EFFECTIVE FRAUD & CORRUPTION MANAGEMENT

EFFECTIVE FRAUD & CORRUPTION MANAGEMENT

CONFERENCE PAPER

1^ST NATIONAL FORENSIC CONFERENCE,

YAOUNDE, CAMEROON

March 20-22, 2013

Dr.  Richard Mayungbe

E-mail: richardmayungbe@gmail.com

www.richardmayungbe.blogspot.com

+2348033467639

Tel: +16462028832

·        Definition of fraud, How Fraud Occurs, Various Fraud Schemes and targets.

Introduction:

It is a great pleasure to welcome all delegates to this brain storming conference aimed at pulling our collective wisdom together in finding effective solutions to one of Africa’s nagging problems, “Fraud and Corruption”

For the next 3 days, we shall be here together on this matter.

Definition of Fraud:

There is no single accepted definition of fraud. It is impossible to provide a comprehensive definition of fraud. Indeed, it may be possible to distinguish between two general types of definition: a general broader one and a criminal narrower one. However, all definitions have one thing in common - an element of dishonesty or deceit.

There are many dictionary definitions of the word 'fraud' each is similar but not exactly the same.

Such expressions as:

·        Unfair advantage by unlawful or unfair means;

·        Knowingly making a false representation;

·        Intentional deception resulting in injury to another person;

·        Something intended to deceive; deliberate trickery intended to gain an advantage;

·        An intentional perversion of truth; deceitful practice or device resorted to with intent to deprive another of property or other right;

·        The intentional and successful employment of cunning, deception, collusion; or artifice used to cheat or deceive another person whereby that person acts upon it to the loss of his property and to his legal injury;

·        The act of leading a person to believe something which you know to be false in a situation where you know the person will rely on that thing to their detriment;

·        A deception, intended to wrongfully obtain money or property from the reliance of another on the deceptive statements or acts, believing them to be true;

·        The intentional perversion of the truth in order to mislead someone into parting with something of value

The specific legal definition varies by legal jurisdiction, but fraud is a crime, and is also a civil law violation.

From the point of view of the criminal law, fraud could be defined as criminal deception, being the use of false representations to obtain unfair advantage or to harm the interests of another.

To deceive is to induce someone to believe that a thing is true which is false, and which the person practicing the deceit knows or believes to be false. To defraud is to deprive by deceit: it is by deceit to induce someone to act to his injury.

Fraud has nine elements:

1.   a representation of an existing fact;

2.   its materiality;

3.   its falsity;

4.   the speaker's knowledge of its falsity;

5.   the speaker's intent that it shall be acted upon by the plaintiff;

6.   plaintiff's ignorance of its falsity;

7.   plaintiff's reliance on the truth of the representation;

8.   plaintiff's right to rely upon it; and

9.   consequent damages suffered by plaintiff.

How Fraud Occurs

Fraud, like other crimes, can best be explained by three factors:

1) A supply of motivated offenders;

2) The availability of suitable targets;

3) The absence of capable guardians or a control system.

When economic climate declines, it is likely to raise the risk of fraud. As individuals and companies suffer financially, more people may be tempted to cross the line of legality and engage in fraud to maintain the lifestyles they had enjoyed during better times. Imagