Fiscal Officers of Colleges and
Universities - State Supported
November 13, 2009
The War Against Fraud & Abuse:
Are We Winning?
Dave Cotton, CPA, CFE, CGFM
Cotton & Company LLP
Alexandria, Virginia
www.cottoncpa.com
p
DAVID L. COTTON, CPA, CFE, CGFM
COTTON & COMPANY LLP CHAIRMAN
Dave Cotton is chairman of Cotton & Company LLP, Certified Public Accountants. Cotton & Company is
headquartered in Alexandria, Virginia. The firm was founded in 1981 and has a practice concentration in assisting United States Federal and State government agencies, inspectors general, and government grantees and
contractors with a variety of government program-related assurance and advisory services. Cotton & Company
has performed grant and contract, indirect cost rate, financial statement, financial related, and performance audits
for more than two dozen Federal inspectors general (including the Department of State, the United States Agency
for International Development, and the Millennium Challenge Corporation) as well as numerous other Federal
and State agencies and programs.
Cotton & Company’s Federal agency audit clients have included the U.S. Government Accountability Office, the
U.S. House of Representatives, the U.S. Small Business Administration, the U.S. Bureau of Prisons, the
Millennium Challenge Corporation, and the U.S. Marshals Service. Cotton & Company also assists numerous
Federal agencies in preparing financial statements and improving financial management and accounting systems.
Mr. Cotton received his BS in mechanical engineering (1971) and an MBA in management science and labor relations (1972) from Lehigh University in Bethlehem, PA. He also pursued graduate studies in accounting and
auditing at the University of Chicago, Graduate School of Business (1977 to 1978). He is a Certified Public
Accountant (CPA), Certified Fraud Examiner (CFE), and Certified Government Financial Manager (CGFM).
Mr. Cotton is presently serving on the Advisory Council on Government Auditing Standards (the Council advises
the United States Comptroller General on promulgation of Government Auditing Standards—GAO’s yellow
book). He is a member of the Advisory Council of the Academy for Government Accountability. He is also a
member of the advisory board of the Institute for Truth in Accounting. He served on the Institute of Internal
Auditors (IIA) Anti-Fraud Programs and Controls Task Force and co-authored Managing the Business Risk of
Fraud: A Practical Guide. He served on the American Institute of CPAs Anti-Fraud Task Force and co-authored
Management Override: The Achilles Heel of Fraud Prevention. He is the past-chairman of the AICPA Federal
Accounting and Auditing Subcommittee and has served on the AICPA Governmental Accounting and Auditing
Committee and the Government Technical Standards Subcommittee of the AICPA Professional Ethics Executive
Committee.
Mr. Cotton served on the board of the Virginia Society of Certified Public Accountants (VSCPA), and on the
VSCPA Litigation Services Committee, Professional Ethics Committee, Quality Review Committee, and
Governmental Accounting and Auditing Committee. He is member of the Greater Washington Society of CPAs
(GWSCPA) and is serving on the GWSCPA Professional Ethics Committee. He is a member of the Association
of Government Accountants (AGA) and is past-advisory board chairman and past-president of the AGA Northern
Virginia Chapter. He is also a member of the Institute of Internal Auditors and the Association of Certified Fraud
Examiners.
Mr. Cotton has testified as an expert in governmental accounting and auditing issues and fraud issues before the
United States Court of Federal Claims and other administrative and judicial bodies.
Mr. Cotton has spoken frequently on professional ethics and auditors’ fraud detection responsibilities under SAS
99, Consideration of Fraud in a Financial Statement Audit. He also has been an adjunct instructor at the
Inspectors General Auditor Training Institute (Auditing the Federal Contracting Process and Contract and
Procurement Fraud) and currently teaches at the George Mason University Small Business Development Center
(Fundamentals of Accounting for Government Contracts).
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Case Study
Mother of All
Pyramid Schemes
How important is the job we do as auditors?

