Ethics and Fraud
on YOUR Campus
Kathy Elliott
kathy.elliott@okstate.edu
David Bosserman
david.bosserman@okstate.edu
1
Acknowledgements
2010 ACFE Report to the Nations
on Occupational Fraud & Abuse
2010 Fraud Examiners Manual,
Association of Certified Fraud
Examiners
American Institute of Certified
Public Accountants
2
Acknowledgements
AICPA Webcast: Financial
Fraud from the Fraudster’s
Perspective . . . How Good
People Go Bad
Teaching for Ethical Reasoning
in Liberal Education: Robert J.
Sternberg
3
Centralia, Pennsylvania
4
5
6
7
8
Then
Now
9
Ethical Reasoning
10
Ethics vs. Ethical Reasoning
• “Ethics is a set of principles for what
constitutes right and wrong
behavior.”
• “Ethical reasoning, by contrast, is a
way of thinking about issues of right
and wrong.”
Teaching for Ethical Reasoning in Liberal Education: Robert J. Sternberg
11
I
Recognize that there is an
event to which to react.
Teaching for Ethical Reasoning in Liberal Education: Robert J. Sternberg
12
II
Define the event as having
an ethical dimension.
Teaching for Ethical Reasoning in Liberal Education: Robert J. Sternberg
13
III
Decide that the ethical
dimension is significant.
Teaching for Ethical Reasoning in Liberal Education: Robert J. Sternberg
14
IV
Take personal
responsibility for
generating an ethical
solution to the problem.
Teaching for Ethical Reasoning in Liberal Education: Robert J. Sternberg
15
V
Figure out what abstract
ethical rule(s) might apply
to the problem.
Teaching for Ethical Reasoning in Liberal Education: Robert J. Sternberg
16
VI
Decide how these abstract
ethical rules actually apply
to the problem so as to
suggest a concrete
solution.
Teaching for Ethical Reasoning in Liberal Education: Robert J. Sternberg
17
VII
Prepare to counteract
contextual forces that
might lead one not to act
in an ethical manner.
Teaching for Ethical Reasoning in Liberal Education: Robert J. Sternberg
18
VIII
Act.
Teaching for Ethical Reasoning in Liberal Education: Robert J. Sternberg
19
Sample Case Studies
• Many ethical situations are not as
simple or as complicated as the case
studies
• Employees must be given the chance
to confront ethical dilemmas so they
will learn how to solve them
20
Case Study 1
Foundation Employee
Request
• You are the Controller
• Your Foundation calls and asks you
to put one of your employees, who
works part-time for you and parttime for the Foundation, on
contractual labor to make sure the
employee will not have an open
records issue.
• Any ethical issues?
21
Case Study 2
Collaboration Scheme
• Your institution has a policy and price
schedule where collaborating noninstitutional researchers can use
institutional equipment and pay for
time used.
• One of your PI’s participates in such a
project with an outside collaborator.
The PI informs the collaborator that he
will receive usage invoices from XYZ
Systems (a firm owned by his wife). 22
Case Study 2
Collaboration Scheme
• The process works and the wife
sends the money to your Foundation
as an unrestricted gift to be used by
the PI’s Department.
• When discovered, the PI said he did
not see a problem as the money was
provided to the Department just as if
it had been a direct payment to the
Department.
• See any problems?
23
Case Study 3
Spousal Hire
• Your Controller’s wife is a well known
HR lawyer. HR reports to the Controller.
Your Board wants to hire her for a
particularly sensitive employer issue
involving an institutional employee.
• Is there an ethical issue here? For
whom?
• What if HR doesn’t report to the
Controller?
• What if the employee wants to hire her?
24
Case Study 4
President’s Request
• A member of your institution’s
leadership team sends you an email
and tells you he is behind in delivery
of a manuscript for a book he has
promised to a publisher.
• He says he has received a large
advance on the book and could be
required to return part of it if he does
not stay on schedule.
25
Case Study 4
President’s Request
• He tells you he plans to hire a
graduate student he has mentored
for years to help get caught up--at a
significant pay rate.
• He further says he will need
additional funding in his office
budget to pay her.
• Any ethical issues?
26
Case Study 5
The Golf Offer
• A vendor offers you an all expense
paid trip to Orlando for the PGA
Championship. Purchasing reports to
you.
