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  • Developing a Fraud Risk Management Program

    Copyright 2013 Deloitte Development LLC. All rights reserved.

    Developing a Fraud Risk Management Program

    Erick O. Bell Priyanka Jhang Deloitte Financial Advisory Services LLP September 11, 2013

  • Developing a Fraud Risk Management Program

    Copyright 2013 Deloitte Development LLC. All rights reserved.

    Agenda

    Making the case for a Fraud Risk Management Program

    A COSO-consistent Process for Fraud Risk Management

    Roles of Key Parties in Managing Fraud Risk

    Control Environment and Fraud Risk Assessments

    Anti-Fraud Control Activities

    Sharing Information and Communication

    Monitoring Activities

  • Developing a Fraud Risk Management Program

    Copyright 2013 Deloitte Development LLC. All rights reserved.

    Making the case for a Fraud Risk Management Program

  • Developing a Fraud Risk Management Program

    Copyright 2013 Deloitte Development LLC. All rights reserved. 4

    Fraud: Defined

    Any illegal acts characterized by deceit, concealment, or violation of trust. These acts are not dependent upon the application of threat of violence or of physical force. Frauds are perpetuated by individuals and organizations to obtain money, property, or services; to avoid payment or loss of services; or to secure personal or business advantage.

    Source: The Institute of Internal Auditors International Standards for the Professional Practice of Internal Auditing www.the.iia.org

  • Developing a Fraud Risk Management Program

    Copyright 2013 Deloitte Development LLC. All rights reserved. 5

    Occupational Fraud: Defined

    The use of ones occupation for personal enrichment through the deliberate misuse or misapplication of the employing organizations resources or assets.

    Source: 2006 Association of Certified Fraud Examiners Report to the Nation on Occupational Fraud & Abuse

  • Developing a Fraud Risk Management Program

    Copyright 2013 Deloitte Development LLC. All rights reserved. 6

    Errors Do Not Constitute Fraud

  • Developing a Fraud Risk Management Program

    Copyright 2013 Deloitte Development LLC. All rights reserved. 7

    ACFE Fraud Statistics Losses = 5 percent of revenue $140,000 per case 18-month duration Highest impact to small businesses Higher positions = higher loss 81% of fraudsters displayed one or more

    red flags Living beyond means Financial difficulties Unusually close association with vendors or

    customers Excessive control issues

    Source: 2012 Association of Certified Fraud Examiners Report to the Nation on Occupational Fraud & Abuse

  • Developing a Fraud Risk Management Program

    Copyright 2013 Deloitte Development LLC. All rights reserved. 8

    Detection of Fraud

    Source: 2012 Association of Certified Fraud Examiners Report to the Nation on Occupational Fraud & Abuse

  • Developing a Fraud Risk Management Program

    Copyright 2013 Deloitte Development LLC. All rights reserved. 9

    Size of Victim Organizations

    Source: 2012 Association of Certified Fraud Examiners Report to the Nation on Occupational Fraud & Abuse

  • Developing a Fraud Risk Management Program

    Copyright 2013 Deloitte Development LLC. All rights reserved. 10

    Percent of cases exceeds 100 percent due to cases spanning several categories.

    Types of Occupational Fraud & Abuse

    Source: 2012 Association of Certified Fraud Examiners Report to the Nation on Occupational Fraud & Abuse

  • Developing a Fraud Risk Management Program

    Copyright 2013 Deloitte Development LLC. All rights reserved. 11 11

    Why Organizations Should Manage Fraud Risk

    Duty of care to shareholders/stakeholders Manage impact of fraud on profitability/available funding Statutory/regulatory requirements (Sarbanes-Oxley, SEC, FCPA,

    Federal Sentencing Guidelines, funding agency requirements) Employee morale Stakeholder confidence

  • Developing a Fraud Risk Management Program

    Copyright 2013 Deloitte Development LLC. All rights reserved. 12

    Statutory and Regulatory Guidance/Requirements for Fraud Risk Management

    NYSE / NASDAQ

    Corporate Governance Listing

    Standards

    IIA/AICPA/ACFE

    Managing the Business Risk of

    Fraud

    Federal Sentencing Guidelines

    Criteria

    Foreign Corrupt

    Practices Act

    SEC Enforcement

    Policies

    AICPA

    Management Override (Achilles

    Heel)