When people make a decision on whether to
invest, they do look to see that there was an
independent auditor's report and whether or not it
was objective and whether or not it basically laid
out the strength of the company.
company

dcotton@cottoncpa.com
--Rockland County District Attorney Thomas Zugibe
1
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Who is Zugibe talking
about?
March 18, 2009

U S says auditor "sold
U.S.
sold his license"
license to Madoff
•
U.S. Attorney's Office in Manhattan says Friehling "not charged
with knowledge of the Madoff Ponzi scheme" but is accused of
deceiving investors by falsely certifying he audited Madoff
financial documents and helping "foster the illusion" Madoff was
a legitimate
l iti t investor.
i
t
•
SEC says Friehling and his firm "did not perform anything
remotely resembling an audit" or try to confirm that stocks
Madoff purportedly bought for customers even existed.
dcotton@cottoncpa.com
2
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
March 18, 2009
•
Authorities say Friehling failed to conduct independent
verification of Madoff operation's assets, review sources of its
revenue including commissions or examine a bank account
through which billions of dollars of client funds flowed.
•
Friehling's and his family's personal accounts at Madoff firm
had an accumulated balance on November 30,
30 2008 of more
than $14 million, and withdrawals from the largest of these
accounts totaled over $5.5 million since 2000, the SEC said.
March 18, 2009
•
SEC says Friehling took steps to hide his investments with
Madoff, replacing his own name on his account with his wife's
name and later renaming it the "Friehling Investment Fund" to
try to conceal his conflict of interest.
•
Friehling and his firm received $186,000 a year in fees for
providing the purported auditing work to Madoff firm along
with bookkeeping and tax services for the confessed swindler
and various Madoff family members, SEC says.
dcotton@cottoncpa.com
3
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Friehling told the AICPA that his
firm did not do any audits—thereby
evading any peer review
q
requirements
It sounds like he was telling the truth
Winning the War Against Fraud & Abuse




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Should auditors be expected to find fraud?
If not auditors
auditors, then who?
How about management?
How about “those charged with governance”?
Maybe the government should do it?
How about more standards?
The Answer
dcotton@cottoncpa.com
4
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
The four possible audit outcomes with
respect to fraud …
1. There was no material fraud
2. There was material fraud, and the auditors
discover the fraud
3. There was material fraud, and the fraud is
discovered through some other means after
the audit is completed
4. There was material fraud, and the fraud is
never discovered
Financial statement fraud is characterized by …
Chicanery
False entries
Collusion
False exculpatories
Concealment
False pretenses
Cover-up
Falsification
Deceit
Guile
Deception
Lies
Deliberate distortions
Misdirection
Dishonesty
Misrepresentation
Evasion
Trickery
dcotton@cottoncpa.com
5
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Finding fraud is not an even contest
 Auditors have limited powers, tight schedules,
constrained budgets, high visibility, and much to try to
examine
i
Auditors begin their work unaware that a crime has
been committed
Perpetrators know that a crime has been committed
and how it was committed
Perpetrators will take as much time and exert as much
effort as necessary to avoid detection
Finding fraud is not an even contest
Perpetrators know exactly what needs to be concealed
Perpetrators know exactly who is trying to find their
fraud and how they plan to go about doing it
Perpetrators will work round-the-clock to avoid
detection
In most cases, the perpetrator’s desire to avoid
detection far exceeds the auditor’s desire to find fraud
dcotton@cottoncpa.com
6
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Here’s what the current standard
((SAS 99)) requires
q
“the auditor has a responsibility to plan and
perform the audit to obtain reasonable
assurance about whether the financial
statements are free of material
misstatement, whether caused by error or
fraud.”
Here’s what the current standard
(SAS 99) requires
Fraud is a broad legal concept and auditors do not
make legal determinations of whether fraud has
occurred. Rather, the auditor’s interest specifically
relates to acts that result in a material misstatement
of the financial statements. The primary factor that
distinguishes fraud from error is whether the
underlying action that results in the misstatement
of the financial statements is intentional or
unintentional.
dcotton@cottoncpa.com
7
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Here’s what the current standard
(SAS 99) requires


Management
g
has a unique
q abilityy to perpetrate
p p
fraud
f
because it frequently is in a position to directly or
indirectly manipulate accounting records and present
fraudulent financial information.
… management and employees engaged in fraud will
take steps to conceal the fraud from the auditors and
others within and outside the organization.
organization Fraud may be
concealed by withholding evidence or misrepresenting
information in response to inquiries or by falsifying
documentation.
Here’s what the current standard
(SAS 99) requires



