Presentation on theme: "November 30th 2012, San Francisco"— Presentation transcript:
1November 30th 2012, San Francisco SF IIA Fall Seminar Internal Audit's Role in the Changing Business LandscapeNovember 30th 2012, San Francisco
2Agenda 7:45 -8:15 am Registration and Breakfast 8:15 -8:20 am Welcome and IntroductionsEd Byers, (Deloitte),Farhan Zahid, (Deloitte)8:20 -9:00 am Emerging Hot IssuesSecurity and Privacy – Husam Brohi, Michael Corey (PWC)Vendor Compliance – Byron Tatsumi, (KPMG)09:00 -09:50 am Leveraging Data Analytics to Enhance Your Internal Audit Function Dawei Qu, (BlueShield of California), Dale Livezey (Deloitte)9:50 -10:10 am BREAK10:10 -11:30 am Enterprise Risk Management and Impact to Your Audit PlanCAE Panel Discussion led by Shawn Kirshner (Accretive Solutions)
3Agenda11:30 -12:20 pm Risks in Social Media Anna Tchernina, Willis Kao (Deloitte) 12:20 -1:20 pm GOURMET LUNCH (provided) 1:20 -2:10 pm Fraud Risk Management – The Things You Need To Know Paul Ritchie, (Deloitte) 2:10 – 3:00 pm Top 10 IT Internal Audit Risks Michael Juergens (Deloitte) 3:00 – 3:20 pm BREAK 3:20 – 4:40 pm Understanding Your Auditee – How to Communicate More Effectively Group Setting Howie Cumme (URS) Ed Byers, (Deloitte) Farhan Zahid (Deloitte)
4Welcome SF IIA Fall Seminar Chair Ed Byers, (Deloitte)Farhan Zahid, (Deloitte)
5Rules of the Road Logistics – Fire Exits and Restrooms Breaks and LunchPhone callsQuestions and Answers
608:20 – 09:00 Various Presenters Emerging Hot Issues08:20 – 09:00Various Presenters
7Emerging Hot Issues 08:20 – 08:40 Security and Privacy Husam Brohi, PWCMichael Corey, PWC08:40 – 09: Vendor ComplianceByron Tatsumi, KPMG
8Fortifying your defenses The role of internal audit in assuring data security and privacy
9CEOs/Boards are no longer ignoring Information and Technology (I&T) Risks I&T Risk is an enterprise-wide issue. Specific types of risks organizations are facing include:Connected IT infrastructure exists in an environment that is increasingly under threat against unauthorized access or disclosure of sensitive data and attacks originating from cyber-criminal groups and hackers.Increase in Privacy and Security regulatory mandates in recent years, as well as expected changes in upcoming years.Boards are no longer willing to accept the risk that technology can pose to the business.Growing demand by business leaders to understand how security integrates with privacy (“what” data is sensitive to the business) and security (“how” they protect the data deemed sensitive).Increase in threats and vulnerabilities to sensitive data and corporate assets.Businesses continue to struggle to maintain accountability to their stakeholders and establish effective strategies and standards for security risk management and privacy control activities.
10Change and Complexity is Right Around the Corner Security and Privacy Hot Topics: Balancing Business Enablers vs Business RisksPrivacy and Data Loss PreventionOrganizations looking to improve privacy management in the event of a breach have to continually plan and prepare.Mobility and Social MediaMobile platforms, social media, and accelerated product life cycles are just the latest contributors to risk of an enterprise.Regulatory ComplianceOrganizations in all industries are under increased scrutiny by regulatory governance bodies.Technical threats and vulnerabilitiesCompanies need to stay informed about the constantly changing threat environment, processes to identify potential vulnerabilities, and processes to resolve potential exposures.Third Parties and Cloud ComputingWhile risks associated with third parties and cloud computing continue to increase, many companies are less prepared to defend their data.Cyber CrimeThe cyber threat landscape continues to yield an increasingly sophisticated underworld of criminals. Companies need to remain prepared for such cyber crises.
11Stakeholders want focus in all critical risk areas Risk areas in which stakeholders and CAEs want/plan to add IA capabilitiesThere is a continued desire to add resources in critical risk areas. Virtually no one wants IA to reduce resources in any of these areas.Good alignment.Interesting that data security and privacy continues to be an area where resources will be added. Although an area of significant focus in recent years, there still appears to be a need or desire to add resources. Perhaps it’s because of the complexity or the pace of change in this area but we also see a danger here of misallocating resources.
