Fraud prevention detection control fuh 12
- 1. Fraud Prevention, Detection & Control. By FUH GEORGE CHEO MBA PROJECT MANAGEMENT SENIOR AGRIC ENGINEER local enterprise/value chain development specialist 2014 The fraudster
- 2. What is Fraud? Fraud is anyFraud is any intentionalintentional act or omissionact or omission designeddesigned to deceive othersto deceive others, resulting in, resulting in thethe victim suffering a lossvictim suffering a loss and/or theand/or the perpetrator achieving a gain,perpetrator achieving a gain, usually,usually, monetary.monetary. Some Dictionary Definitions…… “A deception deliberately practiced in order to secure unfair or unlawful gain” or “Deliberate deception or cheating intended to gain an illegal advantage”2 FUH GC MBA PROJECT MANAGEMENT
- 3. •Fraud is a broad legal concept that generally refers to an intentional act committed to secure an unfair or unlawful gain. Misconduct is also a broad concept, generally referring to violations of laws, regulations, internal policies, and market expectations of ethical business conduct. Intentional act by one or more individuals among management, those charged with governance, employee or third parties involving the use of deception to obtain an unjust or illegal advantage What is fraud? 3 FUH GC MBA PROJECT MANAGEMENT
- 4. What is Occupational Fraud •The use of one’s occupation for personal enrichment through the deliberate misuse or application of the employing organization’s resources or assets. INCLUDES---- the intentional, false representation or concealment of a material fact for the purpose of inducing another to act upon it to his or her injury.FUH GC MBA PROJECT MANAGEMENT4
- 5. Justification for the presentation •Rampant in the Credit Union System •Constitute huge/major source of financial losses •Discredits Credit Unions •Loss of reputation •Loss of confidence / trust 5 FUH GC MBA PROJECT MANAGEMENT
- 6. Fraud black box in the Credit Union System •Inter-branch transaction •money transfer •Loans •Procurement process •Reserve account/ Suspense account6 FUH GC MBA PROJECT MANAGEMENT
- 7. four Common Types of Fraudfour Common Types of Fraud •Corruption •Asset Misappropriation •Financial Statement Fraud •Cash transaction fraud 7 FUH GC MBA PROJECT MANAGEMENT
- 8. CorruptionCorruption Corruption refers to schemes in which fraudsters use their influence in business transactions in a way that violates their duty to their employers in order to obtain a benefit for themselves or someone else. For example, employees through collusion with other third parties might receive or offer bribes, extort funds, or engage in conflicts of interest, payroll fraud. 8 FUH GC MBA PROJECT MANAGEMENT
- 9. Asset MisappropriationAsset Misappropriation •Asset misappropriation schemes are frauds in which the perpetrator steals or misuses an organization’s resources. An examples of asset misappropriation include a staff using a company fuel and vehicle to a private funeral. 9 FUH GC MBA PROJECT MANAGEMENT
- 10. Financial Statement FraudFinancial Statement Fraud •Financial statement fraud, involves the intentional misstatement or omission of material information from the organization’s financial reports; these are the cases of “cooking the books or figures”. •. 10 FUH GC MBA PROJECT MANAGEMENT
- 11. continue •Financial statement fraud cases often involve the reporting of fictitious revenues or the concealment of expenses or liabilities in order to make an organization appear more profitable than its real situation 11 FUH GC MBA PROJECT MANAGEMENT
- 12. CASH TRANSACTION FRAUD Improperly accounting for revenues and expenditures Skimming cash receipts Falsifying voids and refunds Tampering with Credit Union’s checks Overstating expenses Creating a ghost employee Creating fictitious loans/transfers. 12 FUH GC MBA PROJECT MANAGEMENT
- 13. Who commits fraud?Who commits fraud? Supplier4% Client5% Organised Crime6% Employees 30% Management 55% I AM NOT A THIEF 13 FUH GC MBA PROJECT MANAGEMENT
- 14. How Trusted Employees Steal Millions and Why it is so Hard for Credit Unions to Stop Them” The personality profile of a typical employee that commits this fraud is ironically the type of person Credit Unions want to hire…often a committed senior management staff, the trusted branch manager, the loans officer who never missed a day at work or the dependable accountant. It’s a fact that fraudsters are often some of the institution’s top performers. That is because the same creativity, attention to detail, and intelligence that helps them succeed at their jobs also helps them succeed at fraud. FUH GC MBA PROJECT MANAGEMENT14
- 15. Who Commits Fraud?Who Commits Fraud? •Management •Employees •Organised Employee syndicate •Customers •Suppliers. •Apex structure / BOD 15 FUH GC MBA PROJECT MANAGEMENT
- 16. Typical perpetrators. 16 FUH GC MBA PROJECT MANAGEMENT
- 17. continue 17 FUH GC MBA PROJECT MANAGEMENT
- 18. The Fraud TriangleThe Fraud Triangle (Basic factor influencing the occurrence of fraud)(Basic factor influencing the occurrence of fraud) PressurePressure OpportunityOpportunityRationalization (Attitude)Rationalization (Attitude) 18 FUH GC MBA PROJECT MANAGEMENT