• Is this an ethical issue?
• What if you personally reimburse the
vendor for airfare, hotel, food,
admission tickets and incidentals?
• Does this resolve the ethical issues?
27
Case Study 6
Dying Friend
• Your best friend is clearly dying. He
tells you that several years ago he had
a multi-year affair with a co-worker.
His wife doesn’t know. He asks you to
tell his wife after he dies and tell her
he asks for her forgiveness.
• Any ethical issue here? For whom?
28
Fraud
29
Objectives
Evaluate how to
detect fraud in an
institutional
environment
Evaluate
fraud “red
flags”
Discuss how to
be proactive to
fraud issues
Discussion of
ACFE’s 2010
Report to the
Nations on
Occupational
Fraud
30
The Questions
• How is it that employees, including
supervisors, attempt schemes which
are fraudulent in nature against their
section/department/college/
executive directorate/institution?
• How do they justify to themselves
that it is acceptable?
31
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
myself.
32
Definition of Fraud
• From an institutional perspective,
fraud includes any intentioned or
deliberate act to deprive the
institution of property or money by
guile, deception or other unfair
means
33
What Elements are
Necessary for a Person to
Commit Fraud?
34
With increasing pressure and decreased
internal controls – people will explore
more opportunities to create fraud.
Institutions are
downsizing which
has an immediate
effect on internal
controls.
Layoffs are
increasing.
Stock prices
are declining
(401k).
Credit crisis
and other
external
factors are
increasing.
Budgets are decreasing.
Institutions are doing
more with less.
Opportunity
Internal
Controls
The Potential
for Fraud
Incentive/Pressure
Internal and External
Rationalization
Fraudsters
will find a
way to
rationalize
their
actions.
Loss of stimulus funding
will generate additional layoffs.
Fraud Magazine; ACFE. Vol. 23, No. 3 May/June 2009. p.30
35
BY DEFINITION, FRAUD IS
UNETHICAL—HOW DO
YOU IDENTIFY A
FRAUDSTER?
36
AICPA Webcast: Financial Fraud from the Fraudster’s Perspective . . . How Good People Go Bad
37
While it may be hard to
profile a fraudster, there
are characteristics
to look for.
38
Fraud is a Man’s World
• Two-thirds of the frauds are
committed by males—higher
percentage than encountered in 2008
• Median loss of fraud by men is more
than that of women
• Why?
PERCEIVED
OPPORTUNITY
Fraud
Triangle
INCENTIVE/PRESSURE
RATIONALIZATION
2010 ACFE Report to the Nations on Occupational Fraud & Abuse © 2010
39
Fraud by Age
• The higher percentage of fraudsters are
between the ages of 36-45, which is
lower than 2008 where it was 41-50
• The median loss from fraud rises as the
age of the fraudster increases
• Why?
PERCEIVED
OPPORTUNITY
Fraud
Triangle
INCENTIVE/PRESSURE
RATIONALIZATION
2010 ACFE Report to the Nations on Occupational Fraud & Abuse © 2010
40
Education and Position
• Most fraudsters have attended or
graduated from college
• 14% have obtained a post-graduate
degree
• The higher the degree, the more
costly the fraud
ACFE Anti-Fraud Resource Guide-4th Quarter 2008
41
Fraud Red Flags
What are the red flag
personnel traits you could
find in your work area?
Personnel Trait Red Flags
• Tendency to live
• Irritability,
•
•
•
•
beyond one’s
means
Struggling with
personal financial
issues
Wheeler-dealer
attitude
Legal problems
•
•
defensiveness,
addiction
Family financial
problems
Refusal to take
vacation
Complaints about
inadequate pay
43
Here?
Here?
So, where does fraud
occur?
44
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
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
95%
45
The People Who Can Hurt
You the Most are the
People You Trust the Most!
46
AICPA Webcast: Financial Fraud from the Fraudster’s Perspective . . . How Good People Go Bad
47
Facts About Fraud
• 42.1% of frauds involve employees
– Median loss
$82,500
• 41.3% of frauds involve managers
– Median loss
$223,639
• 16.6% of frauds involve owners/
executives
– Median loss
$769,326
2010 ACFE Report to the Nations on Occupational Fraud & Abuse © 2010
48
Facts About Fraud
• Median loss involving:
– Male Employees
– Female Employees
$ 95,000
$ 70,000
• Of organizations surveyed, typical
organization losses were 5% of
annual revenues
2010 ACFE Report to the Nations on Occupational Fraud & Abuse © 2010
49
How Does One Rationalize
Fraudulent Behavior?
