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Fraud in Higher Education - Update AACUBO October 2011.

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Presentation on theme: "Fraud in Higher Education - Update AACUBO October 2011."— Presentation transcript:

1 Fraud in Higher Education - Update AACUBO October 2011

2 Acknowledgements 2008 Fraud Examiners Manual, Association of Certified Fraud Examiners 2010 Report to the Nations on Occupational Fraud and Abuse, Association of Certified Fraud Examiners ACFE CPE Course Workbook: Fraud Related Internal Controls: Complying with Sarbanes Oxley and SAS 99 Black’s Law Dictionary Financial Investigation and Forensic Accounting, George A. Manning, CFE, EA Corporate Fraud Handbook, Joseph T. Wells Executive Roadmap to Fraud Prevention and Internal Controls, Martin T. Biegelman & Joel T. Bartow Fraud Auditing and Forensic Accounting, Singleton, Singleton, Bologna, & Lindquist CPA Expert, AICPA Newsletter, Winter 2009 Fraud Magazine; ACFE. Vol. 26, No. 5 September/October p.23 University Business; July/August 2011, pp Who is the typical fraudster?, KPMG David Bosserman, PhD, CPA, CFE Kathy Elliott, MBA, CPA, CFE Angie Welch, CPA, CFE, CFF, CICA

3 An Audit vs A Fraud Investigation Define Fraud Fraud Theory Fraud Schemes (Education Industry) In the News The Fraudster Fraud Prevention & Deterrence Resources

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5 An Audit Versus a Fraud Examination GAAS Audit – Recurring – Key Elements: Tailored Audit Program Materiality Evaluate Internal Controls Audit Tests & Evidence Cost Estimable – Result is an Opinion on Financial Statements Fraud Examination – Non-Recurring (Based on Predication) – Key Elements: No Roadmap Custom Procedures Hypothesis Interviews Chain of Evidence Cost Difficult to Estimate – Result is a Possible Report to the Board, Management, or Authorities CPA Expert, AICPA Newsletter, Winter 2009

6 An Audit Versus a Fraud Examination Cont. Auditors are required to approach audits with professional skepticism. Fraud examiners approach the resolution of a fraud examination by attempting to establish sufficient proof to support or refute an allegation of fraud. CPA Expert, AICPA Newsletter, Winter 2009

7 Definition of Fraud “... all multifarious means which human ingenuity can devise, and which are resorted to by one individual to get advantage over another by false suggestions or by suppression of the truth, and includes all surprise, trick, cunning or dissembling, and any unfair way by which another is cheated.” Black’s Law Dictionary

8 Occupational Fraud “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets” Corporate Fraud Handbook, Joseph T. Wells

9 Fraud Triangle Developed by Dr. Donald R. Cressey Perceived Opportunity Pressure Rationalization

10 In the Words of the Perpetrator… Before – Oh, what a tangled web we weave when first we practice to deceive – But once we’ve practiced for awhile, Oh my, how we’ve improved our style! After – I remember sitting in your office ashamed, hopeless, afraid, and grieving over the pain my selfish decisions had caused to my coworkers, my employer, my family, and myself…

11 Victim of 90 Occupational Fraud Cases 2010 ACFE Report to the Nations on Occupational Fraud & Abuse © 2010

12 Occupational Fraud Schemes in the Education Industry Type of Scheme% - Education Industry% - All Cases Corruption24.4%21.9% Fraudulent Statements 1.1% 4.3% Cash on Hand 7.8%11.5% Cash Larceny12.2% 9.6% Skimming21.1%16.2% Non-Cash12.2%15.7% Billing42.2%27.6% Check Tampering 7.8%16.9% Expense Reimbursement 16.7%15.1% Payroll10.0%10.6% Register Disbursement0.0% 2.4% Note – The sum of percentages exceeds 100% because some cases involved multiple schemes from more than one category ACFE Report to the Nations on Occupational Fraud & Abuse © 2010

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15 Fraud by Department 80.4% of Cases 95% of ALL Losses

16 Perpetrator’s Position: 42.1% Employee 41.0% Manager 16.9% Owner/Executive Gender of Perpetrator: 66.7% Male 33.3% Female Age of Perpetrator: 5.2% Under % % % % % % % % Over 60 Tenure of Perpetrator: 5.7% Less than 1 year 45.7% 1 – 5 years 23.2% 6 – 10 years 25.4% More than 10 years Education of Perpetrator: 28.8% High School 17.1% Some College 38.0% College 14.0% Postgraduate Perpetrator’s Employment Background: 82.4% Never Punished or Terminated 9.5% Previously Terminated 8.1% Previously Punished Perpetrator’s Criminal Background: 85.7% Never Charged or Convicted 6.7% Prior Convictions 7.7% Charged but Not Convicted 2010 ACFE Report to the Nations on Occupational Fraud and Abuse