Fraud also may be concealed through collusion
among management
management, employees
employees, or third parties.
parties
Collusion may cause the auditor who has properly
performed the audit to conclude that evidence
provided is persuasive when it is, in fact, false.
… fraud usually is concealed and management’s
intent is difficult to determine …
… absolute assurance is not attainable and thus
even a properly planned and performed audit may
not detect a material misstatement resulting from
fraud.
dcotton@cottoncpa.com
8
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Here’s what the yellow book requires
Whether an act is, in fact, fraud is a
determination to be made through the
judicial or other adjudicative system and is
beyond auditors’ professional
responsibility. [Paragraph 7.30]
So, does it matter to auditors if a
misstatement was caused by fraud
rather than error?
dcotton@cottoncpa.com
9
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Yes, according to the PCAOB
Although any financial statement audit entails some
risk that the auditor will not detect a material
misstatement even when the audit has been conducted
in accordance with the standards of the PCAOB [i.e.
SAS 99], the risk of nondetection is likely to be higher
for misstatements caused by fraud than for
misstatements caused by error, since fraud usually
involves deliberate concealment and may involve
collusion with third parties. The auditor should,
therefore, assess risks and apply procedures directed
specifically to the detection of a material, fraudulent
misstatement of the financial statements. [PCAOB
Release 2007-001.]
Case Study:
C
St d Performance
P f
Audit of Port of Seattle
Construction management
dcotton@cottoncpa.com
10
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Major Audit Findings



POS Construction Management Records are
Incomplete and Disorganized.
POS Fails to Enforce Basic Contract Requirements,
Resulting in Delays, Extra Costs, and an Inability to
Defend Against Claims.
POS Construction Management is Vulnerable to
Fraud, Waste, and Abuse.
Details of this finding
included 46 specific situations
indicative of fraud
Port of Seattle Response

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
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“As to the issue of fraud, it is important to note that
no instance of fraud was found …”
“ the
“…
h P
Port hhas zero tolerance
l
for
f fraud
f d should
h ld it
i
ever be found.”
“This performance audit found no fraud.”
“The Port notes that the Performance Auditor did
not find actual cases of fraud during his
investigation.
investigation.”
“… the Port believes that it is not vulnerable to
fraud to the degree suggested by the Performance
Auditor …”
dcotton@cottoncpa.com
11
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Official Reaction to the Audit
January 7, 2008
Feds open criminal inquiry into port
State audit
slams
January
7, port's
2008 waste
Report: $97.2 million down the drain
Justice Department to investigate Port
January 8, 2008
Possible fraud at Port focus of criminal probe
Port Commission Investigation
dcotton@cottoncpa.com
12
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Port of Seattle Performance Audit
Even when evidence of fraud is
overwhelming, those responsible will
deny the facts, attack the auditor, and
demand that auditors provide “proof”
of fraud.
Maybe auditors find more fraud than we realize …




The only difference between an error and
fraud is intent
Intent is very difficult to prove
Auditors find lots of “errors”
Maybe some of them are really fraud
dcotton@cottoncpa.com
13
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
C
Case
S d Daewoo
Study:
D
vU
United
i d
States of America
Daewoo v United States


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
Daewoo Engineering and Construction Co., Ltd., was
awarded an $88 million contract to build a 2-lane
high a aro
highway
around
nd Babeldaop Island,
Island Republic
Rep blic of Palau
Pala
Daewoo encountered weather-related delays
The road was supposed to have been completed in
2001
The road was finally completed in the fall of 2007
Daewoo submitted a $64 million claim to the Army
Corps of engineers
dcotton@cottoncpa.com
14
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Daewoo v United States



DOJ hired Cotton & Company to help defend against the
claim
We spent 3 weeks in Palau auditing the claim
Daewoo’s claim contained equipment costs (about 85% of
the claim), labor costs, and other costs, including the
“kitchen sink”
A true “kitchen sink” claim
dcotton@cottoncpa.com
15
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
A true “kitchen sink” claim
Convoluted claim presentation


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300+ pages
Costs for Daewoo as well as Daewoo’s 6
subcontractors
Different formats and bases
Daewoo hired a claims expert to review its
claim
l i andd that
h expert presentedd an entirely
i l
different claim
dcotton@cottoncpa.com
16
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Convoluted claim presentation—
equipment costs
Auditing the Claim

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We asked for the Excel spreadsheets that
generated the many pages of equipment cost
schedules
We “unhid” the hidden columns
We rearranged the columns so that they were
consistent for all spreadsheets
We merged the spreadsheets into a single
spreadsheet
We performed a “data sort” on the “Chassis No.”
column
dcotton@cottoncpa.com
17
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Auditing the Claim


We sought Daewoo’s explanation for the
duplicated equipment
T “prove”
To
“
” that
th t th
they had
h d certain
t i items
it
off
equipment, Daewoo’s equipment manager
revealed a previously undisclosed spreadsheet
dcotton@cottoncpa.com
18
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Auditing the Claim


