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IAS Conference « Finding the frontier for internal audit » 13 October 2009 Amongst topics to be discussed in this conference, two are more linked to OLAF.

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Presentation on theme: "IAS Conference « Finding the frontier for internal audit » 13 October 2009 Amongst topics to be discussed in this conference, two are more linked to OLAF."— Presentation transcript:

1 IAS Conference « Finding the frontier for internal audit » 13 October 2009 Amongst topics to be discussed in this conference, two are more linked to OLAF : How does audit feed into fraud investigation ? How can audit help preventing fraud ?

2 What I will speak about Differences between audits and investigationsDifferences between audits and investigations How an OLAF investigator is workingHow an OLAF investigator is working An example of a successful articulation between audit and investigation (Pluto approach)An example of a successful articulation between audit and investigation (Pluto approach) 2

3 Differences between audit and investigation What an internal audit is made for ? It has the objective to help the Commission, to : Better control risks,Better control risks, Better safeguard assets,Better safeguard assets, Better monitor compliance with rules,Better monitor compliance with rules, Produce accurate and reliable accounting and management information,Produce accurate and reliable accounting and management information, Improve the quality of management,Improve the quality of management, Improve the efficiency and effectiveness of operations and ensure value for money in the use of Commission resources.Improve the efficiency and effectiveness of operations and ensure value for money in the use of Commission resources. 3

4 Differences between audit and investigation What an investigation is made for ? As stated in Regulation 1073/99 (article 1-3) it has the objective « … to fight against fraud, corruption and any other illegal activity affecting the financial interests of the European Community … » And also « … to investigate serious matters relating to the discharge of professional duties… » 4

5 Differences between audit and investigation The main difference is that : The final objective of an audit is to see how to improve a system, an organisation,The final objective of an audit is to see how to improve a system, an organisation, The final objective of an investigation is to establish if a fraud or any misconduct can be charged upon a natural or legal person.The final objective of an investigation is to establish if a fraud or any misconduct can be charged upon a natural or legal person. Investigation are focussing on the responsabilities of individuals not on the weaknesses of an organisation with a view to improve its efficiency. The key words are improvement and responsibilities 5

6 How an investigator is working ? in comparison with an auditor Most of the time, an investigative body is reactive because of its sources (Free phone, complaints, informants, whistleblowers, formal information from the DGs, legal notifications, Member States, etc.Most of the time, an investigative body is reactive because of its sources (Free phone, complaints, informants, whistleblowers, formal information from the DGs, legal notifications, Member States, etc. Auditors are proactive; they start their enquiries either on the basis of a risk analysis or of a management request.Auditors are proactive; they start their enquiries either on the basis of a risk analysis or of a management request. Investigators check allegations coming to them. Auditors are selecting their targets. Investigators and auditors are moving in opposite directions 6

7 How an investigator is working ? in comparison with an auditor As they are reactive to what they get, investigators have the duty to assess incoming information before opening any investigations. This is also an obligation due to a ruling of the TFI (case C-11/00) requiring that OLAF opens investigations only if it is able to reach a threshold of sufficiently serious suspicions.As they are reactive to what they get, investigators have the duty to assess incoming information before opening any investigations. This is also an obligation due to a ruling of the TFI (case C-11/00) requiring that OLAF opens investigations only if it is able to reach a threshold of sufficiently serious suspicions. Auditors put their efforts where they think the risks are.Auditors put their efforts where they think the risks are. 7

8 How an investigator is working ? in comparison with an auditor To make it simple, perharps too simple, there is an other difference that is good to point out : an investigator always tries to see what is beyond the appearances.To make it simple, perharps too simple, there is an other difference that is good to point out : an investigator always tries to see what is beyond the appearances. Example : we have an invoice and the corresponding transfer of money. All is formally OK but the investigator is wondering whether the invoice is fake without no real work or service in relation to it. 8

9 An example of a good articulation between audit and investigation (Pluto approach) For the sake of the presentation, I have made things simple but everybody knows that in real life things are more mixed together. Borders are not that clear and easy to draw between audit and investigation We do have different legal framework, We do have different prerogatives, We do have different objectives, but … but … 9

10 An example of a good articulation between audit and investigation (Pluto approach) The problem of investigators is to detect the frauds before they investigate them, or at least the suspicions of frauds. Auditors can have the same problem despite it is not their main objective (Title of the conference).The problem of investigators is to detect the frauds before they investigate them, or at least the suspicions of frauds. Auditors can have the same problem despite it is not their main objective (Title of the conference). We have recently developed with DG Infso a challenging but interesting experience in which all starts with and leads to detection. The case relates to a rather sophisticated scheme of fraud in which it is now obvious that the fraudsters have set up a system where risks of detection were low.We have recently developed with DG Infso a challenging but interesting experience in which all starts with and leads to detection. The case relates to a rather sophisticated scheme of fraud in which it is now obvious that the fraudsters have set up a system where risks of detection were low. 10

