office of operations 2009 fall conference navigating uncertain times october 21-22, 2009 fraud red...

Office of OperationsOffice of Operations

2009 Fall Conference2009 Fall Conference

Navigating Uncertain TimesNavigating Uncertain Times

October 21-22, 2009

Fraud Red Flags

Linda Giovannone

Amy Klos




October 21-22, 2009

FRAUDFRAUD

Office of Operations 2009 Fall Conference

What is Fraud?What is Fraud?

MisstatementMisstatement Mistake v FraudMistake v Fraud

Knowledge of falsehood/intentKnowledge of falsehood/intent RelianceReliance DamageDamage

Source: 2008 Report to the Nation on Occupational Fraud & Abuse

What is Fraud?What is Fraud?

Fraud is any intentional act or Fraud is any intentional act or omission designed to deceive others, omission designed to deceive others, resulting in the victim suffering a loss resulting in the victim suffering a loss

and/or the perpetrator achieving a and/or the perpetrator achieving a gain.gain.


What is Occupational Fraud?What is Occupational Fraud?

The use of one’s occupation for The use of one’s occupation for personal enrichment through the personal enrichment through the

deliberate misuse or misapplication deliberate misuse or misapplication of the employing organization’s of the employing organization’s

resources or assets. resources or assets.


A study conducted by the A study conducted by the Association of Certified Fraud Association of Certified Fraud

Examiners (ACFE) consisting of 959 Examiners (ACFE) consisting of 959 cases of occupational fraud found the cases of occupational fraud found the typical fraud continued for typical fraud continued for two yearstwo years

before being detected.before being detected.

How Long Does Fraud Go How Long Does Fraud Go Undetected?Undetected?


7% of annual revenues7% of annual revenues Median loss of $175,000Median loss of $175,000

$200,000 for small businesses$200,000 for small businesses Over 25% had losses of at Over 25% had losses of at

least $1 millionleast $1 million

How Much Is Lost?How Much Is Lost?


How Does It Happen?How Does It Happen?

Lack of adequate internal Lack of adequate internal controlscontrols

Lack of management reviewLack of management review

Override of existing controlsOverride of existing controls


ControlsControls

Control EnvironmentControl Environment Risk AssessmentRisk Assessment Control ActivitiesControl Activities Information and CommunicationInformation and Communication MonitoringMonitoring

Source: KPMG Profile of a Fraudster Survey 2007

Fraudster’s MotivationFraudster’s Motivation

Risk of losing one’s job

Personal vices

Lack of personal development

Conflicts of interest

Opportunity

Greed

Meeting budget/target; hiding losses


Red FlagsRed Flags

A warning or A warning or sense that sense that something isn’t something isn’t rightright

Should lead you Should lead you to take a closer to take a closer look at the look at the transactiontransaction


Personal FlagsPersonal Flags

Weak ethicsWeak ethics Wheeler-dealer personalityWheeler-dealer personality Lack of stabilityLack of stability Strong desire to beat the systemStrong desire to beat the system Significant behavior changesSignificant behavior changes Inadequate income for lifestyleInadequate income for lifestyle



Highly material personal valuesHighly material personal values Success equated with $Success equated with $ Highly self-centeredHighly self-centered Conspicuous consumersConspicuous consumers Careless with factsCareless with facts HostileHostile Exempt from accountabilityExempt from accountability



Demand loyaltyDemand loyalty Have few real friendsHave few real friends Inconsistent, vague or implausible Inconsistent, vague or implausible

responsesresponses SchmoozerSchmoozer Employee has outside businessEmployee has outside business


How Does Fraud Happen?How Does Fraud Happen?

