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Government Funds: An ATM For Thieves Association of Government Accountants Inland Empire Chapter February 10, 2010.

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Presentation on theme: "Government Funds: An ATM For Thieves Association of Government Accountants Inland Empire Chapter February 10, 2010."— Presentation transcript:

1 Government Funds: An ATM For Thieves Association of Government Accountants Inland Empire Chapter February 10, 2010

2 There is no kind of dishonesty into which otherwise good people more easily and frequently fall than that of defrauding the government. Benjamin Franklin

3 Government Funds: An ATM For Thieves? Headlines Federal Offices of Inspector General – A Progress Report to the President

4 Federal Offices of Inspector General $18.6 billion in potential dollar savings $14.2 billion for audit recommendations $4.4 billion for investigative recoveries 6,600 indictments 6,900 prosecutions 5,000 suspensions or debarments 338,000 hotline complaints processed

5 Objectives Attitude & Awareness Some Reasons We Miss Fraud Proactive Strategies

6 Attitude & Awareness

7 Women More Likely To Embezzle More than 60% of embezzlement cases involved women. Men embezzled nearly twice as much as women. Two-thirds committed by accounting and finance workers. Over 40% caused by people between ages of 40 and 49.

8 Women More Likely To Embezzle Average loss more than $1 million. Average scheme lasted 4 ½ years before detected. Primary motivating factor was gambling. Most embezzlers had no prior criminal history.

9 Women More Likely To Embezzle California and Florida experienced greatest losses Private largest loss -- $31 million. Government / nonprofit largest loss -- $8.5 million.

10 The Fraud Triangle Motive RationalizationOpportunity

11 Motives Increase in Down Economy Unbearable financial pressure – a need for money. Unbearable is different for different people: Id really like to have that new convertible. Im way over my head in debt and I cant bear the humiliation of declaring bankruptcy. I like to gamble, I keep losing, but I know my luck will change soon. If I dont come up with $15,000 for the operation, my loved one will die.

12 Would you commit a felony to pay for needed surgery for your child? Yes – 97 percent

13 Would you commit a felony to pay for needed surgery for your spouse? Yes – 42 percent

14 Opportunities Increase in Down Economy Every internal control weakness creates an opportunity for fraud to occur. Segregation of duties continues to be the number one enemy. Collusion can overcome almost all controls and can impede most generally accepted auditing procedures and techniques.

15 Rationalization Easier in Down Economy I deserve it – Im underpaid. I worked overtime but didnt paid for it. I should have been promoted by now. Im not hurting anyone. Everyone else is doing it. Im just borrowing the funds.

16 Why does the government write checks first and ask questions later? -- U.S. Senator

17 Pay and Chase Most organizations focus on providing financial assistance and services, and paying vendors. Place little priority on proactively ensuring that adequate controls are in place to reduce fraud. Organizations tend to pay and chase fraudsters. Most organizations rely on reactive measures to address fraud.

18 Pay and Chase

19 Recovery Act Repaving airport runway that serves 18 flights a week Build underground wildlife road crossing for turtles in Florida Purchase freezer for fish sperm Steam clean bird droppings from a building

20 Recovery Act Repair roof of fast-food franchise on a military base Repair and rehabilitate the White Houses East Wing Provide loans to a ski resort, gas station, and luxury spa and inn Refinance a Rite Aid

21 Tracking Your Taxes $19.6 billion 10,160 projects in 12 appropriations bills 142 anonymous projects: $6.4 billion $88 million: C-40 aircraft $70 million: C-37B aircraft

22 Tracking Your Taxes $12 million:monitor sea turtles and monk seals $5.0 million:supercomputer to help study planets and fruit flies $4.5 million:wood utilization research $2.2 million:Center for Grape Genetics $1.8 million:honey bee lab

23 Tracking Your Taxes $1.6 million:mobile music lab $1.0 million:a trolley museum $866,000:stabilize fly control $800,000:oyster rehabilitation

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25 TANF Program TANF (Temporary Assistance for Needy Families) Provide cash assistance, job training and family counseling for Native Americans throughout Riverside and Los Angeles Counties 2002 – 2008: $123 million (federal/state funds)

26 TANF Program Purchased 45 cars $55,000 in undocumented credit card expenditures Leased apartment for personal residence No competitive bidding $5 million in adjusting entries

27 TANF Program $3 million charged to participate services – only $450,000 of services had supporting documentation Tribal Chair person awarded $64,000 consulting contract 25% increase in salaries $20,000 pay raise within 90 days of hiring No job descriptions or performance reviews

28 Stockton Family Indicted for Food Stamp Fraud Supplemental Nutrition Assistance Program (SNAP) – no more booklet of tear-out coupons, now use plastic cards. Family used its small convenience store, Smoke Shop & Snack, as a front to purchase food stamps at 50 cents on the dollar – committing more than $2 million in food stamp fraud. Stores food stamp redemptions far exceeded its food sales. In 2008 (three quarters), store reported $6,818 in food sales; however, redeemed $718,056 in food stamp benefits.

