scouting for fraud - parag deodhar

SCOUTING FOR FRAUDSCOUTING FOR FRAUD IN YOUR BUSINESSIN YOUR BUSINESS

Seminar on Fraud as a Strategic Riskg“What CFOs and CEOs don’t notice, but should”

Parag DeodharParag DeodharBANGALORE – 27 July 2012

FRAUD RISKFRAUD RISK

• Fraud is now so common that its occurrence is• Fraud is now so common that its occurrence is no longer remarkable, only its scale.If f d di l t ll i• If fraud were a disease, almost all companies would have a slight temperature…

• What’s @ Risk?– The typical organization loses an estimated 5% of yp gits annual revenues to fraud

– Regulatory sanctionsg y– Reputation / Brand image– Company closure!Company closure!

27 July 2012 2Parag Deodhar

TYPES OF OCCUPATIONAL FRAUDTYPES OF OCCUPATIONAL FRAUDSOURCE: ACFE 2012 GLOBAL FRAUD STUDY

87% 8%33%


ASSET MISAPPROPRIATION SCHEMESASSET MISAPPROPRIATION SCHEMESCategory Description Examples

SCHEMES INVOLVING THEFT OF CASH RECEIPTS

Skimming Cash is stolen from an organization before it is recorded on the organization’s books and records

Employee accepts payment from a customer but does not record the sale and instead pockets the money

Cash Larceny 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

SCHEMES INVOLVING FRAUDULENT DISBURSEMENTS OF CASH

Billing 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 services not actually rendered Employee purchases personal items and submits an invoice to employer for paymentemployer for payment

Expense Reimbursements

An employee makes a claim for reimbursement of fictitious or inflated business expenses

Employee files fraudulent expense report, claiming personal travel, nonexistent meals, etc.

Check Tampering A person steals his or her employer’s funds by intercepting, forging or altering a check drawn on one of the

Employee steals blank company checks and makes them out to himself or an accompliceg g g

organization’s bank accountsp

Employee steals an outgoing check to a vendor and deposits it into his or her own bank account

Payroll 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

C h R i t A l k f l t i h i t t E l f d l tl id l hi h h i tCash Register Disbursements

An employee makes false entries on a cash register to conceal the fraudulent removal of cash

Employee fraudulently voids a sale on his or her cash register and steals the cash

OTHER ASSET MISAPPROPRIATION SCHEMES

Misappropriation of Cash on Hand

The perpetrator misappropriates cash kept on hand at the victim organization’s premises

Employee steals cash from a company vaultCash on Hand victim organization s premises

Non-CashMisappropriations

An employee steals or misuses non-cash assets of the victim organization

Employee steals inventory from a warehouse or storeroomEmployee steals or misuses confidential customer financial information


PROFILE OF A FRAUDSTERPROFILE OF A FRAUDSTERSOURCE: ACFE 2012 GLOBAL FRAUD STUDY


HOW ARE FRAUDS DETECTED…HOW ARE FRAUDS DETECTED…SOURCE: ACFE 2012 GLOBAL FRAUD STUDY


DETECTION METHODSDETECTION METHODSSOURCE: ACFE 2012 GLOBAL FRAUD STUDY


PROACTIVE MEASURESPROACTIVE MEASURES


WHISTLE‐BLOWER MECHANISMWHISTLE BLOWER MECHANISM

KEY ELEMENTS FOR SUCCESSKEY ELEMENTS FOR SUCCESS

Who Wh d idHigh

Availability Anonymous

Who receives the complaints?

Who decides the actions?

& Accessibility

& Secure

Who i ti t ?

Who takes ti ?

Independent & Credible &

Impartial

investigates? actions?

transparentImpartial

Who reports?

27 July 2012 Parag Deodhar 9

RED FLAGSRED FLAGS SOURCE: ACFE 2012 GLOBAL FRAUD STUDY

87% First timers87% First timers35% Cases never reported t lito police49% No recovery


BEHAVIORAL RED FLAGSBEHAVIORAL RED FLAGS

• Excessive Family/Peer • Irritability, SuspiciousnessExcessive Family/Peer Pressure for Success

• Complained About Lack f A th it

Irritability, Suspiciousness or Defensiveness

• Wheeler‐Dealer Attitudeof Authority

• Past Legal Problems• Excessive Pressure from

• Divorce/Family Problems• Control Issues,

Unwillingness to Share• Excessive Pressure from Within Organization

• Refusal to Take Vacations

Unwillingness to Share Duties

• Unusually Close • Complained About

Inadequate Pay

yAssociation with Vendor/Customer

• Financial Difficulties /• Past Employment‐Related Problems

• Addiction Problems

• Financial Difficulties / High Debt

• Living Beyond Means• Addiction Problems Living Beyond Means


FRAUD DETECTIONFRAUD DETECTION

• Employee Background ChecksEmployee Background Checks– Not just during recruitment– Mystery ShoppingMystery Shopping

• Mandatory Leave / Job Rotation, Transfers• Anti‐Bribery clause in ContractsAnti Bribery clause in Contracts• Review of Processes and Controls• Dedicated team for fraud detection /• Dedicated team for fraud detection / investigation

• Clear reporting lines & Segregation of duties• Clear reporting lines & Segregation of duties• Electronic / Digital surveillance• Over riding Controls!!!• Over‐riding Controls!!!