11 An example of a good articulation between audit and investigation (Pluto approach) The case started in 2007 => OLAF contacted INFSO because some tiny indications led OLAF to believe that certain entities might have claimed fictitious costs.The case started in 2007 => OLAF contacted INFSO because some tiny indications led OLAF to believe that certain entities might have claimed fictitious costs. The problem was that we were in the grey zone between investigation and audit.The problem was that we were in the grey zone between investigation and audit. The information gathered confirmed that a possible complex fraud scheme had gone unnoticed for years. It involves ~80 companies/entities (10s of millions )The information gathered confirmed that a possible complex fraud scheme had gone unnoticed for years. It involves ~80 companies/entities (10s of millions ) Rapidly the idea of combining the means of the most modern auditing methods and the means OLAF has at its disposal were explored.Rapidly the idea of combining the means of the most modern auditing methods and the means OLAF has at its disposal were explored. We saw excellent synergies between audits and investigations, respecting the different roles and mandates.We saw excellent synergies between audits and investigations, respecting the different roles and mandates. 11

12 An example of a good articulation between audit and investigation (Pluto approach) Why did it go unnoticed for years ? Because of the many fictitious documents, formally correct, shell companies, and cross-payments or back- payments. It was impossible to unveil this scheme with the normal audit tools.Because of the many fictitious documents, formally correct, shell companies, and cross-payments or back- payments. It was impossible to unveil this scheme with the normal audit tools. It was needed to get inside vast amounts of data (1000s of legal entities, contracts, people, adresses, phone numbers, email adresses, etc). To achieve that, the advanced data mining tools used by OLAF were adapted to DG Infsos audit environment.It was needed to get inside vast amounts of data (1000s of legal entities, contracts, people, adresses, phone numbers, email adresses, etc). To achieve that, the advanced data mining tools used by OLAF were adapted to DG Infsos audit environment. 12

13 An example of a good articulation between audit and investigation (Pluto approach) « Pluto » is an intelligence database storing all information about the 15,000 beneficiaries and 5,000 research projects funded by DG Infso. Pluto allows for a visual analysis of relationships between the various entities it contains (beneficiaries, prjects, persons, adresses, telephones). With this analysis, risky areas of the contractual environment are identified facilitating the auditing and investigative work. At the end of the day, it will still be the job of auditors and investigators to demonstrate the fraud, but their task is made easier as far as locating the possible wherabouts is concerned. [Pluto is based on the commercially avalaible software iBase from i2 Inc.] 13

14 An example of a good articulation between audit and investigation (Pluto approach) Lessons learnt and ideas to be kept : To see the forest not only the tree,To see the forest not only the tree, Each partner enriching his scope of work with the feedback of the other (two way road),Each partner enriching his scope of work with the feedback of the other (two way road), Adressing the real risky areas,Adressing the real risky areas, No confusion on the respective roles as the investigator is not auditing and vice versa,No confusion on the respective roles as the investigator is not auditing and vice versa, Efficiency increased in the preparation, in the course of and after the fieldwork.Efficiency increased in the preparation, in the course of and after the fieldwork. 14

15 An example of a good articulation between audit and investigation (Pluto approach) Results : Improved detection of fraudsImproved detection of frauds Improved detection of the weaknesses in the EU projectsImproved detection of the weaknesses in the EU projects DGs in a stronger position for the RODGs in a stronger position for the RO In the case : judicial investigation in Italy (seen as serious cas by the prosecutor)In the case : judicial investigation in Italy (seen as serious cas by the prosecutor) Deterrent effect for systemic fraudstersDeterrent effect for systemic fraudsters Increasing rate of errors in audits (negative or positive result ?)Increasing rate of errors in audits (negative or positive result ?) Increasing risks of litigationIncreasing risks of litigation 15

16 Answers to the questions of this conference How does audit feed into fraud investigation ?How does audit feed into fraud investigation ? How can audit help preventing fraud ?How can audit help preventing fraud ? This presentation gives the answer with regard to the main issues : detection, identification of weaknesses and deterrent effect Last but not least : with a clear frontier between responsibilities 16

17 « Finding the frontier for internal audit » Questions ? Thierry Cretin OLAF +322 2998768 17


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