Fraud in Higher
Education - Update
AACUBO
October 2011
Acknowledgements
• 2008 Fraud Examiners Manual, Association of Certified Fraud
Examiners
• 2010 Report to the Nations on Occupational Fraud and Abuse,
Association of Certified Fraud Examiners
• ACFE CPE Course Workbook: Fraud Related Internal Controls:
Complying with Sarbanes Oxley and SAS 99
• Black’s Law Dictionary
• Financial Investigation and Forensic Accounting, George A. Manning,
CFE, EA
• Corporate Fraud Handbook, Joseph T. Wells
• Executive Roadmap to Fraud Prevention and Internal Controls, Martin
T. Biegelman & Joel T. Bartow
• Fraud Auditing and Forensic Accounting, Singleton, Singleton, Bologna,
& Lindquist
• CPA Expert, AICPA Newsletter, Winter 2009
• Fraud Magazine; ACFE. Vol. 26, No. 5 September/October 2011. p.23
• University Business; July/August 2011, pp.89-94
• Who is the typical fraudster?, KPMG
• David Bosserman, PhD, CPA, CFE
• Kathy Elliott, MBA, CPA, CFE
• Angie Welch, CPA, CFE, CFF, CICA
•An Audit vs A Fraud Investigation
•Define Fraud
•Fraud Theory
•Fraud Schemes (Education Industry)
•In the News
•The Fraudster
•Fraud Prevention & Deterrence
•Resources
An Audit Versus a Fraud Examination
• GAAS Audit
• Fraud Examination
– Recurring
– Key Elements:
•
•
•
•
•
Tailored Audit Program
Materiality
Evaluate Internal Controls
Audit Tests & Evidence
Cost Estimable
– Result is an Opinion on
Financial Statements
CPA Expert, AICPA Newsletter, Winter 2009
– Non-Recurring (Based on
Predication)
– Key Elements:
•
•
•
•
•
•
No Roadmap
Custom Procedures
Hypothesis
Interviews
Chain of Evidence
Cost Difficult to Estimate
– Result is a Possible Report
to the Board,
Management, or
Authorities
An Audit Versus a Fraud Examination Cont.
• Auditors are required to approach audits with
professional skepticism.
• Fraud examiners approach the resolution of a
fraud examination by attempting to establish
sufficient proof to support or refute an
allegation of fraud.
CPA Expert, AICPA Newsletter, Winter 2009
Definition of Fraud
“. . . all multifarious means which
human ingenuity can devise, and
which are resorted to by one
individual to get advantage over
another by false suggestions or by
suppression of the truth, and
includes all surprise, trick, cunning
or dissembling, and any unfair
way by which another is cheated.”
Black’s Law Dictionary
Occupational Fraud
“the use of one’s
occupation for personal
enrichment through the
deliberate misuse or
misapplication of the
employing organization’s
resources or assets”
Corporate Fraud Handbook, Joseph T. Wells
Fraud Triangle
• Developed by Dr. Donald R. Cressey
Perceived Opportunity
In the Words of the Perpetrator…
• Before
– Oh, what a tangled web we weave when first we
practice to deceive
– But once we’ve practiced for awhile, Oh my, how
we’ve improved our style!
• After
– I remember sitting in your office ashamed,
hopeless, afraid, and grieving over the pain my
selfish decisions had caused to my coworkers, my
employer, my family, and myself…
Occupational Fraud Schemes in the
Education Industry
Type of Scheme
% - Education Industry
% - All Cases
24.4%
21.9%
Fraudulent Statements
1.1%
4.3%
Cash on Hand
7.8%
11.5%
Cash Larceny
12.2%
9.6%
Skimming
21.1%
16.2%
Non-Cash
12.2%
15.7%
Billing
42.2%
27.6%
7.8%
16.9%
Expense Reimbursement
16.7%
15.1%
Payroll
10.0%
10.6%
Register Disbursement
0.0%
2.4%
Corruption
Check Tampering
Note – The sum of percentages exceeds 100% because some cases involved multiple schemes from more than
one category.
2010 ACFE Report to the Nations on Occupational Fraud & Abuse © 2010
Fraud by Department
Department
Accounting
Operations
Sales
Executive/Upper
Management
Customer Service
Purchasing
Number of
Cases
367
299
225
Percentage Median Loss
22.0%
$ 180,000
18.0%
$ 105,000
13.5%
$
95,000
80.4% of Cases
95% of ALL Losses
224
120
103
13.5%
7.2%
6.2%
$
$
$
829,000
46,000
500,000
Warehousing/Inventory
Finance
78
70
4.7%
4.2%
$
$
239,000
450,000
Information Technology
Marketing/Public
Relations
Manufacturing and
Production
Board of Directors
Human Resources
Research and
Development
Legal
Internal Audit
47
2.8%
$
71,400
34
2.0%
$
248,000
28
24
22
1.7%
1.4%
1.3%
$
$
$
150,000
800,000
200,000
13
8
3
0.8%
0.5%
0.2%
$
$
$
100,000
566,000
13,000
2010 ACFE Report to the Nations on Occupational Fraud & Abuse © 2010
Gender of Perpetrator:
66.7% Male
33.3% Female
Age of Perpetrator:
5.2% Under 26
8.6% 26-30
16.1% 31-35
19.3% 36-40
19.3% 41-45
13.7% 46-50
9.4% 51-55
5.2% 56-602.2% Over 60
Tenure of Perpetrator:
5.7% Less than 1 year
45.7% 1 – 5 years
23.2% 6 – 10 years
25.4% More than 10 years
Education of Perpetrator:
28.8% High School
17.1% Some College
38.0% College
14.0% Postgraduate
Perpetrator’s Position:
42.1% Employee
41.0% Manager
16.9% Owner/Executive
Perpetrator’s Employment Background:
82.4% Never Punished or Terminated
9.5% Previously Terminated
8.1% Previously Punished
Perpetrator’s Criminal Background:
85.7% Never Charged or Convicted
6.7% Prior Convictions
7.7% Charged but Not Convicted
2010 ACFE Report to the Nations on Occupational Fraud and Abuse
Behavioral
Red Flags
•
•
•
•
•
•
•
•
Financial difficulties
Living beyond means
Divorce / family problems
Control issues, unwilling to
share duties
Wheeler-dealer attitude
Unusually close association w/
vendor
Irritability, suspiciousness, or
defensiveness
Past employment-related
problems
•
•
•
•
•
•
•
•
Addiction problems
Past legal problems
Refusal to take vacations
Complaining about inadequate
pay
Instability in life circumstances
Excessive pressure from within
organization
Excessive family / peer
pressure for success
Complaining about lack of
authority
2010 ACFE Report to the Nations on Occupational Fraud and Abuse
What is Fraud Deterrence?