Motive

Opportunity Rationalization

MotivMotivee

OpportunitOpportunityy

RationalizationRationalization


MotiveMotive

Motive

Opportunity Rationalization

MotivMotivee


Motive FlagsMotive Flags

High debtHigh debt Significant financial lossesSignificant financial losses Excessive alcohol, drugs or Excessive alcohol, drugs or

gamblinggambling Extramarital affairExtramarital affair Perceived organizational inequitiesPerceived organizational inequities Job frustration or resentmentJob frustration or resentment


MotiveMotive FlagsFlags

Peer group pressuresPeer group pressures Fear loss of statusFear loss of status Single parentSingle parent College tuitionCollege tuition Sick family memberSick family member


OpportunityOpportunity

OpportuniOpportunityty


Opportunity FlagsOpportunity Flags

Familiarity with operationsFamiliarity with operations Ability to override controlsAbility to override controls No periodic rotation of key No periodic rotation of key

employeesemployees No uniform personnel policiesNo uniform personnel policies



Not independently verifying Not independently verifying delivery or pricingdelivery or pricing

Lack of segregation of Lack of segregation of responsibilitiesresponsibilities

Organizations with no fraud training Organizations with no fraud training programprogram

Dishonest or dominant Dishonest or dominant managementmanagement



Management does not emphasize Management does not emphasize the role of strong internal controlsthe role of strong internal controls

Management does not prosecute or Management does not prosecute or punish fraud perpetratorspunish fraud perpetrators

Lack of independence of the Lack of independence of the Internal Audit functionInternal Audit function

Operating in crisis modeOperating in crisis mode



Close association with vendorsClose association with vendors Vendor invoice going anywhere Vendor invoice going anywhere

other than accounts payableother than accounts payable No documents to support invoicesNo documents to support invoices Not independently verifying Not independently verifying

delivery or pricingdelivery or pricing


RationalizationRationalization

RationalizatioRationalizationn


RationalizationRationalization Flags Flags

They owe meThey owe me I’m overworkedI’m overworked I do the work of two peopleI do the work of two people They’ll never miss itThey’ll never miss it I’ll just borrow it; I’ll pay it backI’ll just borrow it; I’ll pay it back I’m not really hurting anyoneI’m not really hurting anyone Everyone is a little dishonestEveryone is a little dishonest


Profile of Profile of Occupational FraudsterOccupational Fraudster


RaceRace GenderGender AgeAge EducationEducation Criminal HistoryCriminal History OccupationOccupation TenureTenure SalarySalary

Source: KPMG Profile of a Fraudster Survey 2007

Fraudster Details Fraudster Details

In 91 percent of profiles the In 91 percent of profiles the perpetrators did not leave it at one perpetrators did not leave it at one

single fraudulent act, but committed single fraudulent act, but committed repeated acts of fraud. repeated acts of fraud.


Fraud DetectionFraud Detection

Source: 2008 Report to the Nation on Occupational Fraud and Abuse

Fraud Detected By:Fraud Detected By:


Source of TipsSource of Tips


ExerciseExercise

Invoice ReviewInvoice Review




October 21-22, 2009


Grantee A Grantee B


Document FlagsDocument Flags

Inadequate, copied or apparently Inadequate, copied or apparently altered documents altered documents

Homemade or handwritten invoices Homemade or handwritten invoices and/or receiptsand/or receipts

Similar or same invoice template Similar or same invoice template used by multiple vendorsused by multiple vendors



PO Box, suite number, mail drop PO Box, suite number, mail drop addressaddress

Multiple addresses for a single Multiple addresses for a single vendorvendor

No phone number or fake phone No phone number or fake phone numbernumber



No TINNo TIN

Unknown company nameUnknown company name

Company name includes initials or Company name includes initials or personal namepersonal name



No letterheadNo letterhead

Misspellings on documentMisspellings on document

Vague informationVague information

Missing documents or no supporting Missing documents or no supporting documentationdocumentation


Document FlagsDocument Flags Large dollar payments made with Large dollar payments made with

cashcash

Higher than usual quantities Higher than usual quantities orderedordered

Unusual items orderedUnusual items ordered

Unexplained items on Unexplained items on reconciliationsreconciliations



Sequential, inconsistent, or Sequential, inconsistent, or repeated invoice numbersrepeated invoice numbers

Invoice figures do not add upInvoice figures do not add up

Recurring identical amounts from Recurring identical amounts from same vendorsame vendor



Round amounts or amounts under Round amounts or amounts under approval levelsapproval levels

Increased amounts to vendor for no Increased amounts to vendor for no apparent reasonapparent reason



Invoices for desirable/portable items Invoices for desirable/portable items (e.g., laptops, cameras, cell phones)(e.g., laptops, cameras, cell phones)

