Fraud

1

• Fraud
• March 30, 2006
• Corey L. Tinsman

2
What Is Fraud ?

• Occupational Fraud
• The use of ones occupation for personal
  enrichment through the deliberate misuse or
  misapplication of the employing organizations
  resources or assets.
• Association of Certified Fraud Examiners

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Internal and External Fraud

• Internal (Employee) Fraud
• Illegal or unethical acts that capitalize on an
  employees position in the company for personal
  reward or gain
• External (Supplier) Fraud
• Any business activity which resorts to deceitful
  practices or devices with the intent to deprive
  another of property or other rights, to cause
  economic injury or gain an unfair advantage

4
Common Fraud Myths

• Fraud is not material, trivial in nature
• Fraud is usually well concealed
• Fraud is a victimless crime
• Fraud identification and prevention is
  exclusively Audit and Securitys responsibility
• It cant happen here

5
Why Talk About Fraud?

• ACFE estimated that US companies lose about 6 of
  revenues to fraud and abuse
• Human Nature
• Motivations and responses
• Corporate Reality
• Fast moving and highly competitive
• Cost controls
• Do more with less

ACFE Report to the Nation on Occupational Fraud
Abuse, 2002
6
The European Impact

• 42.5 of the larger companies were victimized in
  last two years
• 60 of frauds were committed by employees
• 58 of reported frauds were detected by accident

PricewaterhouseCoopers European Economic Crime
Survey, 2001
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The Asian Impact

• The most prominent type of fraud in Asia
  concerns purchasing and vendor fraud.
• Jeff Williams, Vice President Pinkerton Asia
• Kickbacks
• Favoring companies in return for financial
  consideration
• Toll booth companies
• Middleman companies used to increase prices to
  the buyer
• Conflicts of interest
• Favoring family and friends

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ACFE Study

• What factors influence fraud?
• Position
• Gender
• Age
• Education
• Collusion
• Criminal history

ACFE Report to the Nation on Occupational Fraud
Abuse, 2002
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ACFE Report to the Nation on Occupational Fraud
Abuse, 2002
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ACFE Study

• How is fraud initially identified?
• Tips from employees 26.3
• Discovered by accident 18.8
• Internal audit 18.6
• External audit 11.5
• Tips from customers 8.6
• Anonymous tips 6.2
• Tips from vendors 5.1
• Notification by Law Enforcement 1.7

ACFE Report to the Nation on Occupational Fraud
Abuse, 2002
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Cresseys Fraud Triangle

• OPPORTUNITY

FRAUD TRIANGLE
PRESSURE
RATIONALIZATION
Occupational Fraud Abuse, Joseph Wells, 1997
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Ideal Environment for Fraud

• Inadequate or minimal managerial control
• Radical organizational changes
• Work backlogs
• Disorder in record keeping
• No segregation of duties
• Financial reconciliation is overlooked
• Audit or oversight function minor or nonexistent

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Common Characteristics

• Respected at work in the community
• Attention-seeking
• Dominating personality
• Wheeler - dealer
• Nearing retirement
• Dissatisfaction with job
• Close relationships with business associates

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Common Characteristics

• Personal and/or financial stress
• Alcohol, drug, marital or gambling problems
• Lifestyle inconsistent with earnings
• No surprise to coworkers or subordinates

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ACFE Report to the Nation on Occupational Fraud
Abuse, 2002
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Rationalization

• I was just borrowing, not stealing
• Im not hurting anyone (no victim)
• Company policies (laws) are not reasonable
• No choice - needed the money
• The company owes it to me
• It was for a good purpose
• Everybody does it

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ACFE Report to the Nation on Occupational Fraud
Abuse, 2002
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External (Supplier) Fraud
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Fraudulent Practices

• Product Substitution
• Collusive Bidding Practices
• Fraudulent Billing Practices
• Bribery and Conflictsof Interest

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Product Substitution Fraud Indicators

• History of poor performance
• Excessive number of quality deficiency reports
• High failure rates, customer complaints
• Irregular test, conformance or origin
  certificates
• Production delays often a catalyst
• Complete and proper documentation not available
• Reluctance by contractor to cooperate

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Collusive Bidding Fraud Indicators

• Rotation of contract awards
• Similarities in proposals
• Apparent connections between suppliers
• Wholesale price increases unrelated to cost
  increases
• Certain suppliers refrain from bidding
• Unexplainable withdrawal of proposals
• References to price schedules, industry pricing,
  fixed pricing

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Fraudulent Billing Practices

• Definition Submission of false claims for
  payment
• Impact loss, procurement integrity
  compromised, potential publicity issues
• Fraud Indicators

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Bribery Conflict of Interest

• Bribery Giving of gifts or other consideration
  with the intention of receiving favorable
  treatment
• Conflict of Interest Inappropriate relationship
  that could influence business decisions
• Fraud indicators

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Bribery Conflict of Interest Fraud Indicators

• Inappropriate relationships between employees and
  business partners (suppliers, distributors,
  customers)
• Restrictive contract specifications
• Information restricted to certain bidders
• Split purchases to avoid review or approvals
• Poorly documented sole or single source awards
• Unusually high stock levels
• Lifestyle excesses

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Consequences of Fraud

• Negative customer impact, loss of customers and
  competitive advantage
• Discipline, termination, legal action against
  employees or contractors
• Low workforce morale
• Negative publicity
• Program delays
• Loss of funds

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ACFE Report to the Nation on Occupational Fraud
Abuse, 2002