12Acting today to protect data: The critical role of internal audit What the audit committee should expect of internal auditStrengthen the Annual Risk Assessment to be relevantIn the risk assessment report that it presents to the audit committee, internal audit should highlight the organization’s significant data security and privacy risks, including any new risks. Further, it should identify weaknesses in policies and controls.1Having the right peopleBecause the nature of information security risks is evolving continuously, internal audit functions need to stay ahead of the threat curve. stay plugged in to emerging security threats, and practices for protecting against them.2Given that data security and privacy breaches can cost a company dearly in financial losses and market reputation, the firm’s board of directors will want to stay on top of these risks. Keeping the audit committee apprised of emerging risks and effective ways to address them is a key role of internal audit.Stay vigilant on key or triggering eventsInternal audit’s role in ensuring that information security threats are properly considered becomes especially important when a company is ready to roll out a new business process, product or information system.Internal Audit must also keep its ear to the ground and move quickly to conduct special audits for new information security threats, which some executives consider as important as regularly scheduled audits3
13Overcoming the barriers to internal audit playing an effective role Effective data privacy and security measures are not easy to effect. In fact, we commonly find four barriers in organizations that try to adopt them.A mindset that believes adequatecontrols are already in place.1Exposures are changing constantly,policies and controls need to changealongside them.Cost. Achieving and maintainingeffective information security cancost significant money and effort.2Implement cost/benefit analysis in risk assessment to assesses potential damage of various types of security breach.Low expectations. Internal Audit not viewed as capable of assessing complex security and privacy topics.3Hiring & training staff to be top of their game in this arena and/or outsourcing as needed to experts that have technical skillsFragmented responsibilities. The job of maintaining effective information security controls is often split among many stakeholdersEstablish responsibility and accountability. Define and assign a single point of responsibility for information security.4
14Thank you… For more information, please contact: Michael Corey Husam Brohi
20Benefits of Analyzing Data Data Analytics can help in many aspects of business process testingAssist in root cause analysisTest Validity and accuracy of reportsTarget and assess specific risk areasIdentify control weakness / effectiveness gapsOverall more effectivecontrol testingservices for our clientsMore efficient and effective manual testingData analysis improves the quality, effectiveness and efficiency of auditsPerforms 100% recalculations and verification of transactions in a timely and repeatable fashionCompares data from multiple / disparate systemsProvides business insights and identifies process improvement opportunitiesPresents quantifiable results from analysis based on complete population
21Benefits of Analyzing Data ApproachBenefitProfiling and trendingFocus on specific areas of risk or interestProvide insights into transactional history and behaviorTest internal controls effectivenessIdentify hidden relationships between people, organizations and eventsCustomized transactional analysisGeared towards a clients specific business processReduction in manual testing proceduresPerform proactive instead of reactive auditsIdentify potentially improper or fraudulent transactionsStatistical Sample selection and evaluationMore efficient and accurate selection proceduresReduces time spent on selections of little or no interestAnalyze the full population of transactions instead of a traditional sampling approachFocus on risk!Report re-performance and metric recalculationValidate operational reporting systems and assist in the documentation of current reporting processReduce manual testing proceduresNOTESThe IIA Exposure Draft says that technology improves management’s ability to detect fraud. While many internal audit departments use data analysis in their audits, few use it to its full potential and could benefit by learning additional techniques.We will take a few minutes to discuss each of these.First, integrating data analytics into the internal audit approach allows the internal auditor to analyze all the transactions. You are able to run tests on the full population instead of examining a small sample. This makes it more likely that you will detect anomalies and allows you to focus your time and attention on understanding the transactions that are higher risk. For example, instead of selecting 20 entries posted by the fixed asset accountant that are likely to be monthly depreciation expense, you might identify that the CFO posted one large entry at month-end that credit depreciation expense. Isn’t that entry more important to look at?Second, let’s consider hidden relationships between people, organizations and events. When we say people, we mean employees of the company in the same or different departments, various levels of management, or in different locations. We also mean relationships between employees of the company and employees of customers, vendors, government agencies and others. Relationships between organizations include joint ventures, guarantors/guarantees, lenders/borrowers, vendors/customers, etc.Events refer to the sequence of events. For example, is a large cash withdrawal followed by a face to face meeting between a procurement officer and a vendor? Does a payables clerk buy a large new house after a round of layoffs that resulted in her getting additional system access rights?Third, data analysis can help you identify potentially improper transactions.Data analysis can result in a large number of false positives. One useful way of identifying the transactions that are most likely to be fraudulent is to run tests that look at the data in different ways and then combine the results. For example, if you were testing for ghost employees, you might run tests that look for employees with no social security number, no withholdings for 401k or medical benefits, salaried employees in departments that typically have hourly employees, multiple employees with bank accounts in common, etc. While the test for no withholdings is likely to have results, if employees identified on that test also lack social security numbers and have bank accounts in common with other employees, you should focus your attention on these employees because they are more likely to really be ghost employees.Fourth, data analysis can help you assess internal controls. They are very useful for reviewing segregation of duties. For example, you could look for people whose access rights allow them to both create and post a journal entry. Or people who have administrator rights but really should not. Later in this course you will learn how to run these tests. You would take the results of the segregation of duties tests to understand what these employees were able to do in the system. The next step would be to find out whether they used the inappropriate rights to perpetrate any fraud.Finally, data analysis can help an internal audit department perform proactive audits. The longer a fraud is perpetrated before it is detected, the larger it is likely to become. Thus, identifying fraud in its infancy can save a company a lot of money.When an internal audit department uses data analysis to look for red flags of fraud, it increases its effectiveness. A best practice is to use continuous monitoring techniques to look for potential errors and fraud. This is impossible to do well without effective automated procedures, especially in a large company. Of course, the internal audit department needs to plan to follow-up on red flags and be willing to allocate appropriate resources.