Invoices for items you might find in Invoices for items you might find in your home (e.g., table, couch, your home (e.g., table, couch, carpet, air conditioner, microwave, carpet, air conditioner, microwave, tools)tools)



Invoice dates fall outside contract Invoice dates fall outside contract period or spending periodperiod or spending period

Items purchased that were not Items purchased that were not contained in the approved budgetcontained in the approved budget

Budget modifications made after the Budget modifications made after the work was performedwork was performed


Contracting FlagsContracting Flags

Restrictive or vague specificationsRestrictive or vague specifications

Low number of biddersLow number of bidders

Regular bidders do not bidRegular bidders do not bid

Same vendor(s) repeatedly winning Same vendor(s) repeatedly winning bidsbids



Bids from vendors not on an Bids from vendors not on an approved vendor list approved vendor list

Bids/quotes received from the same Bids/quotes received from the same fax number around the same timefax number around the same time

Similar letterheads of biddersSimilar letterheads of bidders

Large difference in bid amountsLarge difference in bid amounts



Unreasonable bid amountsUnreasonable bid amounts

Bid amounts slightly below approval Bid amounts slightly below approval levelslevels

Unable to confirm bids with losing Unable to confirm bids with losing vendorsvendors

Separate bids for labor and Separate bids for labor and materialsmaterials



Lowest bidder does not receive Lowest bidder does not receive awardaward

Lack of vendor contact information Lack of vendor contact information on bidson bids

Bidder’s signature is the company Bidder’s signature is the company name, not an individualname, not an individual

Unusual condition of bid document Unusual condition of bid document (e.g., cuts, rips, white out)(e.g., cuts, rips, white out)


Travel Reimbursement Travel Reimbursement FlagsFlags

High airline prices High airline prices

Business or first-class instead of Business or first-class instead of coachcoach

Plane tickets with matching last Plane tickets with matching last namesnames

Unusual lodging or destinationUnusual lodging or destination


Travel Reimbursement Travel Reimbursement FlagsFlags

Same leave and return times on Same leave and return times on multiple tripsmultiple trips

Consistently over per diem Consistently over per diem allowancesallowances

Personal-type expensesPersonal-type expenses

High ranking officialsHigh ranking officials


Credit Card FlagsCredit Card Flags

Personal-type purchasesPersonal-type purchases

Shipping address differs from billing Shipping address differs from billing addressaddress

No reconciliation of credit card No reconciliation of credit card chargescharges

Charges to the same vendorCharges to the same vendor


Credit Card FlagsCredit Card Flags

Charges made on weekends or Charges made on weekends or around holidaysaround holidays

Charges for the same amountCharges for the same amount

Excessive volume of chargesExcessive volume of charges

For travelers – charges close to For travelers – charges close to home or workhome or work


ExerciseExercise

Travel Card ChargesTravel Card Charges


Travel Card ExampleTravel Card Example

Traveled on day trips from a regional Traveled on day trips from a regional officeoffice

70 charges/month70 charges/month


Charges by VendorCharges by Vendor


Individual ChargesIndividual Charges


Travel Card ExampleTravel Card Example

$8,300 in personal charges$8,300 in personal charges

Two felonies – 3rd degree grand Two felonies – 3rd degree grand larceny and defrauding the larceny and defrauding the governmentgovernment

One misdemeanor - official One misdemeanor - official misconduct misconduct


Gas Card FlagsGas Card Flags

Premium gas chargesPremium gas charges

Regular and diesel gas on the same Regular and diesel gas on the same cardcard

Non-fuel purchases (e.g., cigarettes, Non-fuel purchases (e.g., cigarettes, beer)beer)


Gas Card FlagsGas Card Flags

Gallons purchased exceed gas tank Gallons purchased exceed gas tank capacitycapacity

No accountability for car mileageNo accountability for car mileage

No reconciliation of chargesNo reconciliation of charges


Shell Company FlagsShell Company Flags

You have never heard of this You have never heard of this companycompany

Company receives many small Company receives many small dollar paymentsdollar payments

Company name includes initials or Company name includes initials or personal namepersonal name

Company sells intangible services Company sells intangible services difficult to confirmdifficult to confirm


Shell Company FlagsShell Company Flags

No phone number or fake phone No phone number or fake phone number on invoicesnumber on invoices