29 University Staffer Charged With Stealing $409K John Runowicz, 47, an administrator for New York University. Responsible for managing chemistry lab resources, including budgetary matters, expense reimbursements, and supply requests. Submitted requests for petty cash by attaching discarded liquor store receipts to reimbursement request forms. Claimed expenses were for departmental purchases and other functions. Scheme involved more than 13,000 receipts from September 2003 until January 2009.

30 Unnecessary Dental Services Performed FORBA Holdings LLC, a dental management company that provides business management and administrative services to 69 clinics nationwide know as Small Smiles Centers. Agreed to pay $24 million to resolve fraud allegations. Submitted Medicaid claims for wide range of dental services provided to low-income children that were either medically unnecessary or did not meet professional standards. Dental services included performing baby root canals, placing crowns, administering anesthesia, performing extractions, and providing filings.

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38 Physical Therapist Pleads Guilty Jessica Vigil, a licensed physical therapist, created fictitious therapy files, appearing to document physical and occupational therapy services provided to Medicare beneficiaries, but no services were provided. Vigil was paid between $80 and $100 by the owners of the home health company for each form she signed – paid more than $127,000. Signed documents used to justify $2.4 million in home health claims. Vigil either never saw the patients or the home health services were medically unnecessary.

39 DME Company Owners Sentenced to Prison Husband/wife billed Medicare $950,000 and were paid $600,000 for medically unnecessary power wheelchairs and wheelchair accessories. Beneficiaries were promised vitamins, diabetic shoes and other items they never received in return for providing their Medicare numbers. Many beneficiaries did not know they were getting a power wheelchair until it was delivered. All of beneficiaries didnt need or use the wheelchairs.

40 The Electric Wheelchair $5,000 Billed at least 1,000 times ($5 million) for same wheelchair

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42 Defense Dept. $640 toilet seat cover $435 hammer $409 sink $350 ball bearing $76 screw $1,000,000 flat washer

43 The $1,000,000 Flat Washer Small hardware components, plumbing fixtures, and electronic equipment Company submitted electronic bids via computer Invoices – cost of the items plus shipping costs

44 The $1,000,000 Flat Washer

45 Shipping ItemsValue Costs Flat Washer (2)$.19 $998,798 Cotter Pins (10)$ 1.99 $499,569 Elbow Pipe (1)$ 8.75 $445,640 Machine Thread Plug (1)$10.99 $492,096 Machine Screw (6)$ 9.99 $403,436 Split Washer (1)$.89 $293,451

46 Iraq / Katrina Fraud and Waste

47 Iraq Fraud and Waste In a 13-month period, the Federal Reserve Bank in New York sent nearly $12 billion in cash – mainly in $100 bills – to Iraq. The Federal Reserve packed 281 million individual bills – including more than 107 million $100 bills – onto wooden pallets. The cash weighed more than 363 tons and was flown to Baghdad on C-130 cargo planes. One shipment totaled $2.4 billion – the largest shipment of cash in the banks history.

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50 Iraq Fraud and Waste Cash payments were made from the back of a pickup truck, and cash was stored in unguarded sacks in Iraqi ministry offices. One contractor received a $2 million payment in a duffel bag stuffed with shrink-wrapped bundles of currency. One official was given $6.75 million in cash, and was ordered to spend it in one week before the interim Iraqi government took control of Iraqi funds.

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52 Iraq Fraud and Waste Much of the money was used to pay the salaries for ghost employees. At one ministry, 8,206 employees were on the payroll, but only 602 could be validated. At another site, 1,471 employees were on the payroll, but only 642 could be validated. The state-run Iraqi Airways had 2,400 employees on the payroll when the airline should have had a staff of 400 or fewer.

53 Katrina Fraud and Waste The Government Accountability Office (GAO) has referred more than 22,000 potential cases of fraud to the Katrina Task Force. More than 840 people have been charged in federal cases in 42 judicial districts – from Florida to Oregon – and the District of Columbia.

54 Katrina Fraud and Waste The federal government did not: –Validate the identity of the registrant, the physical location of the damaged address, and ownership and occupancy of all registrants at the time of registration. –Put in place procedures to instruct disaster recipients to provide actual street addresses of damaged property when claiming disaster assistance. –Require hotels to collect registration numbers and social security numbers from residents staying in government-paid for rooms.

55 Katrina Fraud and Waste Approximately $17 million paid in rental assistance to individuals whom already received free housing through trailers or apartments. Approximately $5.3 million paid to people who gave only post office boxes as their address. –$2,358 to someone who claimed a damaged house in a New Orleans cemetery. –$4,358 to someone who listed his residence as a UPS store.

