Prepared and presented by Frank Crawford, CPA
www.crawfordcpas.com
frank@crawfordcpas.com
Perceived
opportunity
to commit
fraud
Perceived
pressure
facing
individual
Exacerbated in
economic downturn
Person’s rationalization
or integrity
©2008 by the Association of Certified Fraud Examiners, Inc.
Occupational Fraud Schemes in Government
and Public Administration (106 cases)12
12The
sum of percentages in this chart exceeds 100 percent because several cases involved multiple schemes from more than one category.
©2008 by the Association of Certified Fraud Examiners, Inc
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Male or female
No prior criminal history (<8%)
Well liked by co-workers
Likes to give gifts/compulsive shopper
Gambling problems not unusual
Long-term employee
Rationalizes: Starts small or “borrows”
Lifestyle clues
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Stealing cash funds
processed or on hand
Not recording &
stealing the cash
receipts
Under ringing &
stealing the difference
in cash receipts
Altering bank deposits
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Lapping
Forging checks received
Altering credit card
receipts
Granting bogus credits
Bogus bad debt write-offs
or account adjustments
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Personal bills
Fictitious suppliers
Kickbacks
Ordering personal
items
Petty cash funds
Employee expense
accounts
Credit cards
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Ghost employees
Manipulated time
records
Unclaimed payroll
checks
Writing extra payroll or
bonus checks
Leave time manipulation
Withholding fraud
W-2 fraud
 Top
Ten Reasons Frauds
Beat Internal Controls in
Government and What You
Can Do About It…
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Process mentality
Just doing the steps in the process
Not thinking about what one is doing
Example: Two signatures required on checks.
Both check signers fail to notice the check has
no payee and still sign the check.
Remedy: Reinforce the need to pay attention and
the consequences for failure.
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Blind trust
Failure to acknowledge warning signals
Example: Failure to follow up on a customer
complaint of an incorrect bill for service and
relying on the experienced and valued billing
clerk’s response that it was just an error.
Remedy: Realize that anyone can commit fraud.
Assume discrepancies are fraud and prove to
yourself it is only an error.
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Positional immunity
Rationalizing that controls don’t apply to me
because I am in upper management.
Often referred to as management override.
Example: Executive director doesn’t report leave
used, but still gets paid for unused leave
annually.
Remedy: Identify someone within or outside the
entity that you can report these circumstances
to and not jeopardize your job.
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Situational incompetence
New employee not in a position to question why
Example: New accounts payable clerk questions why
purchases from a certain vendor do not require
bids, and is told that such purchases are exempt.
Remedy: If you are the supervisor, don’t assume new
employee just doesn’t understand. Take their
questions seriously and ask your self why. If you
are the employee, ask more than one person.
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Workload overload
Not enough time to perform control procedures
Example: Knowing that the supervisor is too
busy to reconcile accounts receivable, a billing
clerk steals cash and posts unauthorized
adjustments.
Remedy: Reevaluate assignment of duties, and
when needed, demand more resources by
focusing on the consequences of fraud.
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Conflict avoidance
Responsible employees not comfortable in
confronting other employees
Example: A supervisor recognizes that the cash
drawer is always short at the end of the day,
but is uncomfortable in confronting the
employee.
Remedy: Reinforce supervisory responsibilities.
Provide employee management training. Don’t
tolerate poor performance.
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Informational restraint
Responsible employees lack the information
they need to identify an improper transaction
Example: An accounts payable clerk is not
provided a contract that includes a not-toexceed price limit and vendor takes advantage
by over-billing.
Remedy: Reinforce with employees the openness
and availability of records and information.
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Behavioral ignorance
Responsible employees ignore behavioral signs
or indicators of possible fraud
Example: Management and other employees fail
to investigate or question an employee that is
living well above their means or salary level.
Remedy: Create an environment within the
government that fosters ethical and
responsible behavior. Create an anonymous
hotline.
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Informational ignorance
Officials ignore fraud warning signs in
reports because they don’t understand the
reports
Example: Highway patrol fine revenue was
embezzled and monthly budget report
shows a potential problem, but the report is
too complicated for management and
governing board to understand.
Remedy: When it comes to reports, use the
KISS principle and train the users.
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Ethically challenged
Employees responsible for controls are just not
ethical and morally responsible individuals
Example: Purchasing supervisor is dishonest and
convinces an accounts payable employee to
process fake invoices for payment and split the
money between them.
Remedy: Don’t hire crooks.
