Government Fraud Allen - PowerPoint Presentation

1. Government FraudAllen T. Stehle, MS, CFEStehle Financial Protection, LLC

2. What is Government Fraud?It is an intentional act designed to deprive the government of funds by deception or other unfair means. All forms of cheating involving money or property are fraud.Fraudulent acts are carried out by individuals inside (employees and elected officials) and outside (contractors, customers and beneficiaries) of the governmental body.

3. Public Perception of Government OrganizationsThe public is highly opinionated about government organizations.Frauds against government organizations are frauds against the public.The government sector is rife with frauds.Government employees and officers should not be highly reimbursed.Public sector salaries and benefits are much higher than the private sector.

4. Government Entities: Prime Targets for FraudLarge dollar amounts of government spending Major employer – U.S. federal government is the nation’s largest employer. Approximately 15.6% of workers in the U.S. are government workers (2010 U.S. Census). U.S. Dept. of Defense alone is the world’s largest employer (BBC, 2012).Lack of resources allocated to combat fraud Inadequate data sharingMost entitlement programs are “pay and chase” when overpayments or illicit payments are made.

5. Harm from FraudReputational harm and loss of public trust – the public tends to view government organizations under heightened security when managing taxpayer dollars Harmful to the beneficiaries of government programs Increases operating costs for the agency which can increase taxes on the publicPotential job loss due to revenue shortfalls

6. City of Dixon FraudThis was the largest municipal fraud in US history.Comptroller was sentenced to 19 years and 7 months for stealing $53.7 million from the City of Dixon, Illinois. Proceeds from the liquidation of perpetrator’s illicit assets totaled $12.38 million as of February, 2013.Fraud was discovered in the fall of 2011 by another employee who found anomalies while the Comptroller was on vacation.

7. City of Dixon Fraud, continuedOpened “RSCDA – Reserve Fund” bank account for which the Comptroller had sole access.Transferred monies from other City accounts to the RSCDA – Reserve Fund bank account.Used funds from the RSCDA – Reserve Fund account for personal use.

8. City of Dixon Fraud, continuedConcealed the RSCDA – Reserve Fund bank account by picking up the bank statements included in the City’s mail.When the Comptroller was away, other staff would pick up the mail and separate out her mail which included the RSCDA bank statements.Comptroller created 159 fictitious invoices to show the City’s auditors that funds being transferred to the account were being used legitimately.

9. City of Dixon Fraud, continuedThe Comptroller took an average of more than $2.5 million per year over 20 years.In one year, she stole $5.8 million.The Comptroller participated in budget meetings with City Council members and stated that the lack of City funds was due to a down economy and because the State of Illinois was behind in its tax payments to the City.

10. City of Dixon Fraud, continuedThe Comptroller’s annual salary was $80,000 as of 2011.The Comptroller used the stolen funds to allow for a lavish life style and to “finance her quarter horse farming business.”

11. Classifications of FraudstersThere are three classifications of fraudsters: 1. Calculating Criminals 2. Situation Dependent Criminals 3. Power Brokers

12. Calculating Criminals• Are predatory• Tend to be repeat offenders• Possess a higher-than-average intelligence• Usually begin careers later in life than other criminals, thereby acquiring knowledge which allows them to circumvent internal controls• Are risk-takers• Lack feeling and empathy

13. Calculating Criminals, continuedPsychology studies of Wall Street’s insider trading scandals have found that calculating criminals:Lacked inner directionLacked self-confidenceLacked self-esteemMotivated by a desire to fit in and be acceptedDefine success by “other standards”

14. Calculating Criminals, continued The best self-defense tactic to try to keep the calculating criminal type out of your organization is by performing a thorough background check…including a criminal background check.

15. Situation Dependent CriminalsSituation dependent criminals, the second classification of fraudsters, are much more common than the calculating criminal classification.Situation dependent criminals are those individuals who are desperate to save themselves, their families, or their companies from a catastrophe.

16. Situation Dependent Criminals, continuedThe vast majority of these types of criminals are not predators at all.They commit crimes without the intent to harm others.They are the most common type of offenders and account for the majority of white-collar crime.

