www.risqgroup.com
Project Management Institute,
Melbourne Chapter
April 2009
About Today’s Presentation
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RISQ Overview
Fraud Statistics
Fraud/Key Drivers
Profile of Fraudster
Economic Downturn
ACFE Report to the Nation
Purchasing Fraud
Role of Fraud in Projects
Fraud Red Flags
Pre Employment Screening
Whistleblower Hotline
RISQ Group
• RISQ Group is a specialist fraud and security
risk management company
• Our primary services include: Business Risk
Consulting, Investigations, Employment
Screening and Crisis and Security
Management
• We have offices in Australia, New Zealand,
Singapore and Canada
• Our key staff have over 25 years experience
in Law Enforcement and extensive
experience within private industry
Studies and Surveys of Fraud
• Fraud costs the Australian economy at least 3
billion per year
• The incidence of fraud with the Australian
economy is increasing year by year
• The financial impact of fraud and corruption
on the victims, and in particular, Australian
entities engaged in some form of business
activity, is steadily increasing
• The involvement of organised crime in
external attack on the financial sector within
the Australian economy is increasing
• Australian entities are ill-prepared to detect
and prevent fraud against their businesses
What is Fraud?
‘Fraud can be defined as ‘an intentional
misstatement of information to obtain financial
benefits or gain through improper, unauthorised or
illegal actions’
Key Drivers of Fraud
• Pressure
(Real or perceived, I have to do this)
• Rationalisation
(Perceived wrong, I am owed this)
• Opportunities
(It was easy)
• Likelihood of detection and consequences
(I wont get caught)
• Motive
(Financial Hardship, Drugs, Gambling etc)
Personal Profile of a fraudster
• 70% of fraudsters were between the ages of 36 and 55
years old, and so in the later stages of their career
• 85% male
• 68% acted independently
• 69% insiders
• 60% senior management
• 87% employed 2 years or more at the company
defrauded (Highest proportion in the 3-5 year range)
• The internal fraudster most often works in the finance
department followed by operations/sales or as the
CEO
What allowed frauds to occur
Source:KPMG
Current Economic Downturn
• Fraud tends to increase and come to light
• This can be attributed to a number of things:
• Businesses are being scrutinised more
carefully (processes, costs, resources) and
opportunities to commit fraud are being
revealed
• More people becoming unemployed
• The temptation to commit fraud for personal
gain is amplified by those who are left behind
to do more with less
• Directors are still trying to achieve unrealistic
results of the past
• Checks and balances are being removed
ACFE Report to the Nation
• Complied by the Association of
Certified Fraud Examiners (ACFE)
• About the ACFE
• Survey done every two years since
1996
• We have used some of the information
contained in the report for today’s
slides
Key Findings
• Organisations lose 7% of their
annual revenues to fraud
• Fraud Schemes tend to be
extremely costly
• Fraud Schemes continue for
years prior to detection
• Fraud is much more likely to be
detected by a tip than by audits,
controls or any other means
Key Findings cont….
• Implementation of Anti-Fraud
Controls appears to have a
measureable impact on exposure
• Small businesses are especially
vulnerable
• 78% of victims modified their antifraud controls after discovering
fraud
Fraud Tree Classification System
©2008 by the Association of Certified Fraud Examiners, Inc.
Occupational Fraud
The term “occupational fraud”
may be defined as:
“The use of one’s occupation
for personal enrichment
through the deliberate misuse
or misapplication of the
employing organization’s
resources or assets.”
©2008 by the Association of Certified Fraud Examiners, Inc.
Comparisons 2004-2008
Losses to Occupational Fraud % of Turnover
8%
7%
6%
5%
2004
2006
4%
3%
2%
2008
1%
0%
2004
2006
2008
How Occupational Fraud is Committed
Occupational Frauds by Category — Frequency
©2008 by the Association of Certified Fraud Examiners, Inc.
Victim Organizations
Size of Victim Organization — Frequency
©2008 by the Association of Certified Fraud Examiners, Inc.
Detection of Fraud Schemes
Percent of Tips by Source9
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sum of percentages in this chart exceeds 100 percent because in some cases respondents identified more than one source of the initial tip.
©2008 by the Association of Certified Fraud Examiners, Inc.
Purchasing Fraud
• Purchasing Operation particularly
vulnerable to fraud
• Projects: Purchasing budget often
comes from the project. PM needs to
watch out for fraudulent purchases
• For small business this represents a
large risk
• Bogus claims, billing, expense
reimbursements, cheque tampering,
payroll, wire transfers, register
disbursements
Purchasing Fraud cont’d
• Common scheme – Paying
invoices/inflated invoices to fictitious
company
• Employee or accomplice will establish
a fake entity
• Enter fake entity in companies system
as a vendor
• Produce invoices from fake vendor
which get processed
How to detect signs of Fraud in
Purchasing Department
• Watch for unusual behaviour among your
employees
• Stress or illness can often precipitate criminal
behaviour
• Watch for financial irregularities in your
employees personal lives
• Deep debt and expensive habits are often red
flags
• Watch for excessive turnover among vendors
How to detect signs of Fraud in
Purchasing Department cont’d
• Switching vendors more frequently can be a
red flag
• Enquire why vendors were replaced, if you
suspect fraud contact vendors personally
• Suspect fraud if purchase orders consistently
missing or altered
• Cost of routine purchases rises beyond the
cost of inflation
• Investigate any unusual purchases made by
purchasing department
• Ask, why, when and how the purchase was
made?