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Fraud risk assessment
Internal controls
Proper environment
External review
Reporting mechanism
Hire right
Fidelity bonding
Establish “Perception of Detection”
Forensic data mining
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Segregation of duties
Effective bidding processes
Vendor approval controls
Policies
◦ Code conduct, fraud policies
◦ Conflict of interest, gifts, gratuities
◦ Etc.
Fraud awareness training
Internal audit
Initial Detection of Occupational Frauds4
4The
sum of percentages in this chart exceeds 100 percent because in some cases respondents identified more than one detection method.
©2008 by the Association of Certified Fraud Examiners, Inc.
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Managing the Business Risk of Fraud: A
Practical Guide (AICPA & IIA) – REQUIRED
READING
Management Anti-Fraud Programs &
Controls (exhibit to SAS 99)
ACFE Fraud Prevention Check-Up
ACFE Best Practices in Ethics Hotlines
ACFE Sample Code of Conduct
ACFE Sample Ethics Policy
Creating a
Culture of
Honesty & High
Ethics
Developing an
Appropriate
Oversight
Process
Evaluating
Antifraud
Processes &
Controls
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Setting the tone at the top
Creating a positive workplace environment
Hiring and promoting appropriate employees
Providing sufficient training
Confirming accountability for code of conduct
Implementing effective discipline
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Identifying and measuring fraud risks
Mitigating fraud risks
Designing and implementing appropriate
internal controls
Monitoring compliance with internal
controls
Don’t miss the obvious…
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Oversight by the audit committee or
equivalent
Oversight by management
Use of an effective internal audit function
Open and candid dialogue with independent
auditors
Take advantage of the COSO internal
control element “Risk Assessment” by
taking some time to “aim”…
Let’s talk a little more
about Honesty and High
Ethics for a bit…
Ethics refer to the standards that tell us how we ought to act in situations we
find ourselves in as parents, children, family members, friends, citizens,
elected officials, professionals, employees, teachers, etc.
30
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Ethics is not just following the law. The fact that it is
possible or legal to do something doesn’t mean it
“ought to be done”.
Ethics is not just following our feelings. Our feelings
can betray our ethics. Often we may feel it is
uncomfortable to do the right thing.
Ethics is not just following our religion. Ethics applies to
all people, whether religious or not. Some ethical
dilemmas are not addressed by one’s religion.
Ethics is not just following culturally accepted norms.
Some cultures may be blind to certain basic issues, such
as human rights.
Ethics is not just following science. While science may
provide us better information to make decisions, just
because something is scientifically or technologically
possible, does not mean it is ethical.
31
As a Society are We Living a Life Worth
Living?
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Corporate officers, greed, and accounting
scandals
Athletes and performance-enhancing drugs
Martha Stewart and broker/dealer scandals
College students and increased cheating
Hackers, internet viruses, and identity theft
Politicians and government corruption
Catholic priests and sex scandals
Danny Almonte and little league baseball
32
Recent study found that nearly 1/3 of U.S.
workers called in sick in the past year
when if fact they were fine.
Most common reasons given:
◦ Had plans with family and friends
◦ Needed to relax or catch up on sleep
◦ Just didn’t feel like going to work
Source: Harris Interactive Survey for CareerBuilder.com
(Aug-Sept. 2007)
33
Advertising “Prepaid” Bail Bonds
Is this Really Necessary?
34
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Hard to separate moral behavior in personal
life from moral behavior in public life
Where there are ethical lapses in private life,
there are often ethical lapses in public life
(and vice versa)
Ethical lapses in private life can result in
lack of trust in public life
35
Motive/Pressure
Potential for
Unethical
Behavior
Opportunity
Rationalization
36
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Do we rationalize bad behavior?
In what ways?
The “Broken Window Rationalization Theory”
- if we allow inappropriate behavior to go
unchallenged, we create the invitation for
rationalizing that such behavior is
considered acceptable
37
Stage 1 – Educational Level
Stage 2 – Societal Level
Stage 3 – Independent Level
38
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Right and wrong defined in terms of what
authority figures say is right and wrong or
what rewards and punishment result
◦ Parents
◦ Teachers
◦ Ministers
39
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Right and wrong defined in terms of what
society believes and law requires
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Family
Friends
Peers
Community
Nation
Circle of Morality Theory
40
CONCEPT:
Values
Beliefs
The Circle
of Morality™
Ethics
Consequences
Actions
For a shift to higher
Ethics, there must be
meaningful enough
Consequences to the
Actions of individuals to
cause a shift in the Beliefs
of a majority of society
that is significant enough
to change individual
Values.
