control log The ECL is a form used to register evidence, files and other documents received, retrieved, gathered or obtained during the investigation for the purpose of monitoring, recording and preserving its chain of custody. aa Of —— ar® € Evidence management system € € . A , € An EMS monitors the receipt of, document the chain of custody and preserve the state of evidences. € € € € € € € € € € é € e rf e Benford’s law 7 e f arch Dgt td . Benford Law is a mathematical princ! ple + ‘ati98e 0.10178 0.10018, that holds that the distribution of the initial 1 :9:90108.0.11988.0.10191.0:10014) gg digits in natural numbers is not random but 3 0.12494 0.10433 0.10057 0.10006 € i 4 0.10031 0.10016 0.09999) rather follows a predictable pattern 2 S008 10018 Doras carl 6 9 0.09397 0.09940 0.09994] e xample: * Inan analysis of cash disbursements, if the number 5 € as a first digit appears 10% of the time, this would raise a red flag because Benford’s Law predicts it - should appear only 7.9% of the time. = Upon investigation, you may discover that somebody e has been writing unauthorized checks that start with e the number 5. The fraudster may have believed that no one would investigate checks written in the P5,000 2 range because they would be immaterial. \ AJ 0 Ssronion « aTypes of forensic document examinations Detecting Forged signatures, altered and counterfeited documents, erasures and eradications = Sealed documents and examining adhesives = _Typewritten, printed, or handwritten documents Comparisons = Paper and inks Tom or cut paper edges Examination Printed documents. = Paper folds and sequence of folds Facsimile (fax) copies Writers of signatures, handwriting, and hand printing Source of, or alterations to, notary seals, wax seals, and cachets Rubber stamp impressions Mechanical check-writer and numbering-device impressions Charred and partially burned documents + Faint indented writings ¥ wv ww Identifying Restoration 2 © Goretoenion » Recognizing phony documents we y Signature forgeries = Irregularities noticeable in the written letters and/or by their differences in size from a genuine signature > Substituted pages = Holding each page in front of a bright light 2 Ink differences, = Holding a light over the writings at different angles 5 alterations, = Observing differences in the color and reflectivity of the inks disturbances y erasures, and to the paper surface. obliterations Counterfeited = Side-by-side comparisons with corresponding genuine documents printed documents * Use of incorrect or different versions or form revisions of the documents * Obtain an expert opinion Suspicious = Reducing the light in the room and holding a bright beam of light indented writingsc. Reporting the results The investigation team should report * Repott to management (senior age . execs, board directors) its findings to the party overseeing "Advice of counsel needs to be the investigation, such as senior solicited . Issue resolution timetable management, directors, or legal Repeat incidents counsel. Where legal counsel is Value of losses recovered af « " . Value of future losses supervising the investigation, prevented counsel will determine the appropriate form of the report. © GraneMonion » — d. Corrective actions After the investigation has been completed, the organization will need to determine what action to take in response to the findings. ® Civil action = Insurance claim = Criminal referral = Disciplinary action = Extended investigation * Internal control remediation = Business process remediation \ | eo alo DO DOOD HHHOAAH AH ® “em ere enerameanamal> hep > Figure 100; Cases Referred to Law Enforcement > feteree Net Betered w Figure 101; Results of Coses Referred to Law Enforcament ’ : oy 2 , WE Convicted at That : On 1 Prosecule . e ae a Acquired . BOter 2 > {57087 Punonabayan& raul Al raha ree Geant Thornton tomate nae | Case results 2 », [Reasons case not referred to law Action taken against perpetrator enforcement 2 Fear of bad publicity ‘Termination i __| Interna discipline sufficient Settlement agreement Private settlement Permitted or required resignation Too costly Perpetrator was no longer with organization Lack of evidence Probation or suspension Civil suit No punishment Perpetrator disappeared © Gare Mormon soonAgenda Fraud master class w— 1 Foundation on fraud v= ae _—— 2 Fraud detection and prevention 3 Fraud response = Fraud management program = Investigation protocols and conducting investigations Reducing world wide fraud Setting high standards for the anti-fraud professional CERTIFIED FRAUD bata We are the world's largest ant-raud organization and premier provider of anti-fraud training and education. ‘Together with nearly 65,000 members, the ACFE is reducing business fraud world-wide and inspiring public confidence in the integrity and objectivity within the profession, All Certified Fraud Examiners (CFEs) must exemplify the highest moral and ethical standards