17 Behavioral Red Flags Financial difficulties Living beyond means Divorce / family problems Control issues, unwilling to share duties Wheeler-dealer attitude Unusually close association w/ vendor Irritability, suspiciousness, or defensiveness Past employment-related problems Addiction problems Past legal problems Refusal to take vacations Complaining about inadequate pay Instability in life circumstances Excessive pressure from within organization Excessive family / peer pressure for success Complaining about lack of authority 2010 ACFE Report to the Nations on Occupational Fraud and Abuse

18 Protecting the Organization – Internal Controls – Risk Assessments – Tone at the Top (and Tone at the Middle) – Reporting Procedures – Heighten Awareness – Move from being reactive to being proactive – Monitor, Monitor, Monitor, Monitor, Monitor… What is Fraud Deterrence?

19 What is Fraud Prevention? Fraud prevention requires a system of rules, which in their aggregate, minimize the likelihood of fraud occurring while maximizing the possibility of detecting any fraudulent activity that may transpire Fraud Examiners Manual, ACFE

20 The biggest deterrence to fraud is… the perception of detection.

21 2008 Fraud Examiners Manual, ACFE Most experts agree that it is much easier to prevent fraud than to detect fraud.

22 Internal Controls Modified or Implemented in Response to Fraud Increased Segregation of Duties61.2% Management Review of Internal Controls50.6% Surprise Audits22.5% Fraud Training for Employees16.4% Fraud Training for Managers / Executives14.8% Job Rotation / Mandatory Vacation13.5% Internal Audit / Fraud Examiner Department12.3% Anti-Fraud Policy11.7% Code of Conduct 8.7% External Audit of Financial Statements 8.7% Hotline 7.9% External Audit of ICOFR 7.8% Independent Audit Committee 6.0% Management Certification of F/S 5.9% Reward for Whistleblowers 4.0% Employee Support Programs 1.8% Note – Totals more than 100% as some organizations instituted more than one form of change to their control structure Report to the Nations on Occupational Fraud & Abuse © 2010

23 Initial Detection of Occupational Fraud – Tips40.2% – Management Review15.4% – Internal Audit13.9% – Accident 8.3% – Account Reconciliation 6.1% – Document Examination 5.2% – External Audit 4.6% – Surveillance/Monitoring 2.6% – Police Notification 1.8% – Confession 1.0% – IT Controls.8% The sum of percentages in this chart exceeds 100% because in some cases respondents identified more than one detection method ACFE Report to the Nations on Occupational Fraud & Abuse © 2010

24 Source of Tips – Employees49.2% – Customers17.8% – Anonymous13.4% – Vendor12.1% – Shareholder /Owner 3.7% – Competitor 2.5% – Perp’s Acquaintance 1.8% 2010 ACFE Report to the Nations on Occupational Fraud & Abuse © %

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26 Duration Based on Anti-Fraud Control ControlControl Percent In PlaceNot In PlaceReduction Management Review12 mos.24 mos.50.0% Internal Audit/Fraud Exam Dept.14 mos.24 mos.41.7% External Audit of ICOFR15 mos.24 mos.37.5% Code of Conduct15 mos.24 mos.37.5% Surprise Audits12 mos.19 mos.36.8% Hotline13 mos.20 mos.35.0% Mgmt Certification of F/S15 mos.23 mos.34.8% Rewards for Whistleblowers12 mos.18 mos.33.3% Job Rotation/Mandatory Vacation12 mos.18 mos.33.3% External Audit of F/S16 mos.24 mos.33.3% Anti-Fraud Policy13 mos.18 mos.27.8% Fraud Training for Employees13 mos.18 mos.27.8% Fraud Training for Mgrs/Execs13 mos.18 mos.27.8% Independent Audit Committee15 mos.20 mos.25.0% Employee Support Program15 mos.18 mos.16.7% 2010 ACFE Report to the Nations on Occupational Fraud & Abuse © 2010

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34 Original: Altered:

35 Do you need to order a fake receipt?

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37 InvestigativeTeam Human Resources Contact in Area of Fraud Manager of Financial Info Expert in the AreaLegal CounselSpecial InvestigatorIT SecurityFraud Examiner

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39 Resources ACFE (www.acfe.com) AICPA (www.aicpa.org) Managing the Business Risk of Fraud: A Practical Guide (IIA, AICPA, ACFE) 2010 ACFE Report to the Nations on Occupational Fraud & Abuse 2010 ACFE Report to the Nations on Occupational Fraud & Abuse

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41 Contact Information: Brenna Dixon, CPA, CFE, CFF, CICA (405) Fiscal and Administrative Compliance 306 Whitehurst


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