audits, internal controls, ethics, and...

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Audits, Internal Controls, Ethics, and Fraud

CSU 101 March 6-9, 2011MontereyMonterey

Kathi McCoyDirector, Auditing Services

Sacramento

Responsibility / Accountability

CSU FundingSt t– State

– Student Tuition and Fees

Fiduciary Obligation– Spend Funds on Purposes for Which They Were

Allocated / Received

Adherence to Laws / Regulations / Policies

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Audit Definition

“An independent objective assurance and“An independent, objective assurance and consulting activity designed to add value and improve an organization’s operations.”

Institute of Internal Auditors

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Types of Audits

Financial Audits

C li A ditCompliance Audits– Government Laws and Regulations

– Trustee Resolutions and Policies

– Chancellor’s Office Executive Orders

Policies and Directives

ICSUAM / SUAM / SAM

– Campus: Policies and Procedures

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Operational or Performance audits

Types of Audits

Information Systems (IS) or Information Technology (IT) audits

InvestigationsInvestigations

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Audits

CSU Office of the University Auditor

Campus Audits

Systemwide Financial Statements – GAAP

Federal Audits

State Audits

Athletics – NCAA Audits

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Risk

The Probability of Something Happening with Impact to the University

Risk Identification

Risk Assessment

Risk Response– Avoid: No New Ventures / Exit Risky Ones

– Reduce: Put Controls in Place

– Share: Obtain Insurance

– Accept

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Risk Categories

Strategic– Goals and ObjectivesGoals and Objectives

Financial– Loss of Assets

Operational– Ongoing Management Processes

ComplianceCompliance– Laws and Regulations

Reputational– Tarnishing of Image

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INTERNAL CONTROLS

ALL EMPLOYEES

ARE RESPONSIBLE

FOR MANAGING

INTERNAL CONTROLSINTERNAL CONTROLS

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Control Process

Internal control is a process…designed to provide reasonable assurance regarding the achievement of objectives:achievement of objectives:

– Effectiveness and efficiency of operations and the use of resources

– Reliability of financial information and reports

Compliance with applicable laws and regulations– Compliance with applicable laws and regulations

– Safeguarding of Assets

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What Are Controls

System of checks and balances

Procedures to prevent and detect errors, theft or unauthorized use

Ways to manage and reduce risk

Good business practices

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Types of Controls

Preventive Controls– Keep errors / irregularities from occurringKeep errors / irregularities from occurring

Detective Controls– Identify errors / irregularities that occurred

Corrective Controls– Correct errors / irregularities

– Prevent recurrence

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Internal Controls

Segregation of Duties

Safeguarding of Assets

Proper Authorizations & Reviews

Reconciliations

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Examples

Buildings, Offices, Labs, & State Vehicles Kept Locked When Unoccupied

Computer Passwords Changed Periodically

Reconciliations of Source Documents Against Pro Card Statements

Locked Cash Drawers

Secure Storage for Checks Secure Storage for Checks

Proper Authorizations

Alarm Systems

Background Checks14

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ETHICAL BEHAVIORETHICAL BEHAVIOR

DOING THE RIGHT THING

Wh i l i ti ?Where is your moral compass pointing?

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Ethics

Ethical behavior means

Being honestBeing honest,

Telling the truth,

Doing what you said you were going to do.

Barbara Jordan

State Senator – Texas

US. Congresswoman

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Ethical Behavior

Advantages– Credibility

Ethical Behavior

Credibility

– Efficiency

– Morale / Loyalty / Personal Satisfaction

ImpactsInstitutional Reputation– Institutional Reputation

– Morale

– Donations

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Conflict of Interest

Law seeks to minimize the extent to which public employees pursue their own

Conflict of Interest

p p y pfinancial interests at the expense of public interest

– Accepting gifts / honoraria

– Outside employment that would impair independence of judgment related to state dutiesp j g

– Disclosure of confidential information

– Receipt of personal or financial benefit

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Core Values

Act Responsibly and Be Accountable– Integrity / Credibility / Excellenceg y y

Meet Commitments

Respect Confidentiality

Support Controls

Adherence to Laws, Regulations, Policies

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Your Behavior

Protect University Assets

– Financial People Data Equipment

Your Behavior

Financial, People, Data, Equipment

Use of University Assets

– Phones (office and cell), Photocopier, Fax, Software, Internet, Equipment, Office Supplies, Postage

Work Time is University TimeWork Time is University Time

– Arrive late, leave early, long lunch

– Conducting personal business on Univ time

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Your Obligations

Do Your Job: Adhere to Policies, Laws, R l ti d B t B i P tiRegulations, and Best Business Practices

Do Not Disclose Confidential Information

Avoid Conflicts of Interest and the Appearance of ppConflicts of Interest

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Make Good Ethical DecisionsMake Good Ethical Decisions

Ethical Behavior

Publicity Test

Conscience Test

Parent Perspective

Role Model Test

Universality Test

Golden Rule

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“Well, maybe just this once…”

You might be on thin ethical ice, when you hear:

“No one will ever know…”

“It doesn’t matter how it gets done as long as it gets done.”