- 19. PRESSUREPRESSURE: This is what causes a person to commit fraud. This includes bills, expensive tastes, addiction problems, significant financial needs etc. Often this need/problem is non-disclosable in the eyes of the fraudster. That is, the person believes, for whatever reason, that their problem must be solved in secret. RATIONALIZATIONRATIONALIZATION:: It occurs when the individual develops a justification for their fraudulent activities. The rationalization varies by case and individual. Some examples include: “I really need this money and I’ll pay it back when I get my salary” “Other people are doing it” “I didn’t get a raise. The Credit Union owes me.” OPPORTUNITYOPPORTUNITY:: Opportunity is the ability to commit fraud. Because fraudsters don’t wish to be caught, they must also believe that their activities will not be detected. Opportunity is created by weak internal controls, poor management oversight, and through abuse of power. 19 FUH GC MBA PROJECT MANAGEMENT
- 20. INDEPTH ANALYSIS OF TRIANGLE 20 FUH GC MBA PROJECT MANAGEMENT
- 21. ” Causes of High Pressure •High personal debts. •Living beyond their means. •Excessive investment speculation. •Excessive gambling. •Substance abuse. •Extra-marital affairs. •Job frustration. 21 FUH GC MBA PROJECT MANAGEMENT
- 22. ” fraud windows - Opportunity Inadequate internal controls. Too “cozy” with suppliers. Annual vacation or sick days not taken. Weak management or excessive turnover. Ineffective or no internal audit. No rotation of job duties among employees. Procedures not well understood/always in crisis mode. Large amounts of cash on hand or processed. 22 FUH GC MBA PROJECT MANAGEMENT
- 23. Self conviction (pretext) - Rationalization •Not compensated fairly. •No recent raises/cost of living adjustments. •Everyone else does it. •Intended to pay it back. •Needed the money. •Felt cheated and wanted revenge. •Bribe/kickback too tempting. 23 FUH GC MBA PROJECT MANAGEMENT
- 24. BEHAVIORAL WARNING SIGNS Fraudsters exhibit behavioral warning signs of their misdeeds. For example: Living beyond their means. Financial difficulties. Exhibiting control issues – unwillingness to share duties. Unusually close relationship with vendor/customer. Wheeler dealer attitude. Family problems. Irritability, suspiciousness or defensiveness. Addiction problems. Refusal to take vacation. Auditors and employees should be trained to recognize the common behavioral signs that a fraud is occurring. Effective fraud prevention measures are critical 24 FUH GC MBA PROJECT MANAGEMENT
- 25. BREAKING THE FRAUD TRIANGLEBREAKING THE FRAUD TRIANGLE Breaking the Fraud Triangle is the key to fraud deterrence. Breaking the Fraud Triangle entails removing one of the elements in the fraud triangle in order to reduce the likelihood of fraudulent activities. Of the three elements. Removal of opportunity is most directly affected by the system of internal controls and generally provides the most actionable route to deterrence of fraud. 25 FUH GC MBA PROJECT MANAGEMENT
- 26. detecting frauddetecting fraud Indicators / windowsIndicators / windows Receipt of tip-offs Refusal to take vacation or sick leave Significant personal debt and credit problems Behavioral changes - These may be an indication of drugs, alcohol, gambling, or just fear of losing the job Low employee turnover, especially in those areas which are more vulnerable to fraud Lack of segregation of duties in a vulnerable area Employee lifestyle changes: expensive cars, jewelry, homes, clothes Management decisions are dominated by an individual or small group. Managers display significant disrespect for regulatory bodies Policies and procedures are not documented or enforced. 26 FUH GC MBA PROJECT MANAGEMENT
- 27. FRAUD PREVENTION (Prevention – Is Better Than a Cure) 27 FUH GC MBA PROJECT MANAGEMENT
- 28. 7 KEYS TO FRAUD PREVENTION 28 FUH GC MBA PROJECT MANAGEMENT
- 29. Anti-Fraud Culture FUH GC MBA PROJECT MANAGEMENT29 Set the tone at the top = Lead by Example Responsibility of Directors and Officers Conduct background checks for new employees. Treat all employees equally Zero tolerance Behave ethically and openly communicate expectations to employees Create a positive workplace environment Focus on employee morale Empower employees Communicate Hire and promote appropriate employees Conduct background investigations before hiring or promoting Check candidate’s education, employment history, references Continuous and objective evaluation of compliance with entity values Violations addressed immediately
- 30. FUH GC MBA PROJECT MANAGEMENT30 Code of Conduct Formalized and founded on integrity Defines acceptable employee behavior Communicated to all employees All employees are held accountable for compliance Discipline Sends a strong message throughout the entity Should be appropriate and consistent Consequences of committing fraud clearly communicated throughout the entity
