2. Office of Operations 2009 Fall Conference Navigating Uncertain Times October 21-22, 2009 Fraud Red Flags Linda Giovannone Amy Klos

3. Office of Operations 2009 Fall Conference Navigating Uncertain Times October 21-22, 2009FRAUD

4. Office of Operations 2009 Fall Conference What is Fraud? Misstatement Misstatement Mistake v Fraud Mistake v Fraud Knowledge of falsehood/intent Knowledge of falsehood/intent Reliance Reliance Damage Damage

5. Source: 2008 Report to the Nation on Occupational Fraud & Abuse What is Fraud? Fraud is any intentional act or omission designed to deceive others, resulting in the victim suffering a loss and/or the perpetrator achieving a gain.

6. Source: 2008 Report to the Nation on Occupational Fraud & Abuse What is Occupational Fraud? The use of ones occupation for personal enrichment through the deliberate misuse or misapplication of the employing organizations resources or assets.

7. Source: 2008 Report to the Nation on Occupational Fraud & Abuse A study conducted by the Association of Certified Fraud Examiners (ACFE) consisting of 959 cases of occupational fraud found the typical fraud continued for two years before being detected. A study conducted by the Association of Certified Fraud Examiners (ACFE) consisting of 959 cases of occupational fraud found the typical fraud continued for two years before being detected. How Long Does Fraud Go Undetected?

8. Source: 2008 Report to the Nation on Occupational Fraud & Abuse 7% of annual revenues 7% of annual revenues Median loss of $175,000 Median loss of $175,000 $200,000 for small businesses $200,000 for small businesses Over 25% had losses of at least $1 million Over 25% had losses of at least $1 million How Much Is Lost?

9. Office of Operations 2009 Fall Conference How Does It Happen? Lack of adequate internal controls Lack of adequate internal controls Lack of management review Lack of management review Override of existing controls Override of existing controls

10. Office of Operations 2009 Fall ConferenceControls Control Environment Control Environment Risk Assessment Risk Assessment Control Activities Control Activities Information and Communication Information and Communication Monitoring Monitoring

11. Source: KPMG Profile of a Fraudster Survey 2007 Fraudsters Motivation Risk of losing ones job Personal vices Lack of personal development Conflicts of interest Opportunity Greed Meeting budget/target; hiding losses

12. Office of Operations 2009 Fall Conference Red Flags A warning or sense that something isnt right A warning or sense that something isnt right Should lead you to take a closer look at the transaction Should lead you to take a closer look at the transaction

13. Office of Operations 2009 Fall Conference Personal Flags Weak ethics Weak ethics Wheeler-dealer personality Wheeler-dealer personality Lack of stability Lack of stability Strong desire to beat the system Strong desire to beat the system Significant behavior changes Significant behavior changes Inadequate income for lifestyle Inadequate income for lifestyle

14. Office of Operations 2009 Fall Conference Personal Flags Highly material personal values Highly material personal values Success equated with $ Success equated with $ Highly self-centered Highly self-centered Conspicuous consumers Conspicuous consumers Careless with facts Careless with facts Hostile Hostile Exempt from accountability Exempt from accountability

15. Office of Operations 2009 Fall Conference Personal Flags Demand loyalty Demand loyalty Have few real friends Have few real friends Inconsistent, vague or implausible responses Inconsistent, vague or implausible responses Schmoozer Schmoozer Employee has outside business Employee has outside business

16. Office of Operations 2009 Fall Conference How Does Fraud Happen? Motive OpportunityRationalization Motive OpportunityRationalization

17. Office of Operations 2009 Fall ConferenceMotive Motive OpportunityRationalization Motive

18. Office of Operations 2009 Fall Conference Motive Flags High debt High debt Significant financial losses Significant financial losses Excessive alcohol, drugs or gambling Excessive alcohol, drugs or gambling Extramarital affair Extramarital affair Perceived organizational inequities Perceived organizational inequities Job frustration or resentment Job frustration or resentment

19. Office of Operations 2009 Fall Conference Motive Flags Peer group pressures Peer group pressures Fear loss of status Fear loss of status Single parent Single parent College tuition College tuition Sick family member Sick family member

20. Office of Operations 2009 Fall Conference Opportunity Opportunity

21. Opportunity Flags Familiarity with operations Familiarity with operations Ability to override controls Ability to override controls No periodic rotation of key employees No periodic rotation of key employees No uniform personnel policies No uniform personnel policies