We used this newly discovered spreadsheet to
identify scrapped equipment in the claim
D li t d andd scrappedd equipment
Duplicated
i
t in
i the
th claim
l i
totalled at least $2,020,252.
dcotton@cottoncpa.com
19
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Daewoo’s Explanations

Duplicated and scrapped equipment were
insignificant
g
errors in their claim
A Compelling Trial Exhibit
dcotton@cottoncpa.com
20
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Daewoo v United States
We noted that all Daewoo’s “errors” in the claim
increased the amount of the claim; no errors had
the effect of reducing the claim.
claim This would be a
remarkable coincidence in a random review of
claim elements, or any means of “sampling” by
auditors. See, e.g., DX 1015 (Cotton Report); DX
1015 (Cotton Supplemental Report); Tr. 17303
(McGeehin). The possibility that the inflationary
effects
ff t off Exponent
E
t’s andd Daewoo
D
’s errors resulted
lt d
from innocent mistakes is remote.
--The Honorable Robert Hodges
dcotton@cottoncpa.com
21
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Daewoo v United States


ALL of Daewoo’s $64 million claim was denied
The Court entered judgment in the Government’s favor under
fraud counterclaims pertaining to:







The fraud provisions of the Contract Disputes Act
The False Claims Act
The Special Plea in Fraud (Fraud Forfeiture)
Fraud in the Inducement (bait & switch)
Daewoo has been ordered to pay the Government
$50,639,855.88
An additional $10-20 million in penalties (as well as debarment)
is still pending
Daewoo’s appeal was ruled on in February 2009
dcotton@cottoncpa.com
22
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
dcotton@cottoncpa.com
23
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
The Compact Road, Fall 2009
The Compact Road, Fall 2009
dcotton@cottoncpa.com
24
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
The Compact Road, Fall 2009
SCOTUS Appeal Outcome
dcotton@cottoncpa.com
25
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Daewoo v United States
Lessons Learned …
Our audit identified many,
many many “errors”
errors in
the claim. It took a 13-week trial to enable a
federal judge to conclude that many of those
“errors” were actually fraud.
Even then,
then Daewoo continued (and continues)
to deny that it had committed any fraud.
Are auditors getting the job done?
dcotton@cottoncpa.com
26
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
[6/29/02]
Accounting experts say Andersen
should have noticed that WorldCom
hid $3.8 billion of expenses
Are auditors getting the job done?
Not so much
dcotton@cottoncpa.com
27
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
How about management?


After all, we all know that it is management’s
responsibility to design, implement, and maintain
a system of strong internal control to prevent
fraud, waste, and abuse
Yes let
Yes,
let’ss all agree that management should be
responsible …
Quiz #1: What do all of these entities have in common?
MiniScribe
Barings
Bank
ZZZZBest
Arizona Baptist Foundation
Foundation for New Era Philanthropy
dcotton@cottoncpa.com
28
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
There are two types of fraud …
 Misappropriation of assets (aka
employee fraud)
Fraudulent financial reporting
(aka management fraud)
BUT, most of the recent high-profile
fraud cases have been management
fraud cases …
dcotton@cottoncpa.com
29
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
How about “those charged with
governance”?



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This is what we’re trying under Sarbanes-Oxley
for publicly-traded companies
Old question when fraud happened: Where were
the auditors?
New question when fraud happens: Where was
the audit committee?
Essentially a recognition that management cannot
be trusted in all situations
Case Study: Orel Suer
dcotton@cottoncpa.com
30
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Would you give your hardearned money to this man?
May 1, 2004




Ex-Chief Of Local United
Way Sentenced
Former Chief of Area United Way Sentenced to
27 Months for Fraud
Oral Suer pleaded guilty to defrauding the United
Way of almost $500,000 over a 6-7 year period
He was caught in 2002
UWNCA 2001 revenue: $90,000,000
dcotton@cottoncpa.com
31
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
May 1, 2004





Ex-Chief Of Local United
Way Sentenced
Former Chief of Area United Wayy Sentenced to
27 Months for Fraud
Oral Suer pleaded guilty to defrauding the United
Way of almost $500,000 over a 6-7 year period
He was caught in 2002
UWNCA 2001 revenue: $90,000,000
UWNCA 2002 revenue: $19,000,000
The Suer investigation revealed another
scheme: Round-Tripping Receipts
DC Area Donors
$$
$$
United Way of the
National Capital
Area:
Takes 10%
90%
81%
%
United Way of
Frederick, MD: takes
10% of the 90%
72.9%
Charities get 72.9%
Takes another 10%
72.9% goes to
UWNCA charities
dcotton@cottoncpa.com
32
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
May 1, 2004

