FRAUD, WASTE, AND ABUSE Brian Forster, Law Enforcement Programs Supervisor, ADECA Heather Oates, CPA, CGMA, CICA, Senior Auditor, ADECA

What is Waste? The loss or misuse of resources that results from deficient practices, system controls, or decisions. It is managements responsibility to control waste.

What is Abuse? Abuse involves behavior that is deficient or improper when compared with behavior that a prudent person would consider reasonable and necessary business practice given the facts and circumstances.  Abuse also includes misuse of authority or position for personal financial interests or those of an immediate or close family member or business associate.  Abuse does not necessarily involve fraud, violation of laws, regulations, or provisions of a contract or grant agreement. 

WHAT IS FRAUD? An intentional distortion of the truth in an attempt to obtain something of value. Does not have to result in monetary loss. A knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.

PENALTIES OF FRAUD A ban from receiving future funding Suspension, debarment, and cancellation of current or future grant awards Administrative recoveries of funds Civil lawsuits and criminal prosecution A combination of all or some of these remedies

Types of Fraud Internal Fraud External Fraud Fraud Against Individuals

Fraud Tree Obtained from ACFE website

Why Does Fraud Occur?

Indicators of Grant Fraud Structure of Recipient Organization and Grant Program Managers and administrators should closely examine: Organizational design Policies and procedures Staff Application narratives Budgets, proposals, and progress reports Design of project may make it difficult to track and assess Objectives, metrics, progress, and associated costs May indicate that a recipient is hiding a failing program No performance metrics or objectives that have already been completed Lack of internal controls Segregation of duties Unsupervised use of checking accounts, cash, credit/debit cards

Indicators of Grant Fraud Structure of Recipient Organization and Grant Program (cont.) Questionable financial viability High % of assets funded by debt or insufficient funds Using loan to operate Grant managers should check on subgrant administrative personnel using: Public records such as local and federal criminal and civil court information Court judgements Excluded parties list system Signs of conflict of interest Transactions with friends and relatives Gifts from contractors Transactions with organizations that several related employees or board members Failing grant program may indicate misused grant funds

Indicators of Grant Fraud 2. Payment Requests or Drawdown of Grant Funds Drawdowns and frequency of payment requests should be scrutinized as it relates to rules/regulations of the grant project Recipient who draws down most or all of funds shortly after award may be high risk Insufficient justification/documentation for drawdowns indicates high risk

Indicators of Grant Fraud 2. Payment Requests or Drawdown of Grant Funds (cont.) Drawdown requests made well after the award periods and final date of the drawdown have ended may indicate that recipients are drawing funds for unallowable expenditures. Any drawdown made from one grant to cover the costs of another grant program may be unallowable and should be reviewed closely. Payment requests that exceed expenditures recorded for the same period in the accounting system need closer examination. These types of requests may be for unallowable purposes, or they may indicate that internal controls governing accounting entries and financial reports need improvement.

Indicators of Grant Fraud 3. Monitoring Reports and Activities Recipients not responding to requests for additional information/documentation may be trying to conceal something Inconsistent/illogical explanations about use of funds may indicate misuse Unusual financial trends Suspicious transactions Reviewing financial trends Making sure you are familiar with trends that are fraudulent Salary/compensation that exceed agency approved amounts or exceed compensation for comparable services

Indicators of Grant Fraud 3. Monitoring Reports and Activities (cont.) Grant projects funded by more than one grant may indicate a higher potential risk of fraud, particularly if the funds come from more than one federal or state jurisdiction. Disclosure statement Submitted with application Forgery of signature, receipts, timesheets, and payroll information, and alteration of invoices may indicate fraud. Unclear, unsupportable, or inconsistent cost rates should be examined closely..

Indicators of Grant Fraud 4. Contractors and Consultants Deficiencies in procurement systems Policies that do not provide for adequate oversight Several high dollar transactions with single vendor Recipients that expend funds on unapproved purchases Sole source or no bid contracts Use of generic, nonspecific, or nebulous consultants may present a heightened risk. 

Initial Detection of Frauds Obtained from ACFE 2014 Report to the Nations

Mitigating Fraud Risk Preventive Controls Perception of detection (POD) Education and Communication (Anti-Fraud Training) Internal Controls Ensure an individual’s level of authority corresponds with his/her level of responsibility Review of transactions Continuous monitoring

Mitigating Fraud Risk Detective Controls Corrective Controls Tips (i.e. Fraud Hotline) Job rotations and forced vacations Draw on external information to corroborate internally generated information. Formally and automatically communicate identified deficiencies and exceptions to appropriate leadership. Use results to enhance and modify other controls. Regular audits Corrective Controls Insurance Fraud Policy

Mitigating Fraud Risk Examine your operations and internal controls to identify fraud risk areas Implement specific fraud prevention strategies including educating others about the risks. Maintain internal controls and anti-fraud controls Ensure all financial and progress reports are adequately supported with appropriate documentation and evidence. Identify any potential conflict of interest issues Make certain your procurement process is transparent

CASE STUDY

MISAPROPRIATION OF ASSETS

CONTACT INFORMATION Brian Forster, Law Enforcement Programs Supervisor E-mail: brain.forster@adeca.alabama.gov Phone: 334-353-4265 Heather Oates, CPA, CGMA, CICA Senior Auditor E-mail: heather.oates@adeca.alabama.gov Phone: 334-353-3546