fraud awareness: basic july 2013. 2 note: the following provides guidance regarding fraud awareness...
TRANSCRIPT
Fraud Awareness:
BASICJuly 2013
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NOTE:
The following provides guidance regarding fraud awareness and indicators
of fraud
This is not a policy document.
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Improper Business Practices
• Fraud is an “improper business practice”
• Others include
– Giving or accepting bribes– Corruption– Theft– Kickbacks
• This BASIC specifically addresses fraud
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Objectives
• Define fraud • Recognize fraud indicators • Know appropriate internal controls • Take appropriate steps when fraud is suspected
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What is Fraud?
"an intentional deception or misrepresentation made by a person with the knowledge that the deception could result in some unauthorized benefit to himself or some other person.” [42 CFR 455.2]
• Key elements – – Intentional– Deception or misrepresentation– Falsification– Reliance on the deception/misrepresentation– Benefit (or gain)
In our work, Finance, Procurement, and HR have the highest risk for fraud
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Activity
• With the person next to you, list possible acts of fraud on your project (5 minutes)
• Share and discuss in plenary (10 minutes)
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Ratio
naliz
ation
Motivation
Opportunity
Fraud Triangle
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Fraud Triangle
Can these be controlled?
How?
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Scenario 1:David has submitted a purchase requisition form for $97.00 worth of coffee. However, the true cost of the coffee was $79.00. When questioned about this David says he must have transposed the numbers and that it was an accident. Is what David did fraud?
1. Yes2. No
Discuss...
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Internal Controls
• Deterrence • Detection• Segregation of duties• Situational awareness- be observant!• Risk Assessments• Disciplinary Actions
• Control assets and inventory
• Surprise internal audits• Investigations• Corrective Actions• Reporting• External Audits
• Fraud awareness training • Job rotations/mandatory vacation• Policies • Code of Conduct• Hotline• Culture of ethics and compliance• Tone at the top
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Fraud IndicatorsEmployees and contractors who routinely circumvent established procedures
Actions that tend to obstruct an audit trail
Unusual interaction between an employee and bidder/contractor
Awarding a contract outside of approved procedures
Sloppy handling of cash, equipment, or property
Employees who initiate actions without proper prior approval (DOAs)
Unusual patterns of taking leave
Improper access to computer or data Abrupt change in living style
Advances not turned in promptly
Actions that are contrary to policies/procedures, good business practice, or common sense
Unusual or extravagant behavior or spending
Frequent and/or unexplained travel
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Common areas for fraud:
• Finance• Procurement• HR
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Scenario 2:David has been put in charge of purchasing 3 generators. When David submits the bill to IRD the cost of the three generators it is $9,612.00. However a quick search online shows that 3 generators can be procured from Home Depot for $6,912.00. When questioned about this David says that he suffers from dyslexia and made a mistake. Is there fraud here?
1. Yes2. NoDiscuss...
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Top 3 areas for financial fraud
• Cash payments• Payroll• Financial reporting
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Cash Payments
Can take various forms:
– Fraudulent vendors– Fictitious expense reports– Check tampering
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Andy returns from a 3-week business trip. When he gathers his paperwork for the travel costs, he can’t find a receipt for a one-night stay at Red Rum Inn. He goes on Red Rum's website, downloads their logo, and prepares a receipt for the exact cost of the stay at Red Rum. He submits the paperwork to Finance for reimbursement. Did Andy commit fraud?
What should have Andy done?
1. Yes2. No
Scenario 3
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Payroll
Headquarters Employees
Temporary Employees
Local Hires Part-time Employees
US Expatriates Interns
Third Country Nationals
Consultants
Typically the largest single expense line item – easy to conceal fraud
Can take various forms:
• Fictitious employees• Overstating hours• Payments at salary rates
not authorized or approved
• Receiving unentitled benefits
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Financial reporting• Improperly charging expenses to restricted funds or federal grants• Improperly classifying expenses to improve functional allocation• Netting expenses with revenue to improve financial statement
revenues• Overstating receivables by either improper recognition or
understatement of reserve for uncollectible amounts
Question to the group:
What might motivate staff to submit inaccurate or false financial reports?
