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º Ñ all, inority-owned business


º Predo inately wo an-owned
º Located in Ñpringfield, VA
º Provide a variety of quality, cost
co petitive contract services to the
public and private sectors.


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º   
÷onsultant, Manager of Do estic Operations
33 years of Federal Ñervice

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º A Historical Perspective of Fraud


º Definition/Discussion of Ele ents of Fraud
º ÷auses of Fraud
º Exa ples of ÷onte porary Fraud

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º Kho are Kenneth Lay and Bernie Ebbers and why


are they (in)fa ous?

º Khat about ÷larence Hatry and Jero e Kerviel?

º The for er are rather recent and infa ous. But


what about Jero e and ÷larence ± don¶t ring a bell?

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.

º ÷EO of the energy giant that eventually beca e


known as Enron that collapsed co pletely in 2002
a id assive accounting fraud.

º Experts cannot even agree on the total a ount, but


the cost of the fraud is esti ated to exceed $30
billion. The ost disturbing result was the hu an
tragedy ² tens of thousands of people lost their jobs
and their retire ent savings, including one of the
³Big Eight´ accounting fir s that e ployed over
25,000 e ployees. All because of greed by a
handful of individuals.
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º ÷EO of Korld÷o , Inc., a s all Mississippi


co unications co pany whose growth
exploded in the late 1990¶s but fell victi to
an $11 billion accounting scandal that
resulted in the co pany filing bankruptcy in
2002 ² the largest bankruptcy in U.Ñ. history
at the ti e. All because of greed by an
individual.
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"/" "' &

Jero e Kerviel

A business an
A local politician
My brother-in-law

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º ÷larence Hatry &


Associates, 1929

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 Association of ÷ertified Fraud Exa iners, Y  Associates
 

º On Ñept. 20, 1929, the public beca e aware that


Hatry had forged $67 illion in unicipal bonds to
cover debts. As a result, any of his shareholders
had sold their holdings²setting of arket panic and
selling.

º Less than 30 days later, the stock arket crashed,


causing the worse financial crisis in history. All
because of greed by an individual. It took a world
war to end the Great Depression.

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º Deception brought about by isrepresentation of
r    , or silence when good faith requires
expression, resulting in r  
r  to one
who relies on it and has the right to do so (V  

  
º Any intentional or deliberate act to deprive another of
property or oney by guile, deception or other unfair
eans (?
 

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Fraud enco passes an array of    



   characterized by    
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º A p   

º About a   

º Khich is Y
º a  

º Khich is !  ? V

º To the u 

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º ERROR

º MIÑTAKE

º BAD MANAGEMENT

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º The phases of fraud can best be illustrated


by à Y 
  below.
E ployees who co it fraud generally are
able to do so because there is  
 
     .

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  is generally provided through


weaknesses in the internal controls. Ño e
exa ples include inadequate or no:

º Ñupervision and review


º Ñeparation of duties
º Manage ent approval
º Ñyste controls
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  can be i posed due to:

º Personal financial proble s


º Personal vices such as ga bling, drugs,
extensive debt, etc.
º Unrealistic deadlines and perfor ance goals

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p    occurs when the individual develops a


justification for their fraudulent activities. The
rationalization varies by case and individual. Ño e
exa ples include:

º Ëa   


 a    a
  
º Ëa      
 
   
ap
º Ëa    


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º Ëa    

 
  
   
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º Failure to enforce existing controls


º Failures to act on fraud are signs of weak
anage ent
º Executives who do not follow the rules and
focus on personal achieve ent
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º Declining Econo ic ÷onditions ± Has the local


environ ent undergone a substantial down-turn of
business fortunes?

º Occurrence of Disaster or ÷ivil ÷onflict ± Has the


civil society been subjected to the chaos that co es
with a breakdown of the civil order - whether an-
ade or natural disasters?

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º Keak Legal Environ ent ± Does the civil


society have effective anti-corruption statues
and echanis s to deter/detect fraud?
º ÷o placent Business Environ ent ± Do
local business practices help or hinder fraud
deterrence?

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º Inadequate separation of duties involving cash
anage ent, inventory, purchasing/contracting
º Pay ent syste s allow the perpetrator to co it
fraud
º History of i propriety²Past audits and
investigations with findings of questionable or
cri inal activity

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º ÷ash Grants or Entitle ents Activities ± nu erous s all,
individual incidents susceptible to widespread abuse through
anipulation of eligibility and use of phanto clients.