50
PERCEIVED
OPPORTUNITY
Fraud
Triangle
PRESSURE
RATIONALIZATION
2006 Fraud Examiners Manual, Association of Certified Fraud Examiners
51
AICPA Webcast: Financial Fraud from the Fraudster’s Perspective . . . How Good People Go Bad
52
Facts About Fraud
• The most common means of
detecting fraud are:
Employee Tips
Management Review
Internal Audits
Account Reconciliation
Document Examination
External Audits
Accident
Police Notification
Not for
Profits
43.2%
13.0%
10.7%
8.9%
6.5%
6.5%
6.5%
1.8%
Government
46.3%
11.6%
15.1%
4.6%
3.9%
7.4%
5.3%
1.4%
2010 ACFE Report to the Nations on Occupational Fraud & Abuse © 2010
53
So What is Missing in an
Organization to Perpetrate
Fraud?
54
AICPA Webcast: Financial Fraud from the Fraudster’s Perspective . . . How Good People Go Bad
55
How Does One Buy Into
Committing Fraud and
Why?
56
AICPA Webcast: Financial Fraud from the Fraudster’s Perspective . . . How Good People Go Bad
57
How Can We Detect Fraud
• Be Diligent
• Be Inquisitive
• Investigate
58
How would you
approach identifying
fraud?
2006 Fraud Examiners Manual, Association of Certified Fraud Examiners © 2006
59
Denial
• “Oh, that could never happen here,
we have a policy against it.”
“That could never happen
here, we have a policy
against it.”
60
Be Diligent
• You are charged with performing a
surprise vault cash count at your
institution
• During your count the vault cashier
tells you that the key is missing for
one of the cash boxes
• She suggests you come back
tomorrow when one of the cashiers
on leave will be back
• What do you do?
61
Be Inquisitive
• During a review of the Bursar’s daily
deposits you note a significant
number of the deposits have very
little cash included
• The other deposits have large cash
amounts
• All deposits balance to the cashiers’
daily reconciliations, but not to the
payment tender (cash, CC or checks)
• Would this be of concern to you?
62
Fraud Deterrence:
What’s it About?
• Not intended as a “gotcha”
• Not intended for entrapment
• The intent is awareness
• The intent is transparency
63
Types of Fraud
Red Flags
Asset Misappropriation
• By far the most common of all
occupational fraud
• Any scheme that involves the theft or
misuse of an organization’s assets
– Fraudulent invoicing
– Payroll fraud
– Skimming revenues
• Percent of all cases
• Median Loss
89.8%
$100,000
65
Fraud is the “Ain’t it Odd
Crime”
• Ain’t it odd that Kathy can afford a
Mercedes and she makes $20k a
year?
• Ain’t it odd that so and so lives in a
mansion but makes the same as I
do?
• Ain’t it odd that so and so has so
many expensive clothes and on
his/her salary?
66
Payroll Schemes
• Payroll schemes
– Any scheme in which an employee
causes his or her employer to issue a
payment by making false claims for
compensation
• Employee claims overtime for hours not
worked
• Employee adds ghost employees to the
payroll
• Median loss
$72,000
67
The Case of OverPayment Due to
Departmental Error
Is it Fraud?
68
Payroll Red Flags
• Lack of separation
•
•
•
of duties
Missing employee
information
No voluntary
deductions
No evidence of
work performed
• No physical
•
address or phone
number for
employee
Bypassing normal
hiring procedures
69
Pcard
• Relatively new challenge
• Very high fraud risk area-as high a
risk as handling cash unobserved
• Requires diligence and multiple
oversight
• Requires constant monitoring and
review
70
Pcard Schemes
• Purchasing from institutional
employees or family members
• Split purchases
• Making purchase to receive a gift
• Travel reimbursement schemes
• Altering log descriptions
• Personal purchases
71
The Girl with the
Expensive Stilettos
72
Do you want to see how
easy it is to modify an
invoice?