17. Power BrokersPower brokers, the third classification of fraudsters, possess characteristics of both calculating criminals and situation dependent criminals. However, they believe that they have the power to succeed at any cost. Examples include the following:Enron TycoWorldCom

18. Typical White-Collar CriminalOlder (30+ years)55% male, 45% femaleAn appearance of a stable family situationAbove-average (postgraduate) educationLess likely to have a criminal recordGood psychological healthEmployed in a position of trustHave detailed knowledge of accounting systems and their weaknessesPrior accounting experience is commonSource: ACFE/Association of Certified Fraud Examiners

19. Why People Commit Fraud:Situation-DependentCressey’s Fraud Triangle:Need or PressureRationalizationOpportunity

20. Need or Pressure / Cressey’s Fraud Triangle🚩 Behavioral Red Flags (Source: ACFE) 🚩Living beyond means – 45.8%Financial difficulties – 30.0%Unusually close vendor/customer relationships – 20.1%Wheeler-dealer attitude – 15.3%Control issues, non-sharing of duties – 15.3%Divorce/family problems – 13.4%Irritability, suspiciousness or defensiveness – 12.3%Addiction problems – 10.0%

21. Need or Pressure, continuedComplaints of inadequate compensation – 9.0%No behavioral red flags – 8.8%Refusal to take vacations – 7.8%Experienced excessive pressure within organization – 7.0%Past employment-related problems – 6.8%Social isolation – 5.9%Past legal problems – 5.8%Other – 5.5%Excessive family/peer pressure for success – 5.1%Complaints of a personal lack of authority – 4.4%Instability in life circumstances – 4.3%

22. Perceived Opportunity / Cressey’s Fraud TrianglePoor internal controlsPoor separation of dutiesPoor trainingPoor supervisionLack of prosecution of perpetratorsIneffective or absent anti-fraud programs, policies and proceduresWeak ethical culture (e.g., poor tone at the top)Source: ACFE/Association of Certified Fraud Examiners

23. Perceived Opportunity, continued🚩 If you forget everything else that I say today, remember that this is the most important point: If you deny perceived opportunity through the implementation of sound internal controls, supervision and ethics, you go a long way in denying the potential of fraud from taking place. Proactive enforcement is much less costly than reactive enforcement – stop the crime before it happens.

24. RationalizationWe could spend a week exploring the psychology of this topic alone. However, the most important points of rationalization are as follows:Rationalization is important early on but diminishes with multiple frauds and is likely not an issue as fraud progresses.The fraud becomes an acceptable practice to the perpetrator.

25. Capability to Exploit an OpportunityOpportunity tells you that there is a lot of cash behind a locked door…capability or knowledge gets you to the key or a way to “pick the lock.”The person’s position or function may provide the ability to create or exploit an opportunity to commit fraud.The person has the capability to exploit control weaknesses.The person could have designed the controls.The person is persuasive and can coerce others to commit or conceal fraud. Source: Wolfe and Hermanson

26. Work Environment Factors that Result in FraudPlacing too much trust in key employeesLack of proper procedures for authorization of transactionsNo separation of authorization of transactions from the custody of related assetsLack of independent checks on performanceInadequate attention to detailsNo separation of custody of assets from the accounting of same assetsSource: Albrecht, Howe and Romney

27. Work Environment Factors that Result in Fraud, continuedNo separation of duties among accounting functionsLack of clear lines of authority and responsibilityDepartment not frequently reviewed by internal auditorsAll of these listed factors can increase the employee’s opportunities to commit fraud without being caught.

28. Occupational Fraud by Government EmployeesAsset Misappropriation: LarcenyTaking of cash after it has been recorded in the agency’s booksTheft of cash or checks from the register and theft of office supplies, postage, landfill tickets and the like

29. Occupational Fraud by Government Employees, continuedAsset Misappropriation – SkimmingTaking cash before it has been recorded on the agency’s booksSales Skimming – collecting cash payments from the customer without recording or by understating the sale of a good or serviceReceivables Skimming – Stealing cash payments and not recording the payment on the books, thereby leaving an outstanding balance on the customer account (lapping is often used to cover the unrecorded payment)

30. Occupational Fraud by Government Employees, continuedOther Asset MisappropriationFraudulent Disbursements – using agency funds to purchase items for employee personal useBilling schemes: False invoicing schemes False invoicing via shell companies False invoicing via non-accomplice vendors

31. Occupational Fraud by Government Employees, continuedOther Asset Misappropriation, continuedPayroll schemes: Ghost employee schemes Falsified wage and hour documents schemes Falsifying pay rate Falsely reporting paid time off Committing overtime abuses

32. Occupational Fraud by Government Employees, continuedOther Asset Misappropriation, continuedEmployee expense reimbursement schemes Mischaracterized expenses Overstated expenses Fictitious expenses Multiple reimbursements Theft of noncash assets Inventory theft and shrinkage

33. Internal ControlsFive easy ways to implement internal controls:Independent review of bank statements Independent review of canceled/processed checks Independent review of cash receipts Anonymous reporting system (fraud hotline) Surprise examinations

34. Internal Controls, continuedSegregate duties, if possible.If segregating duties is not possible due to small town budgets for employees, utilize independent checks.Increase perception of detection.Implement an anonymous reporting system and, by all means, follow through on any information.

