1. Fraud Presented by: Matt Wireman, CSFO November 13, 2013

2. ITEMS TO BE DISCUSSED  What is Fraud??  Fraud Triangle  School Board Policy on Fraud

3. Simple Definition of Fraud:  Fraud is a deliberate misrepresentation which causes another person to suffer damages, usually monetary losses

4. Define Fraud: What it is and What it isn’t. What it is Intentional Trick or Deceive someone out of their assets Theft A crime What it isn’t Taken by physical force A mistake or error Victimless Insignificant because no one got hurt Acceptable or Justifiable

5. 3 Components of Every Fraud 1. The Theft – Assets Are Taken 2. Concealment – Hide It from Others 3. Conversion – Spends or Converts to Cash and then Spends

6. What Does the Fraudster Look Like?  Like you and me  No specific psychological profile  70% male, while females make up 30%,  Older  More religious  Less substance abuse

7. Donald Cressey's Fraud Triangle  Donald R. Cressey (April 27, 1919 – July 21, 1987) was an American penologist, sociologist, and criminologist who made innovative contributions to the study of organized crime, prisons, criminology, the sociology of criminal law, white-collar crime. WIKIPEDIA.COMAmericanpenologistsociologistcriminologistorganized crime prisonscriminal lawwhite-collar crime  The fraud triangle originated from Donald Cressey's hypothesis: “Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-shareable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property. 1 ” Donald R. Cressey (April 27, 1919 – July 21, 1987) was an American penologist, sociologist, and criminologist who made innovative contributions to the study of organized crime, prisons, criminology, the sociology of criminal law, white-collar crimeAmericanpenologistsociologistcriminologistorganized crimeprisonscriminal lawwhite-collar crime 1 Donald R. Cressey, Other People's Money (Montclair: Patterson Smith, 1973) p. 30

8. Fraud Triangle Perceived Pressure Rationalization Perceived Opportunity

9. Fraud Triangle  Perceived Pressure  A situation where someone believes that they have a need to commit a fraud  Perceived Opportunity  A situation where someone believes they have a favorable or promising combination of circumstances to commit an undetectable fraud  Rationalization  To devise a self-satisfying but incorrect reasons for one’s behavior

10. The First Element - Pressure  95% of frauds are either financial or vice related  List some common pressures 1. Greed 2. Living beyond your means 3. High bills or personal debt 4. Poor credit 5. Personal financial losses 6. Unexpected financial needs

11. What Are the Four Types of Pressure? Financial Vices Work-Related Other Pressures

12. The Second Element-Opportunities  An opportunity is the condition or situation that allows a person to commit and conceal a dishonest act.  Opportunities often stem from a lack of internal controls.  However, the most prevalent opportunity for fraud results from a company’s failure to enforce its system of internal controls.

13. Opportunities to Commit Fraud. 1. Lack of or circumvention of internal controls that prevent or detect fraud 2. Inability to judge quality of performance 3. Failure to discipline fraud perpetrators 4. Lack of access to information 5. Ignorance, apathy, and incapacity 6. Lack of an audit trail

14. Internal Control Structure Control Environment 1.Management philosophy & operating style, modeling 2.Effective hiring 3.Clear organizational structure 4.Effective audits Accounting System 1.Valid transactions 2.Properly authorized 3.Completeness 4.Proper classification 5.Proper timing 6.Proper valuation 7.Correct summarization Control Activities and Procedures 1.Segregation of duties 2.Proper procedures for authorization 3.Adequate documents & records 4.Physical control over assets & records 5.Independent checks on performance

15. Rationalization Because the fraudster does not see himself as a criminal, he must justify the crime to himself in a way that makes it an acceptable or justifiable act.

16. What Are Some Common Rationalizations?  They owe it to me.  I’m only borrowing the money.  Nobody will get hurt.  I deserve more.  It’s for a good cause.  We’ll fix the books as soon as we get past this little financial problem.  It’s for my sick child.

17. Fraud Prevention & Detection Controls Fraud Prevention Board Policy 04.41 REDBOOK Generally Accepted Accounting Princples

18. Fraud Prevention Board Policy 04.41 All employees, Board members, consultants, vendors, contractors and other parties maintaining a business relationship with the District shall act with integrity and due diligence in matters involving District fiscal resources.

19. Fraud Prevention Board Policy 04.41 D EFINITION As used in this policy, “fraud” refers to intentionally misrepresenting, concealing, or misusing information in an attempt to commit fiscal wrongdoing. Fraudulent actions include, but are not limited to: Behaving in a dishonest or false manner in relation to District assets, including theft of funds, securities, supplies, or other District properties. Forging or altering financial documents or accounts illegally or without proper authorization. Improper handling or reporting of financial transactions. Personally profiting as a result of insider knowledge. Disregarding confidentiality safeguards concerning financial information. Violating Board conflict of interest policies. Mishandling financial records or District assets (destroying, removing, or misusing).

20. Fraud Prevention Board Policy 04.41 S TAFF R ESPONSIBILITIES Employees who suspect that financial fraud, impropriety or irregularity has occurred shall immediately report those suspicions to their immediate supervisor and/or the Superintendent/designee who shall have the primary responsibility for initiating necessary investigations. If the Superintendent is an alleged party in the fraud complaint, provision shall be made for addressing the complaint to the Board chairperson. Investigations shall be conducted in coordination with legal counsel and other internal or external departments and agencies as appropriate.

21. Fraud Prevention Board Policy 04.41 The Superintendent/designee shall inform employees with financial/accounting responsibilities of the following anti-fraud standards established by the Board: The District shall operate in a culture of honesty and ethical behavior with employees doing all within their power to further that goal. Employees shall comply with all laws, rules, regulations and court orders of the Commonwealth of Kentucky and of the United States, as well as Board policy addressing fiscal matters. Employees shall practice good stewardship of District financial resources, including timely reporting of fraudulent expenditures. Employees with financial/accounting responsibilities shall support and follow sound business practices to the best of their ability and in keeping with their assigned responsibilities and job-related training by: 1.Maintaining and protecting District financial records; 2.Performing one’s job with the highest attention to detail to minimize and prevent error, falsification of accounting records, and omission of transactions;

22. Fraud Prevention Board Policy 04.41 I NTERNAL C ONTROLS /I NVESTIGATIONS The Superintendent/designee shall be responsible for developing internal controls to aid in preventing and detecting fraud or financial impropriety or irregularity within the District. Reports of suspected fraudulent activities shall be investigated in a manner that protects the confidentiality of the parties and avoid unfounded accusations. Employees involved in the investigation shall be advised to keep information about the investigation confidential. If an investigation substantiates occurrence of a fraudulent activity, the Superintendent/designee shall issue a report to appropriate personnel and to the Board of Education. Final disposition of the matter and any decision to file a criminal complaint or refer the matter to the appropriate law enforcement and/or regulatory agency for independent investigation shall be made in consultation with legal counsel. Results of the investigation shall not be disclosed to or discussed with anyone other than those individuals with a legitimate need to know.

23. DISCUSSION