56 Katrina Fraud and Waste More than 1,000 people used names and social security numbers of inmates in prison along the Gulf Coast and across the country. –$4,358 paid to a Mississippi prisoner who gave officials his correct mailing address – at the prison where he had been locked up since One person received 26 payments totaling $139,000 using 13 different social security numbers and 13 addresses (8 did not exist).

57 Katrina Fraud and Waste People received reimbursements for rent at the same time they were being paid to stay in hotels. –$8,000 paid to someone to stay in a California hotel for 5 months and also sent that person $6,700 in rental assistance for the same period. Persons home was in North Carolina. –Person received a 70-day stay in Hawaii hotel ($8,000) and also received $2,358 in rental assistance. Person never lived in New Orleans.

58 Katrina Fraud and Waste System edits were installed to identify and prevent duplicate payments. Nearly $20 million in potentially improper and/or fraudulent payments went to over 7,000 individuals who registered for both hurricanes Katrina and Rita assistance using the same property. Edits were turned off to increase the speed of distributing disaster assistance.

59 Katrina Fraud and Waste Proper accountability was not established for debit cards. –Actual number of cards distributed were not reconciled with the number of cards for which payment was made. –Sufficient guidance was not issued on the proper use of debit cards. Auditors reported that [t]he general attitude is that the Emergency Response Operation justifies non-compliance with the internal control standards.

60 Katrina Fraud and Waste Questionable Use of Debit Cards VendorTransactionAmount JewelzDiamond jewelry$3,700 Vacation ExpressCaribbean vacation 2,200 Lesea BroadcastingDonations to charity 2,000 New Orleans Saints5 Football tickets 2,000 Mark LipkinDivorce lawyer services 1,000 LegendsGentlemans club 600 The Pleasure ZoneAdult erotica products 400 HootersAlcoholic beverages 300 GGW VideoGirls Gone Wild videos 300 Alamo FireworksFireworks 300

61 Some Reasons We Miss Fraud

62 Strong personalities create difficulties – avoid conflict with people Not questioning the strange, odd and curious (willful blindness) Accept answers on face value (blind trust) Lack of skepticism – never taught and not in personality

63 Watch What They Say The balance sheet is strong. The third quarter is looking great. Our stock is an incredible bargain at current prices. -- CEO Ken Lay, Enron

64 Watch What They Say In todays regulatory environment, its virtually impossible to violate rules. -- Bernard Madoff Oct. 20, 2007

65 Some Reasons We Miss Fraud Checklists – try to get tasks done versus seeing if things make sense from a broader perspective The process mentality Never taught about fraud in school – only technical issues Warning signs not recognized or adequately addressed

66 Think Fraud To Find Fraud Fraud and stupid can look just a like More of a mind-set – focus on exceptions, oddities, accounting irregularities, and patterns of conduct Learned primarily from experience – not textbooks If the fraud doesnt look like something youve seen before (in training or the real world), you may have trouble spotting it Must think like a thief

67 Think Fraud To Find Fraud If you arent looking for fraud or dont believe it exists, you probably wont find it. If you dont want to find it, you probably wont.

68 Proactive Strategies

69 Strategies For Minimizing Workplace Fraud Tone at the Top Ethics Code Fraud Hotline Audit Function

70 Strategies For Minimizing Workplace Fraud New-Hire Screening New-Hire Orientation Ethics Helpline Employee Survey Due Diligence Reviews Fraud Policy Fraud Risk Assessment Fraud Awareness Training Properly Handle Investigations Leverage Technology

71 Invoices and/or checks with same dollar amounts Invoices with same dollar amounts, date, and invoice number Checks paid on sequential dates Sequential invoice dates

72 Leverage Technology Checks paid between $24,000 and $25,000 Checks paid between $90,000 and $100,000 Checks less than $1,000 on same day or sequential days Vendors with more than 1 payment on same day

73 Leverage Technology Vendors with no activity for more than 6 months Purchase order date after invoice date Multiple invoices for same vendor on same date Recurring identical amounts for same vendor

74 Leverage Technology Number of purchases a day/week by vendor Vendors with only cell phone number Vendors with P.O. Box or Apt. addresses Keyword emergency

75 Leverage Technology Vendors and employees with the same address (34 instances) Checks issued before invoice dates (45 instances) Vendors with no activity for a 2-year period (1,800 instances)

76 Leverage Technology Checks with no payee addresses (130 instances) Sequential invoice numbers from the same vendors (1,000 instances) Multiple invoices from the same vendor on the same date (4,500 instances)

77 Leverage Technology Missing check numbers (8,300 instances) Recurring identical amounts for the same vendors (630 instances, ranging from 2 to 78 instances) Checks processed on Saturdays or Sundays (2,100 instances)

78 Summary Attitude & Awareness Some Reasons We Miss Fraud Proactive Strategies

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80 Contact Information Don Mullinax Shareholder Forensic/Strategic Solutions, PC 2272 Colorado Blvd., Suite 1347 Los Angeles, CA (office) (cell)


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