23Computer Aided AuditAd-Hoc Query: One time based specific analytic query or analysis at a point of time.No intention of repetitive testingExplorative and investigativeRepetitive: Periodic analysis of processes from multiple data resourcesPeriodicalSeek to improve the efficiency , consistency, and quality of auditsAd-hoc Query Example:One time query on journal entry posted by a suspicious userOne time query to search for suspicious vendors base on certain criteriaRepetitive Example:Revenue recalculationDuplicate journal entry identificationJournal entries posted by unauthorized users23
24Continuous AuditDefinition: The independent application of automated tools to provide assurance on financial, compliance, strategic and operational data within a company. Nature:AutomatedContinuous basis – Specified intervalsConstantly search for errors, fraud and inefficienciesAdvanced analytic tool involved: SAS and ACL3) Example:Automated A/P reviewAutomated J/E reviewOperational process reviewAnalysis of the data may be performed hourly, daily, weekly, monthly, etc. depending on the need.Continuous auditing is often confused with computer-aided auditing. The purpose and scope of the two techniques, however, are quite different. Computer-aided auditing employs end user technology including spreadsheet software, such as Microsoft Excel, to allow traditional auditors to run audit-specific analyses as they conduct the periodic audit. Continuous auditing, on the other hand, involves advanced analytical tools that automate a majority of the auditing plan. Where auditors manually extract data and run their own analyses in computer-aided auditing during the course of their traditional audit, high-powered servers automatically extract and analyze data at specified intervals as a part of continuous auditing.Internal Focus: To assure the integrity of transactions. Ex. A/P analysis. Claims denials audit.2) External Disclosure Increased frequency on disclosure will drive the nature of the audit process. Ex. Journal Entry Analysis3) Law and Regulations: To ensure compliance to the law and regulations. Ex. Medicare fraud audit. Preventive Care Audit.4) Technology related: Data integrity and quality assurance.24
25What are Companies Doing? 25% have CA programs in 2009, compared to 11% in 2006 *Benefits listed by survey participants :Auditors are aware of issues as they occur100 percent of the population rather than a sample is evaluatedAllow to create preventive controls for process owners3) Challenges listed by survey participants:Implementation takes longAuditors need to have detailed knowledge of the underlying data structures to use the tool correctlyAuditors and business owners have to the determine parameters used in the CA programNote: Statistic is based on IIA surveyAnalysis of the data may be performed hourly, daily, weekly, monthly, etc. depending on the need.Continuous auditing is often confused with computer-aided auditing. The purpose and scope of the two techniques, however, are quite different. Computer-aided auditing employs end user technology including spreadsheet software, such as Microsoft Excel, to allow traditional auditors to run audit-specific analyses as they conduct the periodic audit. Continuous auditing, on the other hand, involves advanced analytical tools that automate a majority of the auditing plan. Where auditors manually extract data and run their own analyses in computer-aided auditing during the course of their traditional audit, high-powered servers automatically extract and analyze data at specified intervals as a part of continuous auditing.Able to quickly identify irregularities including fraudulent transactions25
26Case Study 1 – SAS Medical Claims Denials Analytics Note: Numbers or findings have no meaning beyond being placeholders for the given example
27Steps Audit Planning Data Readiness Data Analysis Risk based Sampling Substantive TestingCommunication of Results27
28Audit Planning Establish Testing Period: Jan to June of 2012 Determine Scope: all medical claims denied from Jan to June of 2012Determine Frequency: quarterly4) Define Audit Objective: Ensure claims were appropriately denied as per provider contract, member benefit and regulation5) Select Audit Methodology:Perform data analysis to identify high risk denial areasPerform risk based sampling and substantive testing6) Know your Deliverables:An excel based deck to present data analysis resultsAn audit report to communicate findings of substantive testing28
29Data Readiness Request Data: Pull data directly from corporate data martsWork with IT to extract relative dataData ReconciliationControl totalKey fields (numeric fields) tie-outData Quality TestDuplicate recordsMissing values of key fieldsInvalid value of key fields. For example, billed date of 01/32/2012; negative co-pay/deductable amount29
30Data Analysis StepsResearch the relative areas of high risks by partnering with business ownersMeasurement of compliance risk: system days per claimMeasurement of operational risk:locations per claimdenial ratio at provider levelMeasurement of financial risk: billed amount /claimDesign the profiling tests in relation to specific risksDetermine the list of testsMap test to risk(s)Develop testing routines in SASReview the data analysis results with business owners30
31Data Analysis – Profiling Tests Population overviewTrend analysis of denial rateTrend analysis of system dateDollar stratificationLocation count stratificationProfiling of providers (hospitals)Profiling of explanation of benefit (EOB) codes31
33Population OverviewThe average billed amount for denied claims is significant higher than paid claimsDenied claims take longer to process compared to paid claimDenied claims go through more locations to complete33
34Trend Analysis – Denial Rate Facility (hospital) denial rate is significantly higher compared to overall averageDenial rate in May 2012 is high driven by the higher denial rate of facility claims34
35Trend Analysis – System Day Manual claims take longer by the processing system to reject or pay.Correlation exists between denial rate and manual system days in MayMay population is worth to look into35
36Stratification Dollar Stratification Stratification on location Yellow strata subjects to risk based sampling while purple might need drill downAuditors may design strata according to relative limit approval controls36
37Profiling on Hospitals The denial rate for top providers is significantly high compared the average (20%)Provider #2 has a high denial rate in MayHospitals #1, #2 and #5 are trending up on denial rate37
38Profiling on Explanation of Benefit 11% blank EOB is notedThis break-out can be compared against the industry benchmark to analyze the space of improvement38
40Risk Based Sampling - Selections Risk score is calculated for each claimTotal risk score is the sum of risk weight for each failed / hit profiling testsSamples were selected from the claims with higher risk scoresAuditors professional judgment plays an important role on finalizing samplesAverage number of risks tested per sample is 5.5640
41Communication of Findings During the data analysis, Internal Audit noted that 11% denied claims do nothave explanation of benefit (EOB) codes. This was a result of an incorrect fieldmapping between the claims processing system and Claims data mart.Finding 2:During the data analysis and the subsequent detail testing, Internal Audit notedthat the denial rate for hospital #2 in May is significant higher than other periodsand other hospitals. This was a result of an insufficient communication on thechanged provider contracts.BenefitIncrease testing coverage – full population reviewIncrease testing frequencyEstablish an ongoing reusable automated testing routinesDecrease samples size - More effective and efficient manual testing on selectionsDetect control deficiencies and fraud “red flags” timelyTrack and escalate exceptions for rapid remediationTarget to high risk areasAdd value to the business41
43Agenda Purpose and Scope Roles and Responsibilities Project Snapshot Final Assessment
44Purpose and Scope Account Payable FCPA Expenses Internal Audit engaged Deloitte to help proof of conceptAccount PayableFCPAExpensesDeloitte understands that the Company’s objectives for this engagement are:Assist with developing ACL scripts, to serve as queries for use by limited members of various business units, as part of routine management oversight.Obtain results of profiling analytics specifically on procurement and expense data provided by the Company.Execute sample profiling scripts, as a test case, to assist with FCPA (Foreign Corrupt Privacy Act) related controls.Assess the applicability of scripts executed, and determination of additional scripts to be considered for future development in the Procurement Cycle.