22. Office of Operations 2009 Fall Conference Opportunity Flags Not independently verifying delivery or pricing Not independently verifying delivery or pricing Lack of segregation of responsibilities Lack of segregation of responsibilities Organizations with no fraud training program Organizations with no fraud training program Dishonest or dominant management Dishonest or dominant management

23. Office of Operations 2009 Fall Conference Opportunity Flags Management does not emphasize the role of strong internal controls Management does not emphasize the role of strong internal controls Management does not prosecute or punish fraud perpetrators Management does not prosecute or punish fraud perpetrators Lack of independence of the Internal Audit function Lack of independence of the Internal Audit function Operating in crisis mode Operating in crisis mode

24. Office of Operations 2009 Fall Conference Opportunity Flags Close association with vendors Close association with vendors Vendor invoice going anywhere other than accounts payable Vendor invoice going anywhere other than accounts payable No documents to support invoices No documents to support invoices Not independently verifying delivery or pricing Not independently verifying delivery or pricing

25. Office of Operations 2009 Fall Conference Rationalization Rationalization

26. Rationalization Flags They owe me They owe me Im overworked Im overworked I do the work of two people I do the work of two people Theyll never miss it Theyll never miss it Ill just borrow it; Ill pay it back Ill just borrow it; Ill pay it back Im not really hurting anyone Im not really hurting anyone Everyone is a little dishonest Everyone is a little dishonest

27. Office of Operations 2009 Fall Conference Profile of Occupational Fraudster

28. Office of Operations 2009 Fall Conference Race Race Gender Gender Age Age Education Education Criminal History Criminal History Occupation Occupation Tenure Tenure Salary Salary

29. Source: KPMG Profile of a Fraudster Survey 2007 Fraudster Details In 91 percent of profiles the perpetrators did not leave it at one single fraudulent act, but committed repeated acts of fraud.

30. Office of Operations 2009 Fall Conference Fraud Detection

31. Source: 2008 Report to the Nation on Occupational Fraud and Abuse Fraud Detected By:

32. Source: 2008 Report to the Nation on Occupational Fraud & Abuse Source of Tips

33. Office of Operations 2009 Fall ConferenceExercise Invoice Review

34. Office of Operations 2009 Fall Conference Navigating Uncertain Times October 21-22, 2009

35. Office of Operations 2009 Fall Conference Navigating Uncertain Times October 21-22, 2009

36. Office of Operations 2009 Fall Conference

38. Grantee AGrantee B

39. Office of Operations 2009 Fall Conference Grantee AGrantee B

40. Office of Operations 2009 Fall Conference Document Flags Inadequate, copied or apparently altered documents Inadequate, copied or apparently altered documents Homemade or handwritten invoices and/or receipts Homemade or handwritten invoices and/or receipts Similar or same invoice template used by multiple vendors Similar or same invoice template used by multiple vendors

41. Office of Operations 2009 Fall Conference Document Flags PO Box, suite number, mail drop address PO Box, suite number, mail drop address Multiple addresses for a single vendor Multiple addresses for a single vendor No phone number or fake phone number No phone number or fake phone number

42. Office of Operations 2009 Fall Conference Document Flags No TIN No TIN Unknown company name Unknown company name Company name includes initials or personal name Company name includes initials or personal name

43. Office of Operations 2009 Fall Conference Document Flags No letterhead No letterhead Misspellings on document Misspellings on document Vague information Vague information Missing documents or no supporting documentation Missing documents or no supporting documentation

44. Office of Operations 2009 Fall Conference Document Flags Large dollar payments made with cash Large dollar payments made with cash Higher than usual quantities ordered Higher than usual quantities ordered Unusual items ordered Unusual items ordered Unexplained items on reconciliations Unexplained items on reconciliations

45. Office of Operations 2009 Fall Conference Document Flags Sequential, inconsistent, or repeated invoice numbers Sequential, inconsistent, or repeated invoice numbers Invoice figures do not add up Invoice figures do not add up Recurring identical amounts from same vendor Recurring identical amounts from same vendor

46. Office of Operations 2009 Fall Conference Document Flags Round amounts or amounts under approval levels Round amounts or amounts under approval levels Increased amounts to vendor for no apparent reason Increased amounts to vendor for no apparent reason

