The F word: FRAUD

About Internal Audit• Audit team• Internal Audit office overview

Fraud and Fraud Schemes• Define fraud• Learn about different types of fraud and fraud

schemes• Fraud reporting methods

Agenda

Corby Johnson, CPA, CFEInterim Chief Audit Executive

Kelly Mintern, CPA, CIAAssistant Director

Shelley Morris, CIAAuditor

Elizabeth Davis, CFEAuditor

Annie EdmonstonAudit Intern

Audit Team

• Internal Audit background− Internal to the University− Independent in nature

• Why are we here?− To protect students and the university− Mandated by State Law

• NCGS 143, Article 79, The NC Internal Audit Act

• Scope of services− Audits− Consultations− Investigations

Internal Audit Overview

Why are you here today?

A process to identify and understand risks and weaknesses in controls that present a fraud risk to the University.

Once the assessment is complete, our office will make recommendations as to how the University can strengthen internal controls.

Objective: To help the University identify what makes it most vulnerable to fraud.

Fraud Risk Assessment

• Promote fraud awareness and educate on fraud prevention methods

• Identify opportunities to strengthen internal controls

Fraud Risk Assessment (Cont’d)

What is Fraud?

Occupational fraud is the use of one’s occupation for personal enrichment through the deliberate misuse or

misapplication of the employing organization’s resources or assets. – Per ACFE

Wrongful or criminal deception intended to result in financial or personal gain. – Per Oxford Dictionary

Fraud Definition

Dr. Donald Cressey (a criminologist whose research focused on embezzlers) concluded that there are

three factors that must be present at the same time in order for an ordinary person to commit fraud.

Fraud Description

Source: Internal Auditor magazine

Three Main Types of Fraud

Source: ACFE Report to the Nations – 2018 Global study on occupational fraud and abuse

Asset Misappropriation can consist of ANY of the following: • Cash

‒ Theft of cash on hand‒ Theft of cash receipts‒ Fraudulent disbursements

• Inventory and all other assets‒ Misuse ‒ Larceny

Asset Misappropriation

Cash - Theft of cash on hand• The most straightforward is to simply open the

register and remove currency or checks• Can occur at cash register, cash drawer, cash

box, safe, or anywhere cash is stored• Reversing transactions• Altering cash counts

Asset Misappropriation

Cash - Theft of cash receipts• Skimming

– The removal of cash from the employer prior to its entry into the system (cash register/Banner).

• Deposit Lapping– Lapping occurs when an employee steals the

deposit from day one, then replaces it with day two’s deposit. Day two is replaced with day three, and so on. The perpetrator is always one day behind, but as long as no one demands an up-to-the minute reconciliation of the deposits to Banner or the bank statement he/she may be able to avoid detection for a period of time.

Asset Misappropriation

Cash – Fraudulent disbursements• Billing schemes

– False invoices, personal purchases with University funds

• Payroll schemes– Falsified hours and salaries

• Expense reimbursement schemes– Requesting reimbursement for a personal

expense• Check and payment tampering

– Forging signature, altering the payee• Register disbursements

– False refunds or voids

Asset Misappropriation

Inventory and all other assets• Misuse

– Misuse would include any use that is not associated with the University’s intended or expressed use of the asset.

– Assets that are misused but not stolen typically include University vehicles, supplies, computers, and other office equipment.

• Larceny– Employee simply takes inventory from the

University’s premises without attempting to conceal the theft in the books and records.

Asset Misappropriation

Corruption can consist of many forms: • Conflicts of interest

‒ Purchasing schemes

Corruption

Corruption can consist of many forms: • Bribery

‒ Invoice kickbacks‒ Bid rigging

• Illegal gratuities• Economic extortion

Corruption (Cont’d)

What are the RED flags of fraud?

Source: ACFE Report to the Nations – 2018 Global study on occupational fraud and abuse

Additional red flags

• Complaints about inadequate pay

• Complaints about authority

• Excessive pressure from within organization

• Excessive family/peer pressure for success

• Social isolation

• Refusal to take vacations

Red Flags of Fraud

• Tips• Internal Audit• Management review• Account reconciliation• Document examination• By accident• Confession • External audit• Surveillance/monitoring• Notified by law enforcement

How is Fraud Detected?

What is the most common detection method?

Source: ACFE Report to the Nations – 2018 Global study on occupational fraud and abuse

Who provides tips?

Source: ACFE Report to the Nations – 2018 Global study on occupational fraud and abuse

What if something doesn’t seem right?

Fraud, Waste, and Abuse Reporting

• UNCW Policy 02.300 Reporting and Investigating Misuse or Theft of University Property, notes:– Any employee who receives information on

possible misuse or theft MUST report the information to their supervisor, the UNCW Police Department, the General Counsel, or the Chief Audit Executive within 72 hours.

Fraud, Waste, and Abuse Reporting

Agency/Office Website Phone/Email

UNCW Office of Internal Audit

IA Anonymous Hotline

2-3457

UNCW Police Department

UPD Anonymous Hotline

910-962-TIPS

UNCW General Counsel 910-962-4027

Office of the State Auditor

OSA Anonymous Hotline

1-800-730-TIPS

Office of State Budget and Management

OSBM Anonymous Hotline

FWA@osbm.nc.gov

Whistleblower Protection

• UNCW Policy 02.300 Reporting and Investigating Misuse or Theft of University Property, also notes:– Employees, who in good faith, report

suspected criminal activity to appropriate management of the University are protected against retaliation by the University for making such a report.

• North Carolina General Statute §126-84 notes:‒ It is the policy of the state that state

employees are free from intimidation or harassment when reporting to public bodies about matters of public concern.

• If you see something, say something• Ask questions• Understand University and department

policies• Ensure appropriate internal controls are

implemented‒ Reviewing timesheets‒ Counting inventory‒ Reviewing work

Ways to Minimize Fraud Risk

Source: ACFE Report to the Nations – 2018 Global study on occupational fraud and abuse

Where can I get more information?

Where can I learn more information?

UNCWOffice of Internal Audit

Alderman 201910-962-3457

http://www.uncw.edu/ia

INT 101 – How to Pass an Audit – An Introduction to Internal Controls

July 18, 2019 2:00 PM – 3:30 PM HO 125

Questions?