º ÷o odity Delivery/Acquisition Activities ± substitution of


inferior co odities, products, or services that do not eet
specifications, billing sche es.

º Major ÷onstruction Activities ± bid rigging, substitution of


inferior co odities, products or services, billing sche es.

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- Persons living beyond their eans,
- High turnover of personnel,
- Uncharacteristic behavior by e ployees
or coworkers.
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- Unexplained entries in records,
- Unusually large a ounts or nu bers of
cash transactions,
- Altered, inadequate, or issing records
and docu ents,
- Non-serial nu ber transactions,

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º
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- Lack of internal controls,
- One person in control with no separation
of duties,
- Inventories and financial records not
reconciled,
- Unauthorized transactions.

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º %6""%
- Tone at the top,
- Overly focused on ission achieve ent,
- Lack of supervisory oversight,
- No prior audits.

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º "86

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º Major U.Ñ Ar y and Depart ent of Justice Public


÷orruption / Fraud ÷ase

º $370 in Fraud Tainted Procure ents

º Largest Recorded Ñeizure of Bribe Money ($730K)


in Ar y and DOJ History

º First DOJ Prosecution for 41 UÑ÷ 423

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º In exchange for bribes, Moran provided Independent


Govern ent ÷ost Esti ates and influenced
procure ent process.

º To insulate and protect hi self, Moran used


surrogates to collect the bribes.

º ÷o and cli ate at UÑA÷÷K allowed bribery


sche e to flourish.
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- Lack of separation of duties, checks and balances.
- ÷ontract award a ounts were uch closer to the
independent govern ent cost esti ates after the
co ander took co and.
- The percentage of bids that the ÷ontracting ÷o and
found unacceptable increased substantially.
- Allegations of favoritis to contractors and certain
e ployees ---awards, pro otions, etc.

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4·6+ 1
- 9 Defendants Indicted
- 7 pleaded guilty
- 2 found guilty at trial
- 5 Ar y ÷ivilian E ployees Ter inated


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- 90 onths (54 onths in prison, and 36 of supervised
release)
- Forfeiture of all illicit onies
- Dropped fro rolls (No retire ent, no VA Benefits)
- Debarred fro contracting for 25 years

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UÑAID Accounting Office Ñche e


Killia John Burns,  à  u
 

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º Killia John Burns was a Ñupervisor at


UÑAID¶s Fiscal Ñervices Office in
Kashington, D. ÷.
º His office disbursed about $74 illion per
year of UÑAID¶s $6.5 billion budget. Of this
about $4 illion per year was disbursed for
travel expense rei burse ents.

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º At UÑAID, bureau chiefs authorized


obligations for travel expenses which were
often esti ated high when deciding how
uch to obligate.
º This procedure allowed the to avoid having
to add to an obligation; and also tended to
µsupport¶ future year budget requests.

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º Bureau chiefs were usually careful to de-


obligate and reprogra unspent funds in the
current year. But, obligated a ounts were
often spent in subsequent years rather than
in the current year.

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º De-obligated prior-year oney reverts to the


UÑ Treasury and cannot be reprogra ed
for agency use; hence, bureau chiefs did not
track it or care about it FÑO¶s top priority was
de-obligating current-year funds.

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º In 1982, Burns began his fraud spree when


he took upon hi self the accounting chore
no one else wanted²reconciling prior year
unliquidated obligations.
º The organization was ecstatic that he took
the initiative.

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º Little did they know that Burns established a


false identity²Vincent Kauff an²and
diverted unexpended travel oney to
µKauff an¶s¶ bank account. Khen his spree
ended in 1988; he stole ore than $1.2
illion.

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º Despite longstanding concerns about weak


accounting controls, Burns¶ cri es were not
discovered by IG audits or reviews.

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º During a routine security check for renewing


Burns¶ clearance, an investigator decided to
drive by Burns¶ ho e, located in an upscale
neighborhood in Poto ac, Maryland. He
found the ho e and expensive cars to be
inconsistent with Burns¶ GÑ-12 salary.

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º In the end, Burns plead guilty to


e bezzle ent, fraud, and evading taxes in
August 1988. He forfeited nearly all of his
assets and agreed to repay the balance of
his esti ated $1.2 illion theft. Burns was
sentenced to 6 years in prison

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