45Project Snapshot Accounts Payable– List of Analytics performed Vendor Analyses:Vendor Master CheckValid Vendor AnalysisVendors with PO Box AddressesDuplicate Vendor AnalysisOne Time VendorInvoice Analyses:Duplicate InvoicesPayment Date vs. Invoice Date AnalysisBenford AnalysisDisbursement Analyses:Payments to Vendors not in Vendor Master or Unauthorized/RestrictedPayee Name / Vendor Name MismatchDuplicate Disbursements
50Project Snapshot Expense Report – List of Analytics performed Line items flagged as “Policy Violation”Expense booked in advance of the actual expense date.Flight within US above $500Hotels above $1000Group Meals above $50Duplicate Analysis 1 – Combination of Expense date, Expense line amount, Expense type, Employee name and Expense report numberDuplicate Analysis 2 – Combination of Expense date, Expense line amount, Expense type and Employee nameMissing Expense ReceiptExpense over WeekendsExpense over Holidays
51Project Snapshot Analytics - Flight within US above $500 Expense Report – Continued….Analytics - Flight within US above $500
52Project Snapshot Analytics – Duplicate Line Items Expense Report – Continued….Analytics – Duplicate Line Items
53Project SnapshotExpense Report – Continued….Analytics – Expenses booked in advance of the actual expense date
54Project Snapshot FCPA Analytics– List of Analytics performed Keyword search – Invoice line descriptionKeyword search – Expense line descriptionPayment Date vs. Invoice Date Analysis – Run as part of the AP Analytics
55Project Snapshot Analytics – Keyword search – Expense line just FCPA – Continued….Analytics – Keyword search – Expense line justDennis
60Enterprise Risk Management and Impact to Your Audit Plan 10:10 – 11:30CAE Panel Discussionled by Shawn Kirshner (Accretive Solutions)
61Panel Members Janet Chapman Cindy Overmyer Thierry Dessange Pat Sammon General Auditor, Union BankCindy OvermyerSVP, Internal Audit Services, Kaiser PermanenteThierry DessangeDirector, IT Audit, SafewayPat SammonHead of Audit & Advisory Services, AutodeskKathy GuthormsenDirector of Risk Management, Autodesk
62Risks in Social Media Social media usage and risks 11:30 – 12:20Willis Kao, (Deloitte)Anna Tchernina (Deloitte)
63Speaking with you today Willis Kao, Senior ManagerSan JoseAnna Tchernina, Senior ManagerSan Francisco
64Agenda Welcome to the world of social business Social media risks deep diveSocial media governance and risk managementLessons learned from auditsQuestions
65Social Media Revolution Video http://www. youtube. com/watch
67Welcome to the world of social business! People matter mostTransparent marketsReal-time expectationsPervasive, mobile, cloud computingBig data and invaluable analyticsConnected customers & ecosystemCross-boundary collaboration6767
68Are you smarter than a 5th Grader? Do you use (personally) Facebook? LinkedIn? Twitter?Does your Company use - Facebook? LinkedIn? Twitter?Does your Company have a Social Media Policy?Are your employees allowed to use Social Media?6868
69Social Media IncludesWikis, Social Networks, Blogs, Presence & Microblogging, Online Sharing of Videos & Media, and Social Bookmarking & Tagging.69
70Social Media DefinedSocial media is an umbrella term for a host of sites and technology that facilitate social interaction, sharing, and creation of user-generated content, and aggregation of users’ opinions and recommendations. Common forms of social mediaSocial mediaDescriptionPopular examplesWikisA page or site designed to enable collaborative contribution and modification of content by usersBlogsShort for web log; frequent online publications with commentary on current events, subjects, or one’s personal thoughtsSocial networkingSite focused on building online communities, establishing connections, and providing avenues for social interactionPresence and MicrobloggingBrief real-time updates of personal commentary, news, or status (aka “Tweets”)Online photo and video sharingMedia-centric online communities that facilitate the viewing, sharing, and “tagging,” or classification, of media contentOnline forums and/review sitesWebsites/Tools that allow users to search for peer reviews or advice on a product or service, as well as to contribute their own ratings and comments7070
71Social media benefits Social media challenges 11GenerateProspects and Leads(Sales)Decrease time to market for new productsIncrease marketing effectivenessDevelop new revenue opportunitiesLeverage “interest” based marketing & advertisingLoss of ControlThe voice of the customer is amplifiedCompanies no longer control the message or topicMessages might include negative publicity22Decrease CostsDecrease R&D costs for new products by listening to your customers (and prospects)Focus on inexpensive social media tools instead of using the traditional expensive marketing channelsDecrease customer support costsInconsistent messageWhen engaging several employees in the social media world, their messages and responses may not always be consistent and aligned with the strategy of the company33Increase LoyaltyIncrease customer insights and intelligence (“Voice of Customer”)Improve customer experience responsivenessImprove customer education, expertise and serviceDirect contact with the customer instead of indirect through the retail channelsConfidential InformationThe use of social media sites enables users to circumvent company controls, opening up the potential to violate communication policiesEducation and training for employees is a key component to managing loss of information44ManageBrand ReputationIncrease brand awareness through social mediaProtect brand and manage reputationBenefit from spontaneous reactions from the community by connecting like-minded peersProductivity lossSocial media drives collaboration among co-workers but can also be a major distraction in the work place
72Key departments affected Advertising departmentsSales and Marketing staffCompliance professionalsInternal AuditRisk ManagementLegal departmentsOperations and IT staffRecruiting/HRCustomer serviceSenior Management72
