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F d A d P tiFraud Awareness and Prevention
Corporation for Public BroadcastingOffice of Inspector Generalp
May 2014May 2014
The CPB/OIG was created by Congress in 1988 to promote the efficiency, effectiveness, and integrity of CPB by conducting audits, investigations, and other evaluations of CPB initiatives and operations. To report potential fraud, waste, or abuse in CPB initiatives and operations, please call 800-599-2170 or go to
www.cpb.org/oig/contact.php
• Why we have to pay attention
• What is fraud
• Detecting and preventing fraud
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Ch l i• Charles Ponzi
E• Enron
• Bernard Madoff• Bernard Madoff
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h i G• Euphonia Green
D S l• Deen Sanwoola
• Lela West• Lela West
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Washington Post investigative seriesfraud in nonprofits
fall 2013
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Association of American Medical Colleges
Administrative Assistant Ephonia Green – stole more than $5 million
• had sole sign-off authority on invoices up to $20,000
• opened bank accounts using company names that looked legitimate
• created phony invoices for legitimate vendors then approved themcreated phony invoices for legitimate vendors then approved them
• issued invoices to her private business, not listed in her budget records
Association President: “We are truly stunned.” She was a “long-time, trusted employee.”
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American Legacy Foundation
Assistant Vice President Deen Sanwoola – allegedly diverted more than $3.4 million
• charismatic computer specialist one of the first and most beloved employees• charismatic computer specialist, one of the first and most beloved employees
• had authority to both order and log in electronic equipment
• used dummy purchases and payments
• foundation waited almost 3 years before calling investigators• foundation waited almost 3 years before calling investigators
Foundation CEO: “We’re not innocent in this. . . . We are horrified it happened on our watch. . . . The truth hurts – we screwed up.”watch. . . . The truth hurts we screwed up.
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Virginia Scholastic Rowing Association
Volunteer Treasurer Lela West stole a quarter to half million dollarsVolunteer Treasurer, Lela West – stole a quarter to half million dollars
• highly respected, sat on the board of the national organization that selects Olympic rowers
• balanced the books, wrote the checks, tallied up cash collected from parking and concessions at more than 100 regattas
• association tipped off by sporting good company complaining about an unpaid bill
• spent association money on clothing car repairs flowers vacations passes to Disney• spent association money on clothing, car repairs, flowers, vacations, passes to Disney World, Redskins season tickets, and cable TV bills
Association President: “People are going to say ‘You stupid people ’ They’re exactly rightAssociation President: People are going to say, You stupid people. They re exactly right. You have to pay attention.”
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Why are nonprofits fraud targets?
Oversight at nonprofits often thinner, staff limited.
Supervisors often more trusting; people are committed to the mission.
Control structures often much weaker.
Tight operating budgets.
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“It’s sadder when it happens to a nonprofit. You go out of your way to trust a nonprofit. People give their money and expect integrity. And when integrity goes out the window, it just hurts everybody It hurts the community it hurts the organizationeverybody. It hurts the community, it hurts the organization, everything. It’s just tragic.”
Reaction of an official of the Maryland Bible Society of Baltimore, which was defrauded by a former employee.
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What is Fraud?What is Fraud?
C i i l d• Criminal Fraud• Civil Fraud
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Government Auditing Standards definition of fraud:
Fraud is a type of illegal act involving the obtaining of something of value through willful misrepresentation.
Section 7.30, ftnt 95.