47. Office of Operations 2009 Fall Conference Document Flags Invoices for desirable/portable items (e.g., laptops, cameras, cell phones) Invoices for desirable/portable items (e.g., laptops, cameras, cell phones) Invoices for items you might find in your home (e.g., table, couch, carpet, air conditioner, microwave, tools) Invoices for items you might find in your home (e.g., table, couch, carpet, air conditioner, microwave, tools)

48. Office of Operations 2009 Fall Conference Document Flags Invoice dates fall outside contract period or spending period Invoice dates fall outside contract period or spending period Items purchased that were not contained in the approved budget Items purchased that were not contained in the approved budget Budget modifications made after the work was performed Budget modifications made after the work was performed

49. Office of Operations 2009 Fall Conference Contracting Flags Restrictive or vague specifications Restrictive or vague specifications Low number of bidders Low number of bidders Regular bidders do not bid Regular bidders do not bid Same vendor(s) repeatedly winning bids Same vendor(s) repeatedly winning bids

50. Office of Operations 2009 Fall Conference Contracting Flags Bids from vendors not on an approved vendor list Bids from vendors not on an approved vendor list Bids/quotes received from the same fax number around the same time Bids/quotes received from the same fax number around the same time Similar letterheads of bidders Similar letterheads of bidders Large difference in bid amounts Large difference in bid amounts

51. Office of Operations 2009 Fall Conference Contracting Flags Unreasonable bid amounts Unreasonable bid amounts Bid amounts slightly below approval levels Bid amounts slightly below approval levels Unable to confirm bids with losing vendors Unable to confirm bids with losing vendors Separate bids for labor and materials Separate bids for labor and materials

52. Office of Operations 2009 Fall Conference Contracting Flags Lowest bidder does not receive award Lowest bidder does not receive award Lack of vendor contact information on bids Lack of vendor contact information on bids Bidders signature is the company name, not an individual Bidders signature is the company name, not an individual Unusual condition of bid document (e.g., cuts, rips, white out) Unusual condition of bid document (e.g., cuts, rips, white out)

53. Office of Operations 2009 Fall Conference Travel Reimbursement Flags High airline prices High airline prices Business or first-class instead of coach Business or first-class instead of coach Plane tickets with matching last names Plane tickets with matching last names Unusual lodging or destination Unusual lodging or destination

54. Office of Operations 2009 Fall Conference Travel Reimbursement Flags Same leave and return times on multiple trips Same leave and return times on multiple trips Consistently over per diem allowances Consistently over per diem allowances Personal-type expenses Personal-type expenses High ranking officials High ranking officials

55. Office of Operations 2009 Fall Conference Credit Card Flags Personal-type purchases Personal-type purchases Shipping address differs from billing address Shipping address differs from billing address No reconciliation of credit card charges No reconciliation of credit card charges Charges to the same vendor Charges to the same vendor

56. Office of Operations 2009 Fall Conference Credit Card Flags Charges made on weekends or around holidays Charges made on weekends or around holidays Charges for the same amount Charges for the same amount Excessive volume of charges Excessive volume of charges For travelers – charges close to home or work For travelers – charges close to home or work

57. Office of Operations 2009 Fall ConferenceExercise Travel Card Charges

58. Office of Operations 2009 Fall Conference Travel Card Example Traveled on day trips from a regional office Traveled on day trips from a regional office 70 charges/month 70 charges/month

59. Office of Operations 2009 Fall Conference Charges by Vendor

60. Office of Operations 2009 Fall Conference Individual Charges

61. Office of Operations 2009 Fall Conference

63. Travel Card Example $8,300 in personal charges $8,300 in personal charges Two felonies – 3rd degree grand larceny and defrauding the government Two felonies – 3rd degree grand larceny and defrauding the government One misdemeanor - official misconduct One misdemeanor - official misconduct

64. Office of Operations 2009 Fall Conference Gas Card Flags Premium gas charges Premium gas charges Regular and diesel gas on the same card Regular and diesel gas on the same card Non-fuel purchases (e.g., cigarettes, beer) Non-fuel purchases (e.g., cigarettes, beer)

65. Office of Operations 2009 Fall Conference Gas Card Flags Gallons purchased exceed gas tank capacity Gallons purchased exceed gas tank capacity No accountability for car mileage No accountability for car mileage No reconciliation of charges No reconciliation of charges