74Social Media Risk Landscape Social Media usage presents behavioral, application and technology related risks. The risk landscape is vast and continuously evolvingAnticipated RisksLegal & regulatory complianceDisclosure of confidential informationViolation of copyright lawsProtection of intellectual property rightsLegal and financial ramifications for non-compliance with industry regulationsSecurity & PrivacyIdentity theft, Social engineeringAbility to retain and log social media communication; data retentionTechnical exploits: Malware, Viruses/Worms, Flash Vulnerabilities, XML injectionBrand and reputation damagePosting unfavorable or confidential information on a public siteUnclear behavioral expectation of end users to use social mediaDefamation, Copyright infringementProductivity lossUse of social media can be a distraction i.e. employees accessing non-work related social media sitesAcceptable use of social media74
75Social Media Risk Deep Dive Malware and virusesData leakage/theft“Owned” systems (zombies)System downtimeResources required to clean systemsBrand hijackingCustomer backlash/adverse legal actionsExposure of customer informationReputational damageTargeted phishing attacks on customers or employeesLack of control over contentEnterprise’s loss of control/legal rights of information posted to thesocial media sitesCustomer service dissatisfactionCustomer dissatisfaction with the responsiveness received in this arena, leading to potential reputational damage for the enterprise and customer retention issues.75
76Social Media Risk Deep Dive – Continued Record retention non-complianceRegulatory sanctions and finesAdverse legal actionsOther threats and vulnerabilities….Use of personal accounts to communicate work-related informationEmployee posting of pictures or information that link them to the enterpriseExcessive employee use of social media in the workplaceEmployee access to social media via enterprise-supplied mobiledevices76
78Social Media Governance and Risk Management Strategy:Review the social media strategy, program goals, and organization model and assess whether these have been formalized and communicated to all relevant teams.Evaluate the alignment of the strategy with company goals.Policy:Review the social media policy and confirm that elements related to disclosure, ethics, community and privacy are included.Identify gaps and test awareness of the policy.Roadmap:Assess the adequacy of the social media roadmap, including whether it is global, or localized and whether short-term and long-term program milestones have been defined.Team Structure:Assess whether the roles of key owners and stakeholders in the social media program have been defined and clearly communicated (e.g. executive sponsorship, communications / PR, employees, Legal, IT, etc).
79Preparedness and Response Customer Profiles and Market Analyses:Review customer profile and market analyses and evaluate whether all products are covered, the appropriate target customers have been identified, including the desired relationship and engagement model.Tools and Analytics:Understand how customer interactions via social media are integrated with existing systems and databases.Assess whether formal alerting tools have been implemented to identify key topics, comments, commentators, and sentiment from website activity.Evaluate KPIs and metrics against best practices and alignment of metrics with the social media strategy.Processes:Test the policies and procedures that have been implemented to ensure that messaging is consistent with the social media strategy / planReview and test policies, processes and procedures used for triage, crisis response, intake and response to customer insights.Understand how customer insights are monitored, tracked, and shared with relevant teams (product marketing, R&D, Support, etc) for resolution.
80Training and Education / Compliance Evaluate the types of training programs implemented to share best practices and rules of the road within the social media teamUnderstand how social media best practices are shared cross functionally with other functions in the organization, such as recruiting, sales, product, etc.Monitoring and Compliance:Understand whether compliance with the social media policy is monitored both internally and externallyPerform procedures to test compliance with the social media policy internally and externally
85Fraud Risk Management: The Things You Need To Know 1:20 – 2:10Paul Ritchie, Deloitte
86Agenda What is Fraud and Why is it an Important Concern? The Profile of a FraudsterFraud Risk Assessment, Schemes and Red FlagsResponding to Indicators of Fraud
87What is Fraud and Why is it an Important Concern?
88What is Fraud? As defined by the Institute of Internal Auditors: “Any illegal acts characterized by deceit, concealment or violation of trust. These acts are not dependent upon the application of threat of violence or of physical force. Frauds are perpetrated by parties and organizations to obtain money, property or services; to avoid payment or loss of services; or to secure personal or business advantage.”
89Types of FraudInternal: illegal acts of employees, managers and executives against the companyExternal: illegal acts of outsiders (non-employees) against a companyThe activity:Is clandestineViolates the perpetrator’s fiduciary duties to the victim organizationIs committed for the purpose of direct or indirect financial benefit to the perpetratorCosts the employing organization assets, revenue or reserves
90Occupational Frauds by Category - Frequency • Asset misappropriation schemes, in which anemployee steals or misuses the organization’sresources (e.g., theft of company cash, falsebilling schemes or inflated expense reports)• Corruption schemes, in which an employeemisuses his or her influence in a business transaction in a way that violates his or her duty to theemployer in order to gain a direct or indirectbenefit (e.g., schemes involving bribery orconflicts of interest)• Financial statement fraud schemes, in which anemployee intentionally causes a misstatement oromission of material information in the organization’s financial reports (e.g., recording fictitiousrevenues, understating reported expenses orartificially inflating reported assets)Source: ACFE 2012 Report to the Nation on Occupational Fraud and Abuse.