- 31. FUH GC MBA PROJECT MANAGEMENT31 Oversight Process Audit Committee or Board of Directors /supervisory Board Evaluate management’s “tone at the top” Identification of fraud risks and implementation of anti-fraud controls Ensure that management implements anti-fraud measures Consider the potential for management override of controls Management Directs, implements and monitors anti-fraud controls Sets the ethical tone Trains employees Internal Auditor Identifies fraud indicators Assesses fraud risks Evaluates anti-fraud controls Recommends actions to mitigate risks Investigates potential frauds
- 32. Fraud Policy FUH GC MBA PROJECT MANAGEMENT32 Demonstrate commitment to combating fraud Apply to all Directors, Management, employees, consultants, vendors, contractors, etc. Should include: Statement of organization’s position on fraud Scope of the policy – who does it apply to Management’s responsibility for prevention and detection of fraud Definition of fraud Actions constituting fraud Fraud reporting process/procedures Fraud investigation process/procedures Unit responsible for administration of the policy and investigating fraud allegations Statement on anonymity/confidentiality Consequences
- 33. Fraud Awareness/Training FUH GC MBA PROJECT MANAGEMENT33 new employees should be trained at time of hiring on the Code of Conduct and Fraud Policy. Training should include: Their duty to communicate certain matters A list of the types of matters to be communicated along with examples How to communicate those matters Affirmation from senior management regarding employee expectations and communication responsibilities Refresher training periodically
- 34. Hotline FUH GC MBA PROJECT MANAGEMENT34 Enable employees, vendors, customers and others to communicate concerns about known or suspected wrongd oing. Telephone, email, internet. Anonymous. Adequately publicized. Internal or External. Complaint monitoring and investigation/resolution.
- 35. Assess Fraud Risks FUH GC MBA PROJECT MANAGEMENT35 Conduct an annual fraud risk assessment. Assists management in systematically identifying where and how fraud may occur and who may be in a position to commit fraud Focus on fraud schemes and scenarios to determine the presence of internal controls and whether or not the controls can be circumvented. General steps: Identify areas and processes to assess Identify potential fraud schemes in each area/process Assess likelihood and significant of each scheme Map existing anti-fraud controls to potential fraud schemes Test operating effectiveness of antifraud controls Identify any control gaps and/or deficiencies = Residual risks Document and report on the fraud risk assessment
- 36. FUH GC MBA PROJECT MANAGEMENT36 Mitigate Fraud Risks Make changes to activities and/or processes = transfer or eliminate the risks Improve anti-fraud controls Monitor Fraud Risks Develop data analytics for management to use to monitor fraud risks Utilize Internal Audit to conduct audits of risk areas.
- 37. FUH GC MBA PROJECT MANAGEMENT37 Fraud Review/Investigation All concerns/suspicions of wrong doing should be reviewed and determination made whether a fraud investigation is warranted. Develop a policy for fraud reviews and investigations that specifies: Who is responsible for the review/investigation Roles of Legal Counsel, Human Resources, Internal Audit, others Process for conducting the review/investigation Documentation requirements Reporting requirements When to involve law enforcement
- 38. Fraud Review/Investigation FUH GC MBA PROJECT MANAGEMENT38 Gather sufficient information and perform procedures necessary to determine: Whether fraud has occurred Loss or exposure associated with the fraud Who was involved and how it happened Must prepare, document and preserve evidence sufficient for potential legal proceedings. Include experts if possible.
- 39. Improved Controls FUH GC MBA PROJECT MANAGEMENT39 Use lessons learned from any fraud reviews or investigations to improve anti-fraud controls. All fraud review and investigations should include a report to management with recommendations for control improvement.
- 40. Antifraud Programs and Controls.(CRIME) • Identify fraud risk factors, fraud risks and fraud schemes • Link or map identified fraud risks to control activities • Effective communication of antifraud programs and controls • Monitoring effectiveness of antifraud programs and controls •Tone at the top •Code of Conduct/Ethics •Whistleblower Hotline CreatingCreating a Controla Control EnvironmentEnvironment PerformingPerforming Fraud RiskFraud Risk AssessmentsAssessments Designing and Implementing Antifraud Control Activities SharingSharing Information andInformation and CommunicationCommunication MonitoringMonitoring ActivitiesActivities CRIME 40 FUH GC MBA PROJECT MANAGEMENT
- 41. In today’s micro finance climate, it is more important than ever to take every precaution possible to reduce exposure to financial loss, reputational damage and service interruption which are the common consequences of fraud. . Conclusion 41 FUH GC MBA PROJECT MANAGEMENT
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- 43. Questions/Discussions 43 FUH GC MBA PROJECT MANAGEMENT