66. Office of Operations 2009 Fall Conference Shell Company Flags You have never heard of this company You have never heard of this company Company receives many small dollar payments Company receives many small dollar payments Company name includes initials or personal name Company name includes initials or personal name Company sells intangible services difficult to confirm Company sells intangible services difficult to confirm

67. Office of Operations 2009 Fall Conference Shell Company Flags No phone number or fake phone number on invoices No phone number or fake phone number on invoices Address is a post office box or suite number Address is a post office box or suite number No receiving reports No receiving reports

68. Office of Operations 2009 Fall Conference Inventory Flags Missing inventory or assets Missing inventory or assets Excess/unnecessary inventory Excess/unnecessary inventory Obsolete inventory Obsolete inventory Unrestricted access to inventory Unrestricted access to inventory Unable to locate purchased items Unable to locate purchased items

69. Office of Operations 2009 Fall Conference Inventory Flags No minimum, maximum or reorder levels for inventory No minimum, maximum or reorder levels for inventory Lack of regular physical inventory counts Lack of regular physical inventory counts Goods different than purchased (e.g., different model or serial numbers) Goods different than purchased (e.g., different model or serial numbers)

70. Office of Operations 2009 Fall Conference Other Flags Unwillingness or unusual delays in providing needed data/information Unwillingness or unusual delays in providing needed data/information Limited access to people Limited access to people Missing data Missing data

71. Office of Operations 2009 Fall Conference Other Flags Managers regularly do subordinate duties Managers regularly do subordinate duties Chronically low morale Chronically low morale Lack of independence in the Internal Audit function Lack of independence in the Internal Audit function

72. Office of Operations 2009 Fall Conference Conflict of Interest Flags Relationships among vendors Relationships among vendors Relationships between vendor(s) and agency staff Relationships between vendor(s) and agency staff Vendors address or identification number matches employees personal information Vendors address or identification number matches employees personal information

73. Office of Operations 2009 Fall Conference Bribes and Kickbacks Flags Unjustified favoritism of a certain vendor Unjustified favoritism of a certain vendor Unexplained increase in wealth of employee Unexplained increase in wealth of employee Close socialization with or acceptance of inappropriate gifts from a vendor Close socialization with or acceptance of inappropriate gifts from a vendor

74. Office of Operations 2009 Fall Conference Professional Skepticism An attitude that includes a questioning mind and critical assessment of information. An attitude that includes a questioning mind and critical assessment of information.

75. Office of Operations 2009 Fall Conference Questioning Mind Why? Why? Show me! Show me!

76. Office of Operations 2009 Fall Conference Critical Assessment of Information Does this make sense? Does this make sense? How can I verify it? How can I verify it?

77. Office of Operations 2009 Fall Conference

78. Questions With Answers Instead of: Instead of: Did you verify that there were 36 items in the box? Did you verify that there were 36 items in the box? Try: Try: How many items are in the box? How many items are in the box?

79. Office of Operations 2009 Fall Conference Why dont people report their suspicions?

80. Office of Operations 2009 Fall Conference What If You Suspect Fraud? Supervisor Supervisor Internal Auditor Internal Auditor State Comptroller State Comptroller (888)OSC-4555 (888)OSC-4555 State Inspector General State Inspector General (800)DO-RIGHT (800)DO-RIGHT

81. Office of Operations 2009 Fall Conference Report Detailed Information Describe the alleged wrongdoing Describe the alleged wrongdoing Identify when the alleged wrongdoing started and if its still occurring Identify when the alleged wrongdoing started and if its still occurring Identify who may be involved Identify who may be involved Identify other potential witnesses or victims Identify other potential witnesses or victims

82. Office of Operations 2009 Fall Conference Report Detailed Information Identify who you may have already notified (i.e., supervisor or other agency/personnel or law enforcement) Identify who you may have already notified (i.e., supervisor or other agency/personnel or law enforcement) Describe what evidence is available and where it can be found Describe what evidence is available and where it can be found Identify what laws or agency regulations have been violated, if known Identify what laws or agency regulations have been violated, if known

83. Source: 2006 Report to the Nation on Occupational Fraud and Abuse Encourage Fraud Reporting Conduct anti-fraud training Conduct anti-fraud training Maintain open lines of communication among employees and management to bring questionable conduct to light Maintain open lines of communication among employees and management to bring questionable conduct to light Establish consequences for those that have committed fraud Establish consequences for those that have committed fraud

84. Office of Operations 2009 Fall Conference Navigating Uncertain Times October 21-22, 2009QUESTIONS