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1. Fictitious companies2. Inflated prices3. Product substitutions4. Fabricated needs
Top 4 procurement frauds
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1. Splitting Bids2. Restrictive specifications3. Conflicts of Interest4. Buy-ins5. Collusion6. Leaking procurement information
Procurement fraud indicators
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Splitting Bids
• Breaking up required services or products into smaller sizes to avoid the approval requirements for larger dollar value contracts
Actions which split bids may indicate fraud
• Provide an example of splitting bids
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Restrictive Specifications
• Writing specifications to meet the qualifications of one particular company, supplier, or product.
Restrictive specs may indicate fraud
• Provide an example
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Conflicts of Interest
• The integrity of the procurement process requires ensures that transactions are fair, transparent and made at an arms-length distance
• A conflict of interest exists when there is an actual or perceived bias toward a person or business which creates, or appears to create, an unfair advantage.
• Conflicts of interest must be disclosed and mitigated
Undisclosed and unmitigated conflicts of interest may indicate fraud
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Buy-Ins
• Modifications or change orders are sometimes scrutinized less than the original procurement.
• Accordingly, some bidders will “buy-in” by submitting a low bid to ensure receiving the award.
• The bidder then makes up the low bid through change orders or modifications
Buy-ins may indicate fraud
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IRD needs to buy services that are estimated to cost $25,000.
The following bids are received Best Services, $26,492 Just in Time, $23,891Elite, Inc. $12,304
Who should be awarded the project?1. Best Services2. Just in Time3. Elite, Inc.
Discuss…
Scenario 4
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Collusion
• Collusion is an agreement between two or more persons or businesses to limit competition to divide the market, set prices, or limit production.
• It can involve wage fixing, kickbacks, or misrepresenting the independence of the relationship between the colluding parties
Collusion may indicate fraud
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Leaking Procurement Information
• Selectively sharing information about an upcoming procurement, which may include IRD’s procurement strategy, specifications, or other proprietary information.
Leaking procurement information may indicate fraud
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HR Fraud Indicators
• Only one individual receives applications• Units where all staff are from the same group/region/ethnicity• Staff pushes for a particular candidate who doesn’t appear the
most qualified• Pressure to skip a full vetting of candidates• Candidate requirements drafted with a specific candidate in
mind• Delays in making job offers• Making false statements about candidates • Using short-term hiring processes for long-term employees • Failure to receive and verify references from a previous employer• Candidates falsify application information (omitting or obscuring)
The above may not be instances of fraud but may indicate fraud
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Other Red flags
Staff who
• Seem to live beyond means • Seem to have financial problems • Show control issues, unwillingness to share duties • Are unusually close with a vendor or customer • Display irritability , suspiciousness or defensiveness • Have addiction problems • Refuse to take vacations
The above items are not fraud but are red flags regarding the risk of fraud
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IRD Fraud Control Strategy Matrix
Deter Detect
Respond
InvestigateCorrective
Actions Report
Culture of Compliance/ Tone at the Top ü ü ü ü
Policies, Procedures, Processes ü ü ü üTraining/Awareness ü ü üRisk Management ü ü
Due Diligence ü ü
Oversight and Monitoring ü ü
Internal Audit ü ü ü ü üReviews/Investigations ü ü ü ü
Corrective Actions ü ü ü üReporting ü ü ü ü
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Remember
• All business transactions must be transparent, fair, objective, and documented – regardless of amount!
• If you have questions, seek advice before proceeding.
• Documentation and record-keeping is key!
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Scenario 5:
David is procuring warehouse space for IRD for 6 months. The cost to rent the space is $18,000.00 however David has submitted paperwork that states the cost as $20,000.00. Is this fraud?
1. Yes2. No
Discuss...
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ConsequencesPlease discuss what you believe are the consequences of committing fraud.
• To the company• To the employee that commits the fraud
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What Can You Do?
Take initiative! How…
•Set the Tone - Communicate the importance of controls, policies and procedures and follow them yourself
•Don’t protect violators or cover-up for them
•Be alert to the fraud indicators
•Share the knowledge with others by conducting training when you go to the field
•Report suspected fraud
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IRD is receiving a shipment of 1000 bags of ewaway seed. The IRD project manager is at the port to supervise the offloading. He counts 1000 bags loaded into IRD trucks for transport to the warehouse. He meets the trucks at the warehouse and watches the bags being unloaded and stacked in the warehouse. At the end of the day, he stops by the warehouse to check. He observes that the bags have been stacked 10 high, 10 deep, and 10 across. He is confident that the 1000 bags of seed are accounted for. Is his count accurate?