VENDOR / PARTNER DUE DILIGENCEVENDOR / PARTNER DUE DILIGENCE

Organizations often operate in unfamiliar territories or with little knowledge of the background, reputation or ability to conduct business of their business associates and service providers. Many a times the track record and reputation can be overlooked, while focusing only on the potential gains. While positive impact is often expected, the potential negative impact from these associates normally ignored at the time of selection which might have significant impact.

Almost all organizations rely on third parties/ vendors to help them

It is, therefore, in the interest of the organizations to discover as much

conduct their business

Each of these associates can have a significant impact on your

information as possible about their vendors

The focus should be on validation ofg p ybusiness

While the positive impact is often expected the potential negative

The focus should be on validation of details provided as well discovery of any undisclosed information

expected, the potential negative impact, normally ignored at the time of selection of a vendor can h t i ifi

It is also important that the right partners are brought on board to assist on the collation and validationhave greater significance assist on the collation and validation of this information

1327 July 2012 Parag Deodhar

MIS & DATA ANALYTICSMIS & DATA ANALYTICS“BIG DATA”- 80% unstructured – emails / spreadsheets & other docs

• Increased revenues without a corresponding increase in cash flow,

i ll i

• Unusual increases in income or income in excess of industry peers

Red Flags can be visible in routine MIS as well:

especially over time• Significant, unusual or highly complex

transactions, particularly those that are closed near the end of a financial

• Significant unexplained increases in fixed assets

• Recurring negative cash flows from operations while reporting earnings and

reporting period• Unusual growth in the number of days’

sales in receivablesSt th h

operations while reporting earnings and earnings growth

• Allowances for sales returns, warranty claims, etc., that are shrinking in

t t th i t• Strong revenue growth when peer companies are experiencing weak sales

• Recurring negative cash flows from operations while reporting earnings and

percentage terms or are otherwise out of line with those of industry peers

• Assets, liabilities, revenues or expensesbased on significant estimates that p p g g

earnings growth• Significant declines in customer demand

and increasing business failures in either the industry or the overall economy

ginvolve subjective judgments or uncertainties that are difficult to corroborate

the industry or the overall economy


PREDICTIVE MODELINGPREDICTIVE MODELING

Assimilate data from multiple sources and apply predictive

Accepting, prioritizing and distributing alerts

Analysis and visualization tool for

uncovering previouslyanalytics to accurately assess transactions, activities and customer state in real time

& determine if it is actual fraud or

suspicious transaction

uncovering previously unknown relationships

among accounts or entities


DIGITAL SURVEILLANCEDIGITAL SURVEILLANCE

• Most frauds leave a trail on the system• Most frauds leave a trail on the system –emails, internet access, access control logs etc

• Data Leakage is a major challenge• Tools are available to:• Tools are available to:

– Log events– Scan logs for suspicious events and alert– Correlate suspicious events across systems and p ynetwork

– Digital forensicsDigital forensics


ETHICAL DILEMMAETHICAL DILEMMA Align the third party code of conduct to the employee code of conduct

• Discrimination and harassment• Wages and benefits

W k h d ti

Demonstrate through actions

• Work hours and over time• Health and safety• Labor – forced labor / child labor /

abuse of employees

• Any activity that you engage in with customers will be fair and defensible –NO EXCEPTIONSabuse of employees

• Compliance to environmental laws and adherence to sustainable business

NO EXCEPTIONS• Approach your big and small customers/

suppliers the same way.• Let all your current and potential

t / li k th t• Anti-bribery and corruption policies customers/ suppliers know that everyone gets a fair chance

• Transparency in process• Take a stand against customer who

Key issues to address

gbehave in a less than ethical manner

• Be willing to miss revenue or earnings targets if things are not done the right wayaddress y


THANK YOUTHANK YOU


scouting for fraud - parag deodhar

Documents

beenemployee steals

employee steals inventory

employee steals blank

employee f d

company vault cash

cash register tl

fraudulent removal of

money cash larcenycash