    IIA Practice

    Advisories

    Office of Foreign Asset

    Control

    Sarbanes-Oxley Act

    PCAOB Auditing

    Standards

    Department of Justice

    Prosecution Policy

    AICPA

    Management AFPC

    Guidance

  • Developing a Fraud Risk Management Program

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    Reasons Why Entities Need to Manage Fraud Risk

    Organizational Benefits Survival Greater Profitability Intact or enhanced image Improved efficiency & increased ability to meet commitments Enhanced morale attract/retain talent

    Individual Benefits Morale Reduced stress Job satisfaction Greater employment security

  • Developing a Fraud Risk Management Program

    Copyright 2013 Deloitte Development LLC. All rights reserved.

    Questions

    ?

  • Developing a Fraud Risk Management Program

    Copyright 2013 Deloitte Development LLC. All rights reserved.

    A COSO-consistent Process for Fraud Risk Management

  • Developing a Fraud Risk Management Program

    Copyright 2013 Deloitte Development LLC. All rights reserved. 16

    COSO An Overview

    The Committee of Sponsoring Organizations of the Treadway Commission (COSO) Formed specifically to study the causal factors that can lead to

    fraud Private sector initiative established in 1985 by the following

    organizations: American Accounting Association (AAA) American Institute of Certified Public Accountants (AICPA) Financial Executives Institute (FEI) The Institute of Internal Auditors (IIA) Institute of Management Accountants (IMA)

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    Copyright 2013 Deloitte Development LLC. All rights reserved. 17

    Internal Control Integrated Framework (the Framework) In 1992, COSO issued the Internal Control Integrated Framework

    Intended to help businesses and other entities assess and enhance their internal control systems

    Underlying principles provide framework for proactively establishing an environment to manage fraud risk

  • Developing a Fraud Risk Management Program

    Copyright 2013 Deloitte Development LLC. All rights reserved. 18

    The COSO Internal Control Integrated Framework COSO offers an integrated framework that defines internal

    control by five interrelated components: Control Environment Risk Assessment Control Activities Information & Communication Monitoring

    The COSO framework helps clarify the context of internal control discussions

    Objectives

    Com

    pone

    nts

  • Developing a Fraud Risk Management Program

    Copyright 2013 Deloitte Development LLC. All rights reserved. 19

    Recognized as an Internal Control Standard

    Organizations are continually being held to increased standards for internal control Sarbanes Oxley Act of 2002 PCAOB Auditing Standard No. 5 Federal Sentencing Guidelines

    COSO Framework is well known and recognized as authoritative The COSO Framework has served as the internal control

    standard for organizations implementing and evaluating internal control in compliance with the US Sarbanes-Oxley Act of 2002 (SOX) and the US Public Company Accounting Oversight Board (PCAOB) Standard[s] 2 [and 5] 1

    Recognized by executives, board members, regulators, standard setters, professional organizations, and others as an appropriate comprehensive framework for internal control

    1 New Guidance for Small Businesses to be Released, July 7, 2006, Institute of Internal Auditors

  • Developing a Fraud Risk Management Program

    Copyright 2013 Deloitte Development LLC. All rights reserved. 20

  • Developing a Fraud Risk Management Program

    Copyright 2013 Deloitte Development LLC. All rights reserved. 21

    The New Internal Control Integrated Framework

    Old framework will be superseded in December 2014 Same 5 components 17 principles

    8. The organization considers the potential for fraud in assessing risks to the achievement of objectives.

  • Developing a Fraud Risk Management Program

    Copyright 2013 Deloitte Development LLC. All rights reserved. 22

    A COSO-Consistent Approach

    Identify fraud risk factors, fraud risks and fraud schemes

    Link or map identified fraud risks to control activities

    Effective communication of antifraud programs and controls

    Monitoring effectiveness of antifraud programs and controls

    ICFR

    Tone at the top Code of

    Conduct/Ethics Whistleblower

    Hotline

    5 Elements Source: Committee of Sponsoring Organizations of the Treadway Commission, Internal Control Integrated Framework

    Creating a Control

    Environment

    Performing Fraud Risk

    Assessments

    Designing and Implementing

    Antifraud Control

    Activities

    Sharing Information and Communication

    Monitoring Activities

    AFPC

  • Developing a Fraud Risk Management Progra

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