73
Pcard Red Flags
• Lack of separation
• Lack of original
•
•
•
•
of duties
Missing invoice
information
Missing entries in
Pcard log
Lack of approvals
•
•
invoices
Bypassing normal
Pcard procedures
Level Three
information
Gift with purchase
74
Skimming Schemes
• Skimming schemes
– Any scheme in which cash is stolen from
an organization before it is recorded on
the organizations books or records
• Employee accepts payment from a customer
but does not record the sale
• Understated sales and receivables
• Theft of check through the mail
• Median Loss
$60,000
75
The Case of the Frozen
Cash
76
Skimming Red Flags
• Lack of separation of duties
• Employees who do not take vacation
• Employees who do not like others to
perform their duties
• Missing register tapes or other
records
• Consistent differences in register
receipts to cash on hand
77
Billing Schemes
• Billing schemes
– Any scheme in which a person causes
his or her employer to issue a payment
by submitting invoices for fictitious
goods or services inflated invoices or
invoices for personal purchases
• Employee creates a shell company and bills
employer for nonexistent services
• Employee purchases personal items, submits
invoice for payment
• Median loss
$128,000
78
The Case of the
Vacant Lot
79
Do you want to see how easy
it is to create a fake invoice?
http://salesreceiptstore.com
http://bestfakedoctornotes.c
om/
80
Billing Red Flags
• Lack of separation of
•
•
•
duties
Increase in services
performed
Falsified or altered
documents
Vendors with PO Box
addresses
• Delivery address other
•
•
than institutional
address
Payments to
unapproved vendors
Excessive returns to
vendors
81
Cash Larceny
• Cash larceny schemes
– Any scheme in which cash is stolen from
an organization after it has been
recorded on the organization’s books
and records
• Employee steals cash and checks from daily
receipts before they can be deposited in the
bank
• Petty cash, change funds, vault cash
• Median loss
$100,000
82
The Scarlet Envelope
83
Cash Larceny Red Flags
• Lack of separation of duties
• Personal checks or IOU’s are in the
cash drawer
• Cash counts and register records do
not reconcile
• Refunds/voids without supporting
documentation/authorization
84
Expense Reimbursement
Schemes
• Expense reimbursement schemes
– Any scheme in which an employee
makes a claim for reimbursement of
fictitious or inflated business expenses
• Employee files fraudulent expense report,
claims personal travel, nonexistent meals,
etc.
• Median loss
$33,000
85
Drinking a Taxi Ride
86
Expense Reimbursement
Red Flags
• Lack of separation of duties
• Original documents supporting
expenses missing
• Receipts are altered
• Many receipts from the same vendor
• Delivery address other than
institutional address
• Submitted receipts are consecutively
numbered
87
Check Tampering Schemes
• Check tampering schemes
– Any scheme in which a person steals his
or her employer’s funds by forging or
altering a check on one of the
organization's bank accounts, or steals a
check the organization has legitimately
issued to another payee
• Employee steals blank company checks,
makes them out to himself or an accomplice
• Forged maker, forged endorsement, altered
payee, unauthorized maker
• Median loss
$131,000
88
The Case of the
Disappearing
Check Numbers
89
Check Tampering Red Flags
• Lack of separation
•
•
•
of duties
Altered bank
statements
Voided checks do
not match physical
copies of checks
Altered check
register
• Altered check
•
•
disbursement
journal
Altered cancelled
checks
Checks endorsed
by employee or
dual endorsements
90
Non-Cash Schemes
• Any scheme in which an employee
steals or misuses non-cash assets of
the victim organization
– Employee steals inventory from a
warehouse or storeroom
– Employee steals or misuses confidential
customer financial information
– Median loss
$90,000
91
The Fraudulent Tool Man
92
Non-Cash Red Flags
• Lack of separation of duties
• Shrinkage in inventory
• Employees who frequently visit the
office after hours
• Missing tools, equipment, office
supplies, etc.
• Missing, altered, or unmatched
supporting documents
• Employees borrowing office supplies,
tools or equipment
93
Final Word from Dianne
94
AICPA Webcast: Financial Fraud from the Fraudster’s Perspective . . . How Good People Go Bad
95
96
Q U E S T I O N S?
97
A COPY OF THIS
PRESENTATION IS
AVAILABLE AT:
http://faac.okstate.edu/index.
php/fraud-deterrence
98