and must agree to abide by the Certified Fraud Examiner Code of Professional Ethics. * Code of Ethics for anti-fraud professionals _SST eee veers eevee eee eee eee CFE code of professional ethics = Demonstrate a commitment to professionalism and diligence in the performance of his or her duties at all times. = Not engage in any illegal or unethical conduct, or any activity which would constitute a conflict of interest. = At all time, exhibit the highest level of integrity and accept only assignments for which there is reasonable expectation that the assignment will be completed with professional competence. = Comply with lawful orders of the courts and will testify to matters truthfully and without bias or prejudice. A” © Graeetroroi0n CFE code of professional ethics * Obtain evidence or other documentation to establish a reasonable basis for any opinion rendered. = Not reveal any confidential information obtained during a professional engagement without proper authorization. = Reveal all material matters discovered during the course of an examination which, if omitted, could cause a distortion of the facts. * Continually strive to increase the competence and effectiveness of professional services performed under his or her direction. , — (reFraud Prevention Checklist The most cost-effective way to limit fraud losses is to prevent fraud from occurring. This checklist is designed to help organizations test the effectiveness of their fraud prevention measures. . 1. Is ongoing anti-fraud training provided to all employees of the organization? (Do employees understand what constitutes fraud? 1 Have the costs of fraud to the company and everyone in it — including lost profits adverse publicity, job loss, and decreased morale and productivity — been made clear to employees? 1 Do employees know where to seek advice when faced with uncertain ethical decisions, and do they believe that they can speak freely? Has a policy of zero-tolerance for fraud been communicated to employees through words and actions? 2. Is an effective fraud reporting mechanism in place? C_ Have employees been taught how to communicate concems about known or potential wrongdoing? Is there an anonymous reporting channel, such as a third-party hotline, available to employees? Do employees trust that they can report suspicious activity anonymously and/or confidentially and without fear of reprisal? Has it been made clear to employees that reports of suspicious activity will be promptly and thoroughly evaluated? Do reporting policies and mechanisms extend to vendors, customers and other outside parties? ooao0adda 3. To increase employees’ perception of detection, are the following proactive measures taken and publicized to employees? 1 Is possible fraudulent conduct aggressively sought out, rather than dealt with passively? 1 Does the organization send the message that it actively seeks out fraudulent conduct through fraud assessment questioning by auditors? 1 Are surprise fraud audits performed in addition to regularly scheduled audits? 1 Is continuous auditing software used to detect fraud and, if so, has the use of such software been made known throughout the organization? 4, Is the management climate/tone at the top one of honesty and integrity? (1 Are employees surveyed to determine the extent to which they believe management acts with honesty and integrity? (Are performance goals realistic? (Have fraud prevention goals been incorporated into the performance measures against which managers are evaluated and that are used to determine performance- related compensation? (Has the organization established, implemented and tested a process for oversight of fraud risks by the board of directors or others charged with governance (e.g., the audit committee)? 5. Are fraud risk assessments performed to proactively identify and mitigate the company's vulnerabilities to internal and external fraud?6. Are strong anti-fraud controls in place and operating effectively, including the following? Proper separation of duties Use of authorizations Physical safeguards Job rotations Mandatory vacations ooooo 7. Does the internal audit department, if one exists, have adequate resources and authority to operate effectively and without undue influence from senior management? 8. Does the hiring policy include the following (where permitted by law)? Past employment verification Criminal and civil background checks Credit checks Drug screening Education verification References checks oooooo 9. Are employee support programs in place to assist employees struggling with addiction, mental/emotional health, family or financial problems? 10. Is an open-door policy in place that allows employees to speak freely about pressures, providing management the opportunity to alleviate such pressures before they become acute? 11, Are anonymous surveys conducted to assess employee morale? (Adapted. ACFE Report to the Nations, 2016 Global Fraud Study)