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Fraud schemes can include:
- Embezzlement- Bribery- Kickbacks- Obstruction of justice- Obstruction of federal audit- Destructions of records
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Federal Criminal laws used to charge fraud
§§ 287 and 286 - false claims and conspiracy to defraud inconnection with claims
§ 371 conspirac§ 371 - conspiracy§ 641 - theft of public funds§ 666 - theft/bribery§ 666 theft/bribery§ 1001 - false statements§§ 1341/43 - mail and wire fraud§ 1516 - obstruction of audit
(all from Title 18 of the United States Code)15
False Claims Act for Fraud
• False Claims Act, 31 U.S.C. § 3729 – can apply fines and penalties for knowingly presenting false claims (or statements i f l i ) hin support of claims) to the government
• Has a broad standard for “Knowing” - includes actual knowledge deliberate ignorance or reckless disregard of theknowledge, deliberate ignorance or reckless disregard of the truth; no requirement that the actor had specific intent to defraud
• Penalty – $5,000 - $10,000 for each false claim plus 3 times the amount that was falsely claimed as damages
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Certifications to CPBCertifications to CPBAnnual General Provisions and Eligibility Criteria for Radio and g yTelevision contain a certification:Section 4- Recordkeeping, Audit and Documentation R i tRequirements
• C. Certificate of Compliance: CPB requires Grantees to annually certifyC. Certificate of Compliance: CPB requires Grantees to annually certify their compliance with the General Provisions and Eligibility Criteria. Compliance is subject to audit by the Inspector General, and improper certification may result in penalties under the Federal False p p y pClaims Act.
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Detecting and Preventing FraudDetecting and Preventing Fraud
Association of Certified Fraud Examiners(ACFE) 2012 Gl b l F d S d(ACFE) 2012 Global Fraud Study
• Typical organization loses 5% of its revenues to fraud–• Typical organization loses 5% of its revenues to fraud–projected to be $3.5 trillion globally (1,388 cases / 778 cases in U.S.)
• Median loss of $140 000 20% are more than $1 million• Median loss of $140,000 – 20% are more than $1 million • Duration of fraud schemes was 18 months before
detection• Asset misappropriation most common type of fraud 87%• Fraud more likely to be detected by tip • Most fraudsters are first-time offenders with cleanMost fraudsters are first-time offenders with clean
employment records• Organizations with anti-fraud controls resulted in less
funds lost and shorter duration of fraud schemesfunds lost and shorter duration of fraud schemes
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Auditor’s Responsibilities D F dto Detect Fraud
– “In planning the audit, auditors should assess risks of fraud occurring that is significant within the context of the audit bj ti ” GAS 6 30objectives.” GAS 6.30
– “The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the aud t to obta easo ab e assu a ce about w et e t efinancial statements are free of material misstatement, whether caused by error or fraud.” AU 316.01H di d i d i h ll– However,… an audit made in accordance with generally accepting auditing standards provides no assurance that illegal acts will be detected …” AU 317.07g
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Myth that External Audits U F dUncover Fraud
– Tip 43.3%– Management review 14.6%– Internal audit 14.4%– By accident 7.0%
A t ili ti 4 8%– Account reconciliation 4.8%– Document examination 4.1%– External audit 3 3%– External audit 3.3%
Source: ACFE 2012 Global Fraud Study
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Sources of TipsSources of Tips
– Employees 50.9%Employees 50.9%– Customer 22.1%– Anonymous 12.4%y– Other 11.6%– Vendor 9.0%– Shareholder/Owner 2.3%– Competitor 1.5%
Source: ACFE 2012 Global Fraud Study
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“Red Flags”Red Flags
– Lax tone set by management and governing board on y g g gaccountability and importance of internal controls
– Lack of policies & procedures– Lack of internal controls– Lack of segregation of duties
L k f t i– Lack of management reviews– Lack of timely reconciliation of bank accounts and non-
integrated operating systems (e.g., membership or g p g y ( g , punderwriting sub-systems)
– Common practice to override existing controls
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“Red Flags” (continued)Red Flags (continued)
– Duplicate or out-of-sequence check numbers appearing on p q pp gbank statement
– Cancelled checks returned from bank have a different font or ink than normalor ink than normal
– Non-payroll checks have been issued to employees– Unusual payments to vendors (amounts, timing, duplicate
)or over-payments)– Invoices received for goods/services not normally
purchased– Invoices not professionally prepared or lack information
(e.g., description of goods/services, invoice number, contact information, etc.)contact information, etc.)