“It sounds too good to be true.”

“Everyone does it.”

“Shred that document.”

“We can hide it.”

“No one will get hurt.”

“What’s in it for me?”

“We didn’t have this conversation.” 23

Last Worst Act

Consider This –Will You Be Judged By Your Last Worst Act:Will You Be Judged By Your Last Worst Act:

Lindsay Lohan

General McChrystal

Gary Condit

Tonya Hardingy g

City of Bell – Mayor, Council Members . . .

Kobe Bryant

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Quote

I would never suggest that ethics is simple. Not only does one have to know the right thing to do --one must also have the moral fortitude to do it.

Norman R. Augustine

Former Chairman and CEOFormer Chairman and CEO

Lockheed Martin

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Quote

What is right is right, even if no one is doing it.

What is wrong is wrong, even if everyone is doing it.

Source Unknown

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FRAUDULENT ACTIVITIES DO OCCUR

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There is nothing ethical about fraud!

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Fraud

Fraudulent, Unlawful, Dishonest Acts– Intentional or Deliberate Act

Theft or Misappropriation of Assets

Diversion of Revenue

Ch U i it f E With t PCharge University for Expense Without Proper Authorization

Wrongdoing

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Fraud Triangle

Motivation / Incentive / PressureMotivation / Incentive / Pressure

Rationalization / Justification

Opportunity

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Fraud TriangleFinancial Need

Motivation

Dissatisfaction

Revenge

Greed

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Fraud Triangle

I Deserve It

Rationalization

I am Underpaid

I Will Pay It Back – Borrowing

Others Do It

It Does Not Really Hurt Anyone

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Fraud Triangle

Inadequate Internal Controls

Opportunity

Lack of Appropriate Oversight

Use of One’s Position & Authority to Override Controls

It Is Critical for University to Limit

the Opportunities for Fraud

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Expanding the Fraud Triangle

Personal Capability– Position / FunctionPosition / Function

– Intelligence

– Strong Ego

– Confidence

– Persuasiveness

Lies Effectively and Consistently– Lies Effectively and Consistently

– Tolerates Stress

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TRUST IS NOT AN INTERNAL CONTROL

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Fiscal Improprieties

Travel ReimbursementsOverstated Expenses


– Overstated Expenses

– Fictitious Expenses

– Double Dipping

– Personal Items Concealed as BusinessPersonal Items Concealed as Business Expense

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Procurement CardPersonal Items– Personal Items

– Purchases NOT Within Program Parameters

– Lack of Proper Approval

– Inadequate Supporting DocumentationInadequate Supporting Documentation

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Other Improprieties

Misuse of University Assets– Computer: Software & InternetComputer: Software & Internet

– Copier and Fax

– Phone and E-Mail

– Equipment

– Program and Office Supplies

– Postage

– University Credit Cards

– Employee Work Time

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Do Things RightDo Things Right

Do the Right Thing

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“Ideal” Audit Observations

Departmental Administrative Policies, Procedures and Practices Are Documented –Current – Followed

All Accounts & Fees Are Reconciled Regularly

Cash Receipts Are Promptly Endorsed, Recorded, Safeguarded, Deposited, and Reconciled

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“Ideal” Audit Observations

Check Requests & Travel Claims Are Properly Authorized, and Sufficiently Documented

Procurement Card Use Adheres to Campus Standards

Duties Are Properly Segregated

S ff Staff Are Properly Trained

Access to HR / Financial Systems Are Properly Assigned and Authorized

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Inter-relationship

Summary

Inter relationship– Audits

– Internal Controls

– Ethical Behavior

– Fraud

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Thanks to Auditing Services – CSUN: Contribution to Presentation Content

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Q U E S T I O N S

CSU Bakersfield Roadrunners

CSU Channel Islands Dolphins

CSU Chico Wildcats

CSU Dominguez Hills Toros

CSU East Bay Pioneers

CSU Fresno Bulldogs

CSU Fullerton Titans

Humboldt State University Lumberjacks

CSU Long Beach 49ers

CSU Los Angeles Golden Eagles

California Maritime Academy Keelhaulers

CSU Monterey Bay Otters

CSU Northridge Matadors

Cal Poly Pomona Broncos

CSU Sacramento HornetsCSU Sacramento Hornets

CSU San Bernardino Coyotes

San Diego State University Aztecs

San Francisco State University Gators

San Jose State University Spartans

Cal Poly San Luis Obispo Mustangs

CSU San Marcos Cougars

Sonoma State University Seawolves

CSU Stanislaus Warriors

Thank You

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Personal Expenditures, $647,949; Texas Southern University

Wrongdoing

Fraudulent Checks, $502,000, NJ City University – Student Gov't Organization

Embezzlement, $429,000, Bowling Green State

Stealing, $400,000, American University

Embezzlement, $200,000, BYUEmbezzlement, $200,000, BYU

Embezzlement, $144,000, Virginia

Commonwealth University

Toner Theft, $45,000; Penn state

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