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Chapter 13 Corruption & The Human Factor. Critical Thinking Exercise A woman had two sons who were born on the same hour of the same day of the same year,

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Presentation on theme: "Chapter 13 Corruption & The Human Factor. Critical Thinking Exercise A woman had two sons who were born on the same hour of the same day of the same year,"— Presentation transcript:

1 Chapter 13 Corruption & The Human Factor

2 Critical Thinking Exercise A woman had two sons who were born on the same hour of the same day of the same year, but they were not twins. How could this be?

3 Why is This Furniture Falling Apart? Waste, fraud and abuse in General Services Administration (GSA) Furniture manufacturer churned out $200 million worth of defective and useless goods GSA didn’t investigate despite years of complaints from customers – Complaints were ignored or rebuffed

4 Corruption Schemes Intent to give some advantage inconsistent with official duty and the rights of others 4 classifications of corruption schemes – Bribery – Illegal gratuities – Economic extortion – Conflicts of interest

5 Bribery Something of value offered to influence business decision or official act Under-the-table payments for the exercise of influence over a business decision Just offering a payment can constitute as a bribe 2 broad categories of bribery schemes – Kickbacks – Bid-rigging schemes

6 Kickback Schemes Submission of invoices for goods and services that are either overpriced or fictitious – Involve collusion between employers and vendors Almost always attack purchasing function of the victim company Diverting business to vendors – Directing excess business to a vendor – Ensure steady stream of business Vendor is no longer subject to economic pressures

7 Kickback Schemes Overbilling schemes – Kickback schemes often begin as overbilling schemes – Vendor submits inflated invoices to victim company – Overstate cost of goods or services or reflect fictitious sales – Employees with approval authority – Fraudsters lacking approval authority – Other kickback schemes Slush funds

8 Kickback Schemes Preventing and detecting kickback schemes – Separate purchasing, authorization, receiving and storing goods, and cash disbursements duties – Maintenance of updated vendor list – Review and match all support in disbursement vouchers – Routinely monitor prices paid for goods and services – Monitor trends in the costs of goods and serviced purchased – Establish price thresholds for material purchases – Track purchase levels by vendor – Check quality of goods delivered – Compare actual expenditures to budgeted amounts – Review organization buying patterns – “Right-to-audit” clause – Establish written policies prohibiting acceptance of gifts or favors

9 Bid-Rigging Schemes “Inside influence” Competitive bidding process Categorized based on the stage in which fraudster exerts his influence – Pre-solicitation phase – Solicitation phase – Submission phase

10 Bid-Rigging Schemes The pre-solicitation phase – Need recognition schemes Employee of buyer recognizes a “need” for a particular product or service Victim company purchases unnecessary goods or services – Specifications schemes Fraudulent tailoring of specifications to a particular vendor “Prequalification” procedures Sole-source or noncompetitive procurement justifications Deliberate writing of vague specifications Bid splitting View specifications earlier than competitors

11 Bid-Rigging Schemes The solicitation phase – Restriction of the pool of competitors – Bid pooling – Fictitious suppliers – Other methods Restricting time for submitting bids Solicit bids in obscure publications The submission phase – Sealed-bid process View competitors bids before submission Information on how to prepare their bid

12 Bid-Rigging Schemes Preventing and detecting bid-rigging schemes – Monitor price trends – Change orders or amendments – Very large, unexplained price differences among bidders – Patterns within bidding process Last bidder always wins Repeatedly winning by narrow margin Predictable rotation of bid winners – Losing bidders appear as subcontractors – Bids from fictitious suppliers – Qualified bidders fail to submit contract proposals – Split large projects into several smaller jobs

13 Something of Value Several ways for a vendor to “pay” an employee to aid the vendor’s cause – Money – Slush funds – “Consulting fees” or “referral commissions” – Promises of future employment – Promise of part ownership – Liquor, meals, free travel, cars, and sexual favors – Transfer of property – Paying off corrupt employee’s loans or bills – Offering of loans on very favorable terms

14 Illegal Gratuities Similar to bribery schemes – there is not necessarily intent to influence a particular business decision Example – City commissioner accepted free international vacation after conclusion of deal

15 Conflicts of Interest Undisclosed economic or personal interest in a transaction that adversely affects the company Employee must have employment interest in the vendor that submits the invoice Majority of conflict schemes fit into 2 categories – Purchasing schemes – Sales schemes

16 Purchasing Schemes Mechanics of billing scheme, conflict or fraudulent disbursement, do not change Fraudsters also engage in bid rigging on behalf of their own companies Not all conflict schemes occur in the traditional vendor–buyer relationship Turnaround sales – Employee purchases asset then resells it to employer at an inflated price

17 Sales Schemes 2 types of conflict schemes associated with victim company’s sales – Under-billings Sell goods or services below fair market value to vendor with a hidden interest Diminished profit margin – Writing off sales Tamper with victim company’s books to write off amount owed by an employee’s business Delay billing

18 Other Conflicts of Interest Schemes Business diversions – Siphon employers clients for own business – Steer potential clients away from employer Resource diversions – Divert funds of their employers to the development of their own business Financial disclosures – Management obligation to disclose fraud committed by employees in positions of trust – Inadequate disclosure can be among the most serious of frauds

19 Conflicts of Interest Preventing and detecting conflicts of interest – Specifically address conflict of interest illegalities in company ethics policy – Annual financial disclosure statement – Communication with employees regarding their other business interests – Establish anonymous reporting mechanism to receive tips and complaints – Periodically run comparisons between vendor and employee addresses and phone numbers

20 Proactive Computer Audit Tests for Detecting Corruption See details in text

21 The Human Factor Establish clear and reasonable antifraud standards Human failings lead trusted people to violate trust No one factor alone will deter occupational fraud Greed Wages in kind Unreasonable expectations

22 Understanding Fraud Deterrence Prevention – Removing the root causes of the problem Deterrence – Modification of behavior through the perception of negative sanctions Fraud offenders are easier to deter than run- of-the-mill street criminals – Fraud offenders are very deliberate – Fraud offenders’ conduct can be more easily modified

23 The Impact of Controls Accountants and auditors expect controls to do too much Many controls have nothing to do with fraud Some controls are only indirectly related Controls are only part of the answer to fraud deterrence

24 The Perception of Detection Employees who perceive that they will be caught engaging in occupational fraud and abuse are less likely to commit it Deal with occupational fraud and abuse in an open forum If not handled correctly, it can cause more problems than it solves

25 The Perception of Detection 6 steps to increase perception of detection – Employee education – Proactive fraud policies – A higher stance – Increased use of analytical review – Surprise audits where feasible – Adequate reporting programs

26 Fraudster’s Perspective The art of spinning – Sell people hope – Make excuses as long as you can – “Take responsibility” but shift blame – Accept underlying facts as true but rationalize your actions – When you can’t defend your actions, attack the messenger – Always show your kindness by doing favors – Publicize good deeds – Build strong base of support – Take “high road”, have surrogates do “dirty work” – When you can no longer spin, shut up – Have selective memory under oath – Keep friends close and enemies closer – If under investigation always say you will “cooperate”


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