41
42
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Right and wrong defined from an independent
point of view based on our individual ideals of
justice or human rights and welfare
These ideals are acquired through our knowledge,
experiences, and personal feeling
These ideals may differ from the norm of society
43
You are driving on a highway (with a normal speed
limit of 70 mph) with no other vehicles around.
The highway has recently been repaved.
Construction is now complete and all construction
barriers have been removed. However, the
temporary speed limit signs of 55 mph are still
posted. You are driving 70 mph.
Are you doing anything wrong?
44
Whatever our level of moral development, we
have all developed our own individual ethical
orientation or tendencies we follow when
faced with making decisions that involve
ethical dilemmas.
Let’s determine our own ethical orientation.
45
1.
Which is worse?
a. Hurting someone’s feelings by telling the
truth
or
b. Telling a lie and protecting their feelings
46
2. Which is the worse mistake?
a. To make exceptions too freely
or
b. To apply rules too rigidly
47
3. Which is it worse to be?
a. unmerciful
or
b. unfair
48
4. Which is worse?
a. Stealing something valuable from someone
for no good reason
or
b. Breaking a promise to a friend for no good
reason
49
5. Which is it better to be?
a. Just and fair
or
b. Sympathetic and feeling
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6. Which is worse?
a. Not helping someone in trouble
or
b. Being unfair to someone by playing favorites
51
7. In making a decision, on which do you rely
more?
a. Hard facts
or
b. Personal feelings and intuition
52
8. Your boss or superior orders you to do
something that is hurtful to someone. If you
carry out the order, have you actually done
anything wrong?
a. Yes
b. No
or
53
9. Which is more important in determining
whether an action is right or wrong?
a. Whether anyone actually gets hurt
or
b. Whether a rule, law, commandment, or moral
principle is broken
54
Ethics of Justice (J orientation)
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Based on equal application of moral principles and laws
or policies with little flexibility or exceptions
Actions are either inherently right (truthfulness, respect,
honoring promises) or inherently wrong (lying, theft,
manipulation, broken promises)
Generally more common of men than women
Ethics of Care (C orientation)
Based on sense of responsibility to reduce harm and
suffering with considerable flexibility for individual cases
Actions that produce more good than harm are “right”;
those that don’t are “not as right”
Generally more common of women than men
(Based on Ethical Orientation Questionnaire
developed by the Center for Ethics and Business at
Loyola Marymount University)
55
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Another perspective:
1. Ethics of Justice Orientation
RIGHT versus WRONG
2. Ethics of Care Orientation
RIGHT versus Not As RIGHT
56
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A situation where there are compelling
reasons for taking an action and
competing compelling reasons for not
taking the action
Ethical dilemmas exist because of these
conflicting or competing compelling
reasons
57
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You want to borrow another individual’s
truck, without approval (compelling reason
not to do it), and use it to deliver food,
clothing, and sleeping bags to desperately
hungry and homeless families immediately
after a natural disaster strikes (compelling
reason to do it).
What action should the individual take?
◦ In what direction would an Ethics of Justice thinker lean?
◦ In what direction would an Ethics of Care thinker lean?
58
1.
2.
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3.
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4.
First get all the facts and consider alternative
actions.
Analyze the actions themselves (ethics of justice
considerations)
Do they comply with the law
Are they honest, fair and equitable
Are they respectful of others rights
Analyze the potential results or consequences of the
actions (ethics of care considerations)
Do they advance the common good
What is the extent of good versus harm to others
What is the extent of good versus harm to me
Combine both analyses and make a decision (none
of the considerations should be ignored, each acts
as a check on the limitations of the other)
59
“Ask yourself whether or not you would feel
good about your decision while appearing
on prime-time television being
interviewed by a highly-skilled, wellinformed, and hard-hitting journalist,
knowing that your family, friends and
peers are watching.”
Quote from Warren Buffet
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1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Avoid conflicts of interest in fact and appearance
Don’t misuse nonpublic information for personal gain
Don’t accept or solicit gifts or items of value
Put forth honest effort in duties
Make no unauthorized or unfullfilable promises or
commitments
Be impartial and avoid giving preferential treatment
Don’t misuse or misappropriate company funds or property
Exercise civility and respect others opinions and beliefs
Comply with laws and meet all obligations as a citizen
Expose corruption and report fraud, waste and abuse
61
“I know nothing,
I see nothing, and
I say nothing!"
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