Ex-Chief Of Local United
Way Sentenced
Lessons



Auditors and not-for-profits need to re-evaluate their
focuses on quantitative materiality
Abuse is often the iceberg-tip that can reveal bigger
problems ($60,000 to sound-proof Orel’s office might
ha e been a good red flag)
have
Governance matters
New Guidance for Audit Committees
FREE at:
www.aicpa.org
dcotton@cottoncpa.com
33
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Management Override: The
Achilles Heel of Internal Control
TARGET AUDIENCE:
Those Charged with
Governance
Management Override: The Achilles
Heel of Internal Control


Section
S
ti A:
A M
Managementt O
Override
id and
d th
the Audit
A dit
Committee’s Responsibilities
Section B: Actions to Address the Risk of
Management Override of Internal Controls
dcotton@cottoncpa.com
34
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Management Override: The Achilles
Heel of Internal Control





Maintaining
M
i t i i Skepticism
Sk ti i
Strengthening Committee Understanding of the
Business
Brainstorming to Identify Fraud Risks
Using the Code of Conduct to Assess the
Financial Reporting Culture
Cultivating a Vigorous Whistleblower Program
Management Override: The Achilles
Heel of Internal Control

Developing a Broad Information and Feedback
Network





Communications With Internal Auditors
Communications With Independent Auditor
Communications With the Compensation Committee
Communications With Key Employees
Appendix: Suggested Audit Committee
Procedures: Strengthening Knowledge of the
Business and Related Financial Statement Risks
dcotton@cottoncpa.com
35
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
How about “those charged with
governance”?




Too soon to tell at the SEC level …
There are about 17,000 publicly-traded
companies
There are about 450,000 private companies,
not-for-profits, and state/local governmental
entities
i i …. Most
M do
d not have
h
audit
di
committees, some do not have boards
How good is the typical non-SEC board?
dcotton@cottoncpa.com
36
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
dcotton@cottoncpa.com
37
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
The Smithsonian Board

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John G. Roberts, Jr., Chief Justice of the United States
Richard B. Cheney, Vice President of the United States
Thad Cochran, Senator from Mississippi
Christopher Dodd, Senator from Connecticut
Patrick J.
J Leahy,
Leahy Senator from Vermont
Xavier Becerra, Representative from California
Sam Johnson, Representative from Texas
Doris Matsui, Representative from California
Eli Broad, Chairman of AIG Retirement Services, Inc.
Anne d’Harnoncourt, Chief Executive Officer, Philadelphia Museum of Art
Phillip Frost, former Chairman and CEO of IVAX Corporation
Shirley Ann Jackson, President of Rensselaer Polytechnic Institute
Robert P. Kogod, former CEO of the Charles E. Smith Companies
Walter E. Massey, President of Morehouse College
Roger W. Sant, Chairman Emeritus of The AES Corporation
Alan G. Spoon, Managing General Partner of Polaris Venture Partners
Patricia Q. Stonesifer, President of the Bill & Melinda Gates Foundation
dcotton@cottoncpa.com
38
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Can we rely on “those charged with
governance” to stop fraud and abuse?
Not so much
Maybe the government should do it?




Sure, let’s let the government do it
The government’s doing a real good job at other
things …
Like crime-prevention, education, emergency
management,
t balancing
b l i budgets
b d t …
Look at the great job the SEC has done to prevent
fraudulent financial reporting since 1934 …
dcotton@cottoncpa.com
39
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Picture = 1,000 Words (and $65 billion)
Can we trust the government to
stop fraud?
Not so much
dcotton@cottoncpa.com
40
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
How about more standards?