91Occupational Frauds by Category – Median Loss Source: ACFE 2012 Report to the Nation on Occupational Fraud and Abuse.
92Fraud Across Industries Source: ACFE 2012 Report to the Nation on Occupational Fraud and Abuse.
93Corruption Across Industries Source: ACFE 2012 Report to the Nation on Occupational Fraud and Abuse.
94Initial Detection of Occupational Frauds Source: ACFE 2012 Report to the Nation on Occupational Fraud and Abuse.
95Why Do Companies Need to Manage Fraud Risk? Legal duty of care to shareholdersStatutory/regulatory requirements (SOX, SEC, FCPA, and Federal Sentencing Guidelines)Direct financial impact to the organizationIndirect costs to the organization
96XYZ Company Profit margin = 10% Economics of FraudA $250,000 fraud loss . . .500,0001,000,0001,500,0002,000,0002,500,000Fraud LossRevenue. . . will require an additional $2.5 million in revenue to maintain net income levelsXYZ Company Profit margin = 10%
98The Fraudster – Which Department? Statistics from the 2012 ACFE Report to the Nation on Fraud
99The Fraudster – How Old?Statistics from the 2012 ACFE Report to the Nation on Fraud
100Typical Fraudster – On the Surface Long-time employeePosition of trustAppears to be extremely dedicatedUnexplained cash or other wealthAlways willing to help out and put in extra hours
101Typical Fraudster – Beneath the Surface GamblerDrug or alcohol problemBehavioral changesExtramarital affairsHostility to managementGeneral disenchantment with compensation
102The Fraudster – Educational Background Statistics from the 2012 ACFE Report to the Nation on Fraud
103The Fraudster – Effects of Tenure Direct correlation between length of time employed and size of fraud lossesEmployees with 10 or more years of tenure caused median fraud losses of $229,000Employees with less than one year of tenure caused median fraud losses of $25,000Statistics from the 2012 ACFE Report to the Nation on Fraud
104The Fraudster – Effects Of Gender Male perpetrators accounted for 65% of cases with median fraud losses of $200,000Female perpetrators accounted for 35% of cases with median fraud losses of $91,000Statistics from the 2012 ACFE Report to the Nation on Fraud
105The “10-80-10” Rule 80% of the Population: Might engage in illegal conduct.10% of the Population: Deviants and always on the lookout to cheat, steal, etc. (regardless of profession).10% of the Population:Would never engage in illegal conduct.You have all no doubt heard of the fraud triangle-
106Attaching false time frames. Taking advantage of perceived fears. The Fraudster – How do they Attempt to Fool, Distract and Undermine an Auditor?Overloading.Attaching false time frames.Taking advantage of perceived fears.Killing time with trivia.Exploiting expected scopes.Exploiting historically low-risk areas.Exploiting complex areas.Predicting cycle audits.Stalling.Making staff unavailable.Filtering of information.Not updating procedures.Discrediting the auditor.Statistics from the 2012 ACFE Report to the Nation on Fraud
107How to Address Maintain an attitude of professional skepticism Investigate what does not make senseIf it seems to good to be true, it usually is – trust your instinctsBeware of trust over reasonAvoid placing faith in other people’s faithVerify and corroborateGood interviewing and observation skills are keyLook for signs of deceptive behaviorDo not ignore information or dataReconciliations – so bad
109Internal Audit Plan The plan should be: Dynamic/Flexible. Comprehensive/Complete.It integrates fraud risk assessment, appropriate cycle rotations, and management insight.It directs resources to areas with highest risk.Reconciliations -
110Fraud Risk Assessment Approach 2. Identify Possible Fraud Schemes and Scenarios1. Evaluate Fraud Risk Factors4. Evaluate Fraud Risk Assessment Results and Prioritize Residual Fraud Risks3. Analyze Fraud Risks and Schemes and Evaluate Mitigating ControlsReconciliations -
111Design Tests to Identify Fraud Reconciliations -Color By Numbers ApproachCreativity and Thought Approach
112What Are The Hallmarks Of An Effective FRA? Is systematic and recurring.Is dynamic and is updated when new or unique circumstances arise (e.g., changed operating environments, restructurings, acquisitions), at least annually.Is performed with the involvement of appropriate personnel.Considers possible internal and external fraud schemes and scenarios.Considers management override (e.g., journal entries, bias of estimates, non-routine transactions).Assesses risk at organization-wide, significant business unit, and significant account levels.Consider historical fraud or industry fraud risks.Results are monitored by the Audit Committee/Board.Reconciliations -
113Indicators in Practical Use Where is the potential for fraud (according to interview results and survey responses)Areas where fraud has been detectedManual and complex processes.Timing to register transactionsProcess involving cash managementUnclear – who reviews and who approvesLack of controls – or knowledge of proceduresReconciliations -
114Valuable Soft Skills for an Internal Auditor Think like a fraudster.Facilitate a control self assessment.Use information gathering techniques.Communicate and build rapport.All segments of an audit are connected.Use an unpredictable and flexible audit approach.Perform and understand data analytics.Don’t lead the interviewee.Pay attention to the details.Reconciliations -
118Deceptive Behaviors – Verbal Changing Speech PatternsRepeating QuestionsSelective MemoryMaking ExcusesRepetition of OathsAnswering with a QuestionCharacter TestimonyOveruse of RespectReconciliations -
120Internal Auditor Proficiency Standard Internal auditors must have sufficient knowledge to evaluate the risk of fraud and the manner in which it is managed by the organization, but are not expected to have the expertise of a person whose primary responsibility is detecting and investigating fraud.Source: The Institute of Internal Auditors International Standards for the Professional Practice of Internal Auditing (www.theiia.org)
121When Does an Internal Audit Become a Fraud Investigation? Expand sample, expand scope, or perform additional procedures. Look for additional instances or patterns.Ask additional questions framed in the context of the internal audit (e.g., how could a situation like this occur?).Maintain copies of documents and data files that support the red flags and symptoms of fraud.When possible, maintain originals of documents.Any indication of potential perpetrators?Cease audit work if there appears to be a predication for suspecting fraud.
