Fraud Detection and Deterrence GAAF December 7, 2011 Presented by Rod Ballard

2. Fraud Detection and Deterrence GAAF December 7, 2011 Presented by Rod Ballard

3. The First 48 Hours • Maintain Secrecy • Contact Corporate Attorney • Contact Fraud Examiner • Retain Documents

4. The First 48 Hours • Control Physical Access • Control Electronic Access • Memorialize events • Chain of Custody

5. The Element of Surprise • “Need to Know” basis • Avoid drastic changes • Team needs non-threatening cover

6. Legal Cover • Privilege & Confidentiality • Right to Privacy • Future Claims & Actions

7. Business Crime Scene Investigator • Chain of Custody • Accounting issues • Interview skills

8. Record Retention • Invoices, Bank Statements, Credit Card Statements • Contracts, Spreadsheets, Receipts • Memos, emails, messages

9. Control Physical Access • Review surveillance film • Take inventory of keys • Note variances

10. Control Electronic Access • Change key passwords • Load mirror programs • Note variances

11. Memorialize Key Facts • Write down sequence of events • Record names, dates, amounts • Any detail can become important

12. Control Evidence • Note date obtained and key facts • Lock up and protect • Limit handling

13. Fraud Categories • Asset misappropriations • Corruption • Fraudulent statements

14. Asset Misappropriations • Theft or misuse of an organization’s assets. • Skimming revenues • Stealing inventory • Payroll fraud

15. Corruption • Misuse of influence • To procure some benefit • For themselves or another person, • Contrary to their duty • Accepting kickbacks • Engaging in conflicts of interest

16. Fraudulent Statements • Falsification of an organization’s financial statements. • Overstating revenues • Understating liabilities or expenses

17. 2010 Report to the Nations • Association of Certified Fraud Examiners (ACFE) • $652 Billion or 5% of GDP in total cost of fraud • $159,000 median loss per incident • $82,000 median loss per incident for Government

18. Department • Accounting • $199,000 per incident • 30% frequency • Executive • $900,000 per incident • 21% frequency • Purchasing • $1,000,000 per incident • 3% frequency

19. The Fraud Triangle Incentive Opportunity Rationalization

20. Risk Analysis What is the probability? • Remote • More than remote • Probable

21. Risk Analysis (cont) What is the significance? • Inconsequential • More than inconsequential • Material

22. Risk Analysis (cont)

23. Brainstorm • Conduct session at least annually • Think like a perpetrator • Perform in conjunction with corporate attorney • Address vulnerable areas

24. Vulnerable Areas • Which assets are most susceptible to misappropriation? • The answer will vary slightly from organization to organization, but the most common ones are • Cash • Inventory • Assets easily converted into cash • Equipment that is readily marketable

25. Corporate Accountability Programs • Tone at the Top • Policies & Procedures • Effective Monitoring • Regulations and Laws

26. Tone at the Top • Goes beyond the code of ethics • Creates positive work environment • Increases deterrence effectiveness

27. Policies & Procedures • Code of Ethics/Ethics Statement • Internal controls • “Fraud, Waste, and Abuse” reporting mechanism

28. Effective Monitoring • Internal Audit • Rewards & Punishment • Anonymous Tip Hotline

29. Regulations & Laws • Competitive Bids • Lobbying & Gifts • Private Use of Public Assets

30. Elements for an Effective Program • Tone at the top • Anonymous hotline • Internal Audit • Workplace conditions • Employee education • Open communication • Hiring independent external auditors • Active Board • Active audit committee

31. Resources • “Guide to Internal Control and Fraud Prevention” • The ACFE Report to the Nation 2010 • The COSO Report www.coso.org • Jackson Thornton Corporate Governance • Rod.Ballard@jacksonthornton.com • 334-240-3622