Sure, this HAS to be the answer
We need more auditing standards and more
accounting principles
Statements on Auditing Standards
120
100
80
60
40
20
dcotton@cottoncpa.com
05
20
95
19
85
19
19
75
0
41
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Statements on Financial Accounting Standards
160
140
120
100
80
60
40
20
20
05
95
19
19
19
85
75
0
SEC Enforced Restatements by Year
80
70
60
75
50
40
30
20
10
0
15
14
6
1990
1992
17
10
8
1994
4
3
1996
21
4
1998
2000
Source: Financial Executives Research Foundation Inc.
dcotton@cottoncpa.com
42
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Restatements by
Stock Exchange 1990-2000
250
200
Pink Sheets
OTC
Nasdaq
AMEX
NYSE
150
100
50
00
99
20
19
98
97
19
19
96
95
19
94
19
93
19
92
19
91
19
19
19
90
0
Source: Financial Executives Research Foundation Inc.
Source: The Huron Report: 2004 Annual Review of Financial Reporting Matters
See: www.huronconsultinggroup.com
dcotton@cottoncpa.com
43
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Source: Financial Restatements: Update of Public Company Trends, Market Impacts, and
Regulatory Enforcement Activities (GAO-06-678), July 25, 2006
SASs and Financial Statements Restated
600
500
400
300
200
100
SASs
dcotton@cottoncpa.com
05
20
00
20
95
19
19
90
0
Restatements
44
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Source: Financial Restatements: Update of Public Company Trends, Market Impacts, and
Regulatory Enforcement Activities (GAO-06-678), July 25, 2006
Will adding more standards put an end
to fraud?
Not so much
dcotton@cottoncpa.com
45
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
One more thought on all those auditing
standards …




We have had 116 SASs since the ASB was
f
formed
d in
i 1973
How many dealt specifically with fraud and
illegal acts?
Just 5: SAS 16, 53, 54, 82, and 99 (just 2 still in
effect)
So, we’ve had 111 SASs focused on finding
mistakes?
One more thought on all those auditing
standards …




In the Bob Kratchet, green eyeshade accounting
era, maybe 111 SASs focused on finding errors
was a good idea …
But, in the age of automated accounting and
electronic data processing????
Maybe we COULD use a few more SASs focused
on finding fraud
Just a thought …
dcotton@cottoncpa.com
46
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
The Answer:
The Answer: Comprehensive antifraud programs and controls

Deterring, preventing, and detecting fraud needs
to be a comprehensive and concerted effort by all
involved
dcotton@cottoncpa.com
47
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
The IIA Anti-Fraud Task Force





Chaired by Dave Richards, IIA CEO, and Ron
Durkin,, KPMG Forensic Partner
Developed a comprehensive guide for
organizations committed to implementation of the
strongest anti-fraud measures possible
Exposed for review and comment
Vetted by endorser and supporter groups
Issued in 2008
Preventing Fraud, Waste, and Abuse


Comprehensive fraud risk management
What the COSO Framework has been to internal
control, this new guide will be to fraud
prevention
dcotton@cottoncpa.com
48
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
FREE at
www.theiia.org
Preventing Fraud, Waste, and Abuse


Written by the Anti-Fraud Task Force, sponsored by:
 Institute of Internal Auditors (IIA)
 Association of Certified Fraud Examiners (ACFE)
 American Institute of CPAs (AICPA).
Task Force members included accountability
professionals
p
f
from
f
a wide arrayy off large,
g , small,, public,
p
,
private, governmental and academic organizations and
institutions.
dcotton@cottoncpa.com
49
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Preventing Fraud, Waste, and Abuse

Managing the Business Risk of Fraud: a
practical
ti l guide
id






Introduction
Fraud Risk Governance and the Fraud Risk
Management Program
Fraud Risk Assessment
F dP
Fraud
Prevention
ti
Fraud Detection
Fraud Investigation and Response
Preventing Fraud, Waste, and Abuse

Managing the Business Risk of Fraud: a
practical
ti l guide
id

Appendices:
Reference Material
 Fraud Governance Policy
 Risk Assessment Framework Sample
 Fraud Prevention Scorecard
 Fraud Detection Scorecard
 COSO Fraud Risk Management Activities

dcotton@cottoncpa.com
50
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
Preventing Fraud, Waste, and Abuse
End Thoughts




Fraud is VERY difficult to prevent
Even harder to detect
No single player in our free market system should
be held singularly responsible
We ALL need to be involved in the fight
dcotton@cottoncpa.com
51
Fiscal Officers of Colleges and Universities - State Supported
November 13, 2009
End Thoughts
We have the strongest capital market in the world
and the most vigorous and generous donor
community in the world.
These are the engines of productivity, prosperity
and progress.
Imagine
g how much stronger
g they
y can be if we
stamp out fraudulent financial reporting and draw
more capital from totally confident investors and
donors across the country and around the globe.
Fiscal Officers of Colleges and
Universities - State Supported
November 13, 2009
The War Against Fraud & Abuse:
Are We Winning?
Dave Cotton, CPA, CFE, CGFM
Cotton & Company LLP
Alexandria, Virginia
www.cottoncpa.com
dcotton@cottoncpa.com
52