1. Yes2. No3. Maybe
Scenario 6
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Taking materials out of the middle is a common way to commit fraud.
This donut looks solid from the side. The same donut from the top is full of air.Dig a little deeper to get the full picture.
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Remember to check for a “donut hole” in materials that have been stacked.
Viewed from the side, the stack above looks fine.
But, by viewing the same stack from a higher vantage point, it’s clear that some materials are missing.
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Scenario 7:John has planned for 25 people to attend training at a hotel. However at the last minute 8 of those people can’t make it. John still submits a payment request for 25 people to attend. Is this fraud?
1. Yes2. No3. Maybe
Discuss…
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Abdul is responsible for managing a farm research project. 25 field workers are hired to work on the project. Abdul tells 5 of the workers that their services are no longer needed and they shouldn't report to work. At the end of the week, Abdul signs the names of the 5 workers and takes their pay. He tells his co-worker, Solomon that they are working on another project and he will pay them.
What should Solomon do? 1. Nothing2. Report it3. Demand bribe in order to stay silent
on the matter
Scenario 8
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Jose tells the field accountant to add the name of a new employee to the payroll. When the field accountant asks for the approval documentation, Jose says, “Don’t worry, this has been approved. Just go ahead and enter the payroll information.”
What should the field accountant do?
1. Do what Jose asks2. Ignore Jose3. Double check the request
with the proper person
Discuss…
Scenario 9
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IRD has a repair contract with Generators R’ Us for all generator repair work excluding the purchase of parts. Generators R’ Us has been to IRD’s office several times to repair the relatively new generator however the generator continues to need new parts. Is there fraud in this case?
1. Yes2. No3. Maybe
Discuss…
Scenario 10
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Scenario 11:Following an earthquake, Rebuild, Inc. is managing a cash for work program. Workers fill trucks with rubble for daily pay. Truck drivers are paid by the load. The drivers watch the loading and when the trucks are full, they haul away the rubble and return to repeat the process. An IRD staff member carefully tracks the number of workers, hours worked, and truck loads to ensure that payments to workers and drivers are accurate.
What are the fraud risks?
What steps can be taken to mitigate the risks?
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John rushes into his supervisor’s office at 5 pm before a holiday weekend and says, “Please hurry and sign this. I want to make sure this is completed before the weekend.” He hands the supervisor a pen and acts impatient. At first glance, it appears that some documentation is missing. What should the supervisor do?
1. Give John a break and sign it. 2. Tell John that he needs time to review the paperwork before
signing to make sure its complete3. Write up John for insubordination4. Assume that something is wrong and take extra time to
review the transaction
Scenario 12:
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Scenario 13:Conducting fraud awareness training
1. Is a waste of time. There is no risk of fraud under IRD projects.
2. Helps staff identify fraud risks so that steps can be taken to Prevent, Detect, and Report
Discuss…
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Whistleblower Protection
• IRD will not tolerate retaliation against anyone who reports a concern in good faith or who cooperates in an investigation
• Allegations of retaliation will be investigated immediately and, if substantiated, will be grounds for termination of employment and, in some cases, civil or criminal liability
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Reporting
IRD Hotline (Confidential and Anonymous)Telephone: (703) 957-1500Email: [email protected]
The Code of Business Ethics and Conduct requires you to report suspected fraud or other improper business practices to your supervisor or to the IRD Hotline.
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Please Note:
This presentation educates all IRD personnel
on the basic elements of fraud awareness.
IRD has additional training geared towards procurement professionals, contracts and grants specialists, finance, compliance,
audit and other IRD personnel.
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Further Information• Finance
– Donnell Neal, Senior Manager of Finance [email protected]
• Procurement– Olga Wall, Director Contracts and Grants [email protected]
• HR– Francia Poholchuk, Director of Int’l HR [email protected]
• Compliance– Jean M. Hacken, Chief of Compliance [email protected]
• Internal Audit– Sara Reekoye, Director of internal Audit [email protected]
• Legal Counsel• Jason Matechak, General Counsel [email protected]