122Forensic Accounting vs. Financial Audit Forensic InvestigationAuditMindsetAll cases may end in litigationProfessional SkepticismFrequencyNon-recurring; randomRecurring; scheduledApproachNo management planning sessionLimited notificationMeet with management to plan and scope the auditRelationshipPotentially adversarialProfessional skepticismScopeDocument examination of particular issue;Review of outside data, interviews of potential persons of interest.Analysis of financial statements and/or other financial data;Interviews with management.Work ProgramsPrograms developed and amended as neededAudit programs“Employer”Client’s Attorney, In-House Counsel, Special CommitteeAudit Committee/Client ManagementObjectiveIdentify responsible parties;Quantify damagesIssue an opinion on the client’s financial statements and related disclosuresReport AudienceReport is presented to counselOpinions used by Board of Directors/Audit Committee/Shareholders/Public
123Benefits of a Fraud Response Plan Standardized response.Consistent approach.Clarified roles and responsibilities.Internal and external reporting responsibilities.Process for consensus and agreement.
125Top Ten Emerging IT Audit Issues 2:10 – 3:00pmMichael JuergensDeloitte & Touche LLP
126OverviewIT controls continue to increase in importance to organizationsCorporate reliance on technology increasesCompliance requirements increaseDeficiencies in IT controls can have a significant impact on the organization
128Top 10 IT audit issues By no means a comprehensive list Will vary by environmentMay be greater/lesser risk depending on industry, technology, business processes etc.This list is based on what we see in the marketplaceDesigned to get you thinking about your environments and if currently scheduled IT audit procedures will evaluate these risksList is in no particular order
1291. Omnichannel Commerce Issue Traditional “bricks and mortar” channels are merging with e-commerce channels to create a single integrated approach to sales.RiskFailure to evolve could impact long term enterprise viabilityWill change sales approach and systemsLarge integration and master data concernsRecommendationUnderstand current and planned changes to sales channels. Determine impact on systems, specific transactions processed, accounts impacted, and master data. Evaluate risk and then plan and execute audit procedures accordingly.
1302. Cyber Security Reporting IssueAs of October 2011, the SEC now requires public companies to disclose the risk of cyber incidents as part of Management’s Discussion and Analysis if "these issues are among the most significant factors that make an investment in the company speculative or risky."RiskFailure to comply with SEC reporting requirementsExposure to potential shareholder litigation if requirement not metAudit Committee exposureRecommendationChallenge is that the reporting requirement lacks specificity. Organizations must determine what to report, if anything. Therefore, organizations must have a process for identifying exposures, evaluating impact, and then reporting and disclosing appropriately. IT audit should perform an assessment of this process to determine if it exists, and how comprehensive it is. Additional steps should be taken to evaluate how effective the process is.
1313. Software Asset Management IssueSoftware licensing contracts are complicated, and software lifecycles are complex. Economic downturn has caused software vendors to aggressively pursue licensing audits.RiskPotential significant financial liabilities in case of an auditLoss of potential savingsFailure to “sunset” unused applicationsRecommendationPerform a software asset management (SAM) audit. Consider use of International Organization for Standardization (ISO) and Information Technology Information Library (ITIL) SAM standards. Audit should include evaluating the process for SAM, review of contracts and software license baselines, and analysis of non-essential software and patch deployment.
1324. Payment Processing Issue Emerging methods of payment processing (ISIS, GoogleWallet, PayPal).RiskFailure to adopt impacts potential revenueImpact on revenue cycle processes, systems and controlsRecommendationDetermine what changes are planned or underway to adopting new payment processing technologies. Determine impact on financial systems and processes (e.g. sales audit). Evaluate integration management. Identify new security and controls considerations and execute audit steps accordingly.
1335. Hyper-Hybrid Cloud Issue Adoption of heterogeneous cloud solutions creates significant issues with management and integration of processes and data, as well as leads to the need for deployment of additional management solutions.RiskMaster data proliferation and managementDisparate cloud solutions impact business processesSecurity management becomes much more complex e.g. Security Assertion Markup Language (SAML), OpenIDNeed for effective service lifecycle management increasesRecommendationUnderstand current and planned cloud services grid, and specific business control points, integration and workflow. Understand security management strategy, and deployment of new technologies/standards. Determine process and data risk and identify/test controls. Evaluate Service Organization Control (SOC) reports for vendors.