35. Internal Controls, continuedDo NOT overlook suspicious or unexplainable activity.Managers must have a good understanding of the work functions, ask questions and actively manage the staff.

36. Internal Controls, continued🚩 Deterrence is the best form of preventing a fraud in your agency, similar to proactive policing versus reactive policing.People rarely commit fraud if they think they will get caught.The perception of detection is the most effective deterrent to fraud.

37. Internal Controls, continuedExample: Alabama Sheriff case – where is the dummy?I strongly feel that management needs robust internal controls to help their employees resist pressures to commit fraud.If you can deny the opportunity, you can deny a potential fraud from happening at your agency.

38. Internal Controls, continuedCheck out the Association of Certified Fraud Examiner’s website at ACFE.com for the “Fraud Prevention Check-Up”.This is a good resource to utilize at your agency and assess the fraud prevention health of your internal controls.

39. How to Build an Effective Ethics ProgramEthical behavior is doing the right thing when no one else is watching – even when doing the wrong thing is legal. (Aldo Leopold)Ethical dilemma – “a situation concerning right and wrong where values are in conflict”Business ethics – the application of values such as integrity, fairness, respect and openness, to organizational behavior

40. Organizational Pressures to Act Unethically1. Following supervisor’s orders Meeting impracticable business or financial objectives Helping the organization survive Meeting stringent deadlines Wanting to be a team player Source: Human Resource and the Ethics & Compliance Initiative (ECI)

41. Extent of Unethical Behavior75% of employees have stolen at least once from their employer 67% of CFO’s have been pressured to misrepresent results 33% of employees have called in sick and are not actually ill 25% of middle managers have written a fraudulent internal report Source: Business Ethics by Dennis Collins

42. Detection of Fraud Schemes, 2016Tip – 39.1%Internal Audit – 16.5%Management review – 13.4%By accident – 5.6%Account reconciliation – 5.5%Other – 5.5%Document examination – 3.8%External audit – 3.8%Notified by LE – 2.4%Surveillance/monitoring – 1.9%IT controls – 1.3%Confession – 1.3%Source: ACFE/Association of Certified Fraud Examiners

43. Sources of TipsEmployee – 51.5%Customer – 17.8%Anonymous – 14.0%Other – 12.6%Vendor – 9.9%Shareholder/Owner – 2.7%Competitor – 1.6%Source: ACFE/Association of Certified Fraud Examiners

44. Impact of HotlinesWhile tips were the most common detection method regardless of whether a hotline was in place, schemes were detected by tips in 47.3% of cases at organizations that had hotlines, but in only 28.2% of cases at organizations without them.More than 40% of all tips were received from non-employees such as customers and vendors.Source: ACFE/Association of Certified Fraud Examiners

45. Create a Whistleblower Policy:ACFE GuidelinesA whistleblower policy must be well-communicated and include:Examples of allegations that should be reported The various reporting mechanisms available, including phone or email Whether the reporting mechanism is anonymous and confidential Anti-retaliation provisions Incentives/rewards for whistleblowers

46. Create a Whistleblower Policy: ACFE Guidelines, continued Formal reporting mechanisms which are used by whistleblowers include:Telephone hotline – 39.5%Email – 34.1%Web-based Online form – 23.5%Mailed letter/forms – 16.7%Other – 9.8%Fax – 1.5%

47. Writing an Ethics Policy: ACFE GuidelinesKeep it short. Use simple vocabulary. Definitions and acronyms – lead with a detailed explanation. Be concise.Provide examples.Consider the audience.Solicit feedback.Distribute the policy and have employees read and sign the policy.

48. Ten Tips for Ethics Training:ACFE GuidelinesDo not drown employees in details.Focus training disproportionately on management.Make training interactive.Keep training short.Use a variety of media types.Use simple “do’s” and “don’ts”.Employ engaging gimmicks such as quizzes, games or skits.Personalize the ethics code to the company/agency.Have managers conduct the training.Tell stories of employee misconduct and how they were handled.

49. Why Ethics Policies FailPutting the code on the shelf Ignoring the company’s culture Misguided or poor recruitment and hiring strategies Exclusive focus on financial performance metrics Failing to create a credible hotline Fear of retaliation for being a whistleblower Weak internal controls Poor “tone at the top”Source: ACFE/Association of Certified Fraud Examiners

50. Conclusion, Group Scenario and Q & AConclusion and group scenario Questions & answers