• Protecting the Organization
– Internal Controls
– Risk Assessments
– Tone at the Top (and Tone at the Middle)
– Reporting Procedures
– Heighten Awareness
– Move from being reactive to being proactive
– Monitor, Monitor, Monitor, Monitor, Monitor…
What is Fraud Prevention?
• Fraud prevention requires a system of
rules, which in their aggregate, minimize
the likelihood of fraud occurring while
maximizing the possibility of detecting
any fraudulent activity that may
transpire.
2008 Fraud Examiners Manual, ACFE
The biggest deterrence to
fraud is…
the perception of
detection.
Most experts agree
that it is much
easier to prevent
fraud than to
detect fraud.
2008 Fraud Examiners Manual, ACFE
Internal Controls Modified or Implemented in
Response to Fraud
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Increased Segregation of Duties
Management Review of Internal Controls
Surprise Audits
Fraud Training for Employees
Fraud Training for Managers / Executives
Job Rotation / Mandatory Vacation
Internal Audit / Fraud Examiner Department
Anti-Fraud Policy
Code of Conduct
External Audit of Financial Statements
Hotline
External Audit of ICOFR
Independent Audit Committee
Management Certification of F/S
Reward for Whistleblowers
Employee Support Programs
61.2%
50.6%
22.5%
16.4%
14.8%
13.5%
12.3%
11.7%
8.7%
8.7%
7.9%
7.8%
6.0%
5.9%
4.0%
1.8%
Note – Totals more than 100% as some organizations instituted more than one form of change to their
control structure.
2010 Report to the Nations on Occupational Fraud & Abuse © 2010
Initial Detection of
Occupational Fraud
–
–
–
–
–
–
–
–
–
–
–
Tips
Management Review
Internal Audit
Accident
Account Reconciliation
Document Examination
External Audit
Surveillance/Monitoring
Police Notification
Confession
IT Controls
40.2%
15.4%
13.9%
8.3%
6.1%
5.2%
4.6%
2.6%
1.8%
1.0%
.8%
The sum of percentages in this chart exceeds 100% because in some cases respondents identified more than one detection method.
2010 ACFE Report to the Nations on Occupational Fraud & Abuse © 2010
Source of Tips
– Employees
– Customers
– Anonymous
– Vendor
– Shareholder /Owner
– Competitor
– Perp’s Acquaintance
49.2%
17.8%
13.4%
12.1%
3.7%
2.5%
1.8%
2010 ACFE Report to the Nations on Occupational Fraud & Abuse © 2010
Duration Based on Anti-Fraud Control
Control
In Place
Management Review
12 mos.
Internal Audit/Fraud Exam Dept. 14 mos.
External Audit of ICOFR
15 mos.
Code of Conduct
15 mos.
Surprise Audits
12 mos.
Hotline
13 mos.
Mgmt Certification of F/S
15 mos.
Rewards for Whistleblowers
12 mos.
Job Rotation/Mandatory Vacation 12 mos.
External Audit of F/S
16 mos.
Anti-Fraud Policy
13 mos.
Fraud Training for Employees
13 mos.
Fraud Training for Mgrs/Execs
13 mos.
Independent Audit Committee
15 mos.
Employee Support Program
15 mos.
Control
Not In Place
24 mos.
24 mos.
24 mos.
24 mos.
19 mos.
20 mos.
23 mos.
18 mos.
18 mos.
24 mos.
18 mos.
18 mos.
18 mos.
20 mos.
18 mos.
Percent
Reduction
50.0%
41.7%
37.5%
37.5%
36.8%
35.0%
34.8%
33.3%
33.3%
33.3%
27.8%
27.8%
27.8%
25.0%
16.7%
2010 ACFE Report to the Nations on Occupational Fraud & Abuse © 2010
Original:
Altered:
Do you need
to order a fake
receipt?
www.salesreceiptstore.com
www.bestfakedoctornotes.com
Investigative
Team
Fraud Examiner
Expert in the Area
IT Security
Manager of
Financial Info
Special Investigator
Contact in Area of
Fraud
Legal Counsel
Human Resources
Resources
• ACFE (www.acfe.com)
• AICPA (www.aicpa.org)
• Managing the Business Risk of Fraud: A
Practical Guide (IIA, AICPA, ACFE)
• 2010 ACFE Report to the Nations on
Occupational Fraud & Abuse
Contact Information:
Brenna Dixon, CPA, CFE, CFF, CICA
(405) 744-2296
brenna.dixon@okstate.edu
Fiscal and Administrative Compliance
306 Whitehurst
fraud.deterrence@okstate.edu