1346. Data Lifecycle Management (DLM) Issue2011 saw the emergence of new regulations and legislation for records management and data retention. Regulators have significantly increased their scrutiny of the data lifecycle space.RiskLarge potential financial penalties for non-complianceImpact on brandImpact on customers and vendorsRecommendationGain an understanding of how DLM is operationalized throughout the organization, DLM awareness levels and how DLM compliance is achieved. Evaluate the organization’s DLM capability maturity and identify compliance gaps related to the DLM governance structure, policies, processes and procedures
1357. End User Computing (EUC) IssueSignificant increase in evaluation of spreadsheets and other end user computing solutions by auditors and regulators. Additional regulations promulgated (e.g. Solvency II). Uncontrolled EUCs still impacting financial statements and business operations.RiskLoss of critical dataPotentially inaccurate financial or management reportingExposure to regulatory sanctions or finesRecommendationPerform an extensive EUC audit. Evaluate criteria such as criticality determination, governance model, and use of technical accelerators. Audits should also evaluate programming structure. A policy-based audit and/or access based audit is likely insufficient.
1368. IT GovernanceIssueIT Governance continues to play a large role in aligning the proliferation and use of technology with organizational objectives. Also, Institute of Internal Auditors (IIA) Standard 2210.A2 states: “The internal audit activity must assess whether the information technology governance of the organization sustains and supports the organization’s strategies and objectives.RiskNoncompliance with IIA standardsPotential misalignment of IT resources with organization strategyRecommendationAssess capabilities across IT governance capabilities: Strategic Alignment, Risk Management, Value Delivery, Performance Management and Resource Management. Establish a baseline of understanding regarding current capabilities and maturity level of IT governance processes.
1379. Digital Identity Issue Deployment of emerging technologies and unification of internal/external systems creates significant identity sprawl, and difficulties managing across platforms, applications and networks. To be efficient and compliant, federated identities are emerging. Our IT access audits and analysis are becoming more reliant on review-based controls.RiskUnauthorized access to data or transactionsRegulatory fines or litigationBrand impactRecommendationUnderstand corporate security perspective on identity management. Inventory systems, devices and technologies currently deployed or planned (consider external sources as well). Evaluate strategy and technical solutions for managing digital identity. Perform a detailed audit of critical technologies and controls.
13810. Product Duplication Issue Proliferation of cheap 3D printing technology makes it possible to easily duplicate certain consumer productsRiskLoss of sales, market shareImpact on brandRecommendationUnderstand current product mix; identify products susceptible to duplication (small, higher value items are typical). Understand security and controls around schematics. Peruse pirate sites to identify proliferation of schematics. Consult with loss prevention teams to understand approach to managing remote duplication.
139SummaryNeed to understand which items may be relevant in your business and technical environmentEnsure that risk assessment and audit universe address relevant itemsDon’t walk the plank alone – communicate with management and the audit committeePlan resource requirementsBe careful not to underestimate
142This presentation contains general information only and Deloitte & Touche LLP is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.
148First Impressions How many seconds to form a first impression? 1/10th of second, 7 seconds, 12 secondsAll the correlations between judgments made after a 1/10-second glimpse and judgments made without time constraints were high, but of all the traits, trustworthiness was the one with the highest correlation.
149How the Mind Works Neomammalian Paleomammalian Reptilian Emotional LogicalComplex,CertainEmotionalAttachment,UncertaintyPrimalHealth/StatusNeomammalianPaleomammalianReptilian
150First ImpressionsYou need to cater to the brain in the order it evolved Primal, Emotional and then LogicalHealth and Appearance - PrimalBehavior and Body Language - PrimalWarmth and Introductions – EmotionalPersonality, Professionalism and Preparation - Logical
151Personality Analysis – Intro to DISC Key to effective communication is to understand the style or method of communication desired by the auditeeThe auditee’s behavior style is key!Ineffective communication typically results when an auditor communicates in THEIR style vs. the AUDITEES desired style
152DISC ProfileThe DISC profile is a simple tool to understand your behavior style and how to best work with others (e.g. SPOUSE!)No behavior style is right/wrong – the key is to understand how to communicate effectively with others
153Steps to filling out the DISC Profile Select a word that MOST describes you and a word that LEAST describes youPut an M/L next to the word – DO NOT put a big “X” for example in the MOST/LEAST columnUse a coin to gently rub the rectangle after the word in the MOST/LEAST columnsTally up the results in the tally box on page 5Fill out graphs I, II, and III
154Understanding the DISC Profile Each style has its strengths, weaknesses, and needs – a weakness is an “overextension” of a style’s strengthThere are typically key success factors in communicating to different stylesUnderstanding how to “match styles” is important – “evolve” if necessaryGood questions to ask different stylesNote: refer to handouts which overviews these four areas
155DISC Discussion Points How do you communicate if you are presenting to two different styles (e.g. D & C)Do not assume that all executives are “D’s” and all auditors are “C’s”How can you assess a person’s behavior style by looking at their office (or other factors)What have you learnt about yourself?Key potential next steps
156Building Trust Friendliness/Rapport Flow of Conversation – Comfort WarmthConnectionAssertivenessFlow of Conversation – ComfortProfessionalism and preparednessReassurance/Implications
157Getting The Truth Fear of the consequences Focus on what you need to knowProfessional reassurance – rationalism, unbiasedHow to know if you are always getting the truth?Sweaty palms?Hesitation?Avoidance of eye contact?
158LiesTough to tell the difference between lies and an honest person under stressIndicators of lying:Level of detail being providedTone of voice, unusual body languageInconsistency when changing viewpointsConcealment of anger, distress or fearLifting just the inner part of the eyebrow (Distress>85%)Eyebrows raised and pulled together (Fear)Narrowed, tightened lips or lopsided smile (Anger)No absolute clues to lying, only indicators.
159Navigating Politics Is it always possible? Internal and external politics affecting the meetingPressures in the room. Possibility of one on one time?Ask questions again when necessary to each individual
160Wrapping Up “Leave the door open” Follow up within 24 hours Be genuine and smileFinish with something memorable and relaxed