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Scheme TypesScheme Types
– Asset misappropriation 86.7%Asset misappropriation 86.7%– Corruption 33.4%– Financial Statement Fraud 7 6 %Financial Statement Fraud 7.6 %
Source: ACFE 2012 Global Fraud Studyy
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Billing & Payroll SchemesBilling & Payroll Schemes
– Billing schemes 26.1%g• Submits invoice from fictitious company controlled by employee• Employees overpays a vendor and pockets the overpayment when it
was returned• Employee bills company for a personal purchase or uses company
credit card (e.g., bookkeeper embezzlement case) – Payroll schemes 11.6%y
• Ghost employees• Falsified hours (overtime)• Commission schemes (fictitious sales)( )• Leave abuse
Source: ACFE Fraud Examiners Manual
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Expense & Skimming SchemesExpense & Skimming Schemes
E i b 16 6%– Expense reimbursements 16.6%• Claimed personal expenses as business travel or other (e.g., expensed
payroll service deposited into personal account case) • Altered receipts overstating expenses (blank receipts from vendor or p g p ( p
claim expenses of others)• Submitting a single expense multiple times for reimbursement
– Skimming 15.7%• Collecting cash but not recording the revenue (e g donated goods• Collecting cash but not recording the revenue (e.g., donated goods
case)• Collecting cash but keeping a portion and under-report amount
received• Collecting a donor’s payment but not crediting donor’s account• Collecting cash and depositing in personal account before giving to
organization
Source: ACFE Fraud Examiners Manual
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Cash & Check SchemesCash & Check Schemes
– Cash larceny 11.2%• Stealing cash at point of receipt after recording• Stealing cash from bank deposits
– Check tampering 14.9%Check tampering 14.9%• Forged authorized signature• Forged endorsement of intended recipient of check
Ch i d i ti t t t• Changing payee designation to perpetrator or an accomplice (e.g., altered vendor name case)
• Authorized check signer writes fraudulent check for their own usetheir own use
Source: ACFE Fraud Examiners Manual
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Be Aware of Fraud TriangleBe Aware of Fraud Triangle
– Opportunity (lax internal controls, “rubber stamp” approvals, no management oversight, etc.)
– Rationalization (under compensated, not treated fairly, etc.) – Pressure (personal debt, family issues, unrealistic
performance expectations etc )performance expectations, etc.)
Source: ACFE Fraud Examiners Manual
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Behavioral Red Flags – PerpetratorsBehavioral Red Flags Perpetrators
– Living beyond means 35.6%– Financial difficulties 27.1%– Control issues / unwillingness to share duties / doesn’t take
leave 18.2%Divorce / family problems 14 8%– Divorce / family problems 14.8%
– Irritability, suspiciousness or defensiveness 12.6%– Addiction / substance abuse 8.1%Addiction / substance abuse 8.1%
Source: ACFE 2012 Global Fraud Study
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Fraud Prevention Measures
– External audits of financial statements 80.1%– Code of conduct 78.0%– Management certification of financial statements 68.5%Management certification of financial statements 68.5%– Internal audit function 68.4%– Management review 60.5%
I d d t dit itt 59 8%– Independent audit committee 59.8%– Hotline 54.0%– Fraud training 46.6%
Source: ACFE 2012 Global Fraud Study
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Recommended Prevention & Detection MeasuresDetection Measures
– Establish tone for accountability & control– Reinforce system of internal controls– Provide fraud awareness training for all employees and
managers – emphasizing behavioral and organizational “red flags”flags
– Set-up a hotline & encourage employees to report suspicious activities to organizational officials
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How to contact OIG hotlineHow to contact OIG hotline• Online Hotline Complaint Form http://www.cpb.org/oig/contact.php
• Telephone Hotline 202-879-9728 or 800-599-2170
• FAX 202-879-9699 (private fax)
i i i @• E-mail [email protected]
• Regular MailCorporation for Public BroadcastingOffice of Inspector General401 Ninth Street, NWW hi DC 20004 2129Washington, DC 20004-2129
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How to contact OIG staffHow to contact OIG staff• OIG Office 202-879-9669
• Inspector GeneralMary Mitchelson [email protected] @ p g
• Deputy Inspector GeneralWilliam Richardson brichardson@cpb orgWilliam Richardson [email protected]
• IG Counsel, Assistant IG for InvestigationsHelen Mollick hmollick@cpb orgHelen Mollick [email protected]
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