How to detect signs of Fraud in
Purchasing Department cont’d
• Check for fraud if purchasing contracts are
awarded to select companies without
competitive bidding by other vendors
• Inquire with past vendors, why they think they
are no longer being utilised
• Explore any irregular business behaviour in
purchasing department
• If fraud or suspected fraud is uncovered seek
the assistance of an auditor or investigator to
review departments records and business
practices
Roll of Fraud in Projects
• Fraud is just as likely to occur in Projects as
anywhere else across the business
• If there is property and money involved you
will experience fraud
• Bribery, corruption, kickbacks, theft, fraud,
deception, collusion etc
• Systems and processes need to be robust
• Remove the opportunity
• Insist on segregation of duties
• Put in appropriate checks and balances
• Make someone responsible for the Fraud
Risks associated with the project
How to identify potential frauds
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Fraud Risk Reviews
Whistleblower Hotline
Employee Screening
Regular account reconcilliations
Credit Card statements to be reviewed
Payment codings to be reviewed
Review accounts payable list of vendors
Authorisation procedures of purchase orders, invoicing
and payments
• Segregation of duties
• Control methods to check for duplicate invoices
Fraud Red Flags—top 6
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Living beyond means
Financial difficulties
Wheeler-dealer attitude
Control issues, unwillingness to
share duties
• Divorce/Family problems
• Unusually close association with
vendor/customer
Malicious Programming Code
• Can be a major risk in the project
environment
• Can be installed on systems by
persons with access rights
• Username and password security
• Administration rights
• Terminated employees, contractors,
disgruntled vendors
• Manipulation of data for personal gain
or benefit
Employee Screening/Background
Checks
• “Employment screening is the process
of verifying (with the consent of the
individual) the identity, integrity and
credentials of an entrusted person and
should apply to an individual that is, or
will be, entrusted with resources and/or
assets.”
Australian Standard 4811:2006 – Employment
Screening
Employee Screening/Background
Checks
• A simple, cost effective yet powerful
tool that organisations can use to
minimise the numerous risks to their
business
• Screening highlights whether
employees have the necessary skills,
experience and background to carry
out their duties, which is fundamental
to the success and sustainability of any
business
Pre-employment Screening Defined
Preemployment
Screening
Probity
Checks
Vetting
Employment
Checking
The verification of
personal information
supplied by a candidate
seeking employment
with an organisation
Employee
Due Diligence
Background
Checking
Security
Checks
Background
Verification
Why the Need to Screen
Risk Management
Fraud
Australian Standards
AS 4811 - 2006 on “Employment
Screening”
AS 8001-2008 on “Fraud and
Corruption Control”
“A thorough pre-employment screening process is considered by some experts to be the most
effective way of minimising and guarding against potential security risks by identifying
undesirable employees before they join the organisation.” Standards Australia AS 8001
Benefits of Employment Screening
• Provides organisations with competitive
edge, allowing them to ID most appropriate
candidate
• Reduces the risk of damage to a firm’s
reputation and culture
• Deterring dishonest individuals from applying
in the first place, through a well-publicised
employment screening policy
• Assisting in the reduction of staff turnover
• Limiting the costs associated with terminating
and replacing unsuitable employees
Applications of Employment Screening
Pre- employment
Promotion
Transfer
Company Restructure
Due Diligence
Legislative Requirements
Directors and Officers
When to Screen
Pre-employment as a candidate short
list tool
Pre-employment on preferred
candidate
Promotion / change in position
Legislative requirement eg FSRA
Due Diligence – acquisitions and buy
outs
Background checks on vendors
Director and officer appointments
Enquiries Conducted
Background
database checks
Whistleblowing Hotline
Benefits include:
• Reduction in fraud, theft and unacceptable
behaviour
• Minimises potential losses through early
intervention, protecting the organisations
reputation and profit margin
• Improved morale and safety of employees
• Peace of mind for those responsible for
corporate governance
• Raises confidence of clients and
shareholders
• Savings in unnecessary legal costs
Research Findings
• It is best practice for employees to have an
anonymous channel to report perceived
problems to management
• The 2008 ACFE Report to the Nation
concluded that:
• 46.2% of internal fraud was detected via tipoffs from employees, customers, vendors and
anonymous sources.
• Organisations with hotlines cut losses by
approximately 50% per fraud scheme
Detection of Fraud Schemes
Implementing Hotline
• Development of Whistleblower Policy
• Dedicated training provided to relevant
staff/management
• Internal v’s External
• Protected Disclosures
• Socialisation through face to face and
other various mediums
• Ongoing programs such as reminders
• Advertisements on the intranet etc
Anonymous Hotline within Project
• Commencement of project, specify to all
Project Team members the contact details of
a senior person they can contact should they
be aware or suspect any unethical or
fraudulent behaviour within project
• If uncomfortable with contacting internal
person, provide name of senior person within
company independent to the project
• Create an open and transparent culture right
from the start
• Encourage people to come forward
What to do when fraud identified
• Assess situation
• Seek support and guidance from experts, internally or
externally
• Ensure findings are kept confidential and only released
to necessary parties
• Develop a strategy or Investigations Plan to continue
the conduct of the investigation
• Interview witnesses
• Gather all available intelligence
• Evidence collection, collation, analysis and storage
• Case Management/Brief preparation
• Reporting
Fraud Prevention Check Up
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Fraud Risk Oversight
Fraud Risk Ownership
Fraud Risk Assessment
Fraud Risk tolerance and risk
management policy
• Process-level anti-fraud controls
• Environment anti-fraud controls
• Proactive fraud detection
RISQ Contact Details
Guy Underwood: (CEO) 02 9392 8801
Peter Callaway: (MD Consulting) 03 9670 9855
Mobile 0412 519 571
Wayne Gilbert (Principal Consultant) 02 9392 8833
Web: www.risqgroup.com