Address is a post office box or Address is a post office box or suite numbersuite number

No receiving reportsNo receiving reports


Inventory FlagsInventory Flags

Missing inventory or assetsMissing inventory or assets

Excess/unnecessary inventoryExcess/unnecessary inventory

Obsolete inventory Obsolete inventory

Unrestricted access to inventoryUnrestricted access to inventory

Unable to locate purchased Unable to locate purchased itemsitems


Inventory FlagsInventory Flags

No minimum, maximum or No minimum, maximum or reorder levels for inventoryreorder levels for inventory

Lack of regular physical Lack of regular physical inventory countsinventory counts

Goods different than purchased Goods different than purchased (e.g., different model or serial (e.g., different model or serial numbers)numbers)


Other FlagsOther Flags

Unwillingness or unusual delays Unwillingness or unusual delays in providing needed in providing needed data/informationdata/information

Limited access to peopleLimited access to people

Missing dataMissing data


Other FlagsOther Flags

Managers regularly do Managers regularly do subordinate dutiessubordinate duties

Chronically low moraleChronically low morale

Lack of independence in the Lack of independence in the Internal Audit functionInternal Audit function


Conflict of Interest FlagsConflict of Interest Flags

Relationships among vendorsRelationships among vendors

Relationships between Relationships between vendor(s) and agency staffvendor(s) and agency staff Vendor’s address or Vendor’s address or

identification number matches identification number matches employee’s personal informationemployee’s personal information


Bribes and Kickbacks FlagsBribes and Kickbacks Flags

Unjustified favoritism of a Unjustified favoritism of a certain vendorcertain vendor

Unexplained increase in wealth Unexplained increase in wealth of employeeof employee

Close socialization with or Close socialization with or acceptance of inappropriate acceptance of inappropriate gifts from a vendorgifts from a vendor


Professional SkepticismProfessional Skepticism

An attitude that includes a An attitude that includes a questioning mind and critical questioning mind and critical assessment of information. assessment of information.


Questioning MindQuestioning Mind

Why?Why? Show me!Show me!


Critical Assessment of Critical Assessment of Information Information

Does this make sense?Does this make sense? How can I verify it?How can I verify it?


Questions With AnswersQuestions With Answers

Instead of:Instead of: ““Did you verify that there were 36 Did you verify that there were 36

items in the box?”items in the box?”

Try:Try: ““How many items are in the box?”How many items are in the box?”


Why don’t people report their Why don’t people report their suspicions?suspicions?


What If You Suspect Fraud?What If You Suspect Fraud?

SupervisorSupervisor Internal AuditorInternal Auditor State Comptroller State Comptroller

(888)OSC-4555(888)OSC-4555 State Inspector GeneralState Inspector General

(800)DO-RIGHT(800)DO-RIGHT


Report Detailed InformationReport Detailed Information

Describe the alleged wrongdoingDescribe the alleged wrongdoing Identify when the alleged Identify when the alleged

wrongdoing started and if it’s still wrongdoing started and if it’s still occurringoccurring

Identify who may be involvedIdentify who may be involved Identify other potential witnesses Identify other potential witnesses

or victimsor victims


Report Detailed InformationReport Detailed Information Identify who you may have already Identify who you may have already

notified (i.e., supervisor or other notified (i.e., supervisor or other agency/personnel or law agency/personnel or law enforcement)enforcement)

Describe what evidence is available Describe what evidence is available and where it can be foundand where it can be found

Identify what laws or agency Identify what laws or agency regulations have been violated, if regulations have been violated, if knownknown

Source: 2006 Report to the Nation on Occupational Fraud and Abuse

Encourage Fraud ReportingEncourage Fraud Reporting

Conduct anti-fraud trainingConduct anti-fraud training Maintain open lines of Maintain open lines of

communication among employees communication among employees and management to bring and management to bring questionable conduct to lightquestionable conduct to light

Establish consequences for those Establish consequences for those that have committed fraudthat have committed fraud




October 21-22, 2009

QUESTIONSQUESTIONS

office of operations 2009 fall conference navigating uncertain times october 21-22, 2009 fraud red...

Documents

fraud slide

office of operations

lifestyle slide

resentment slide

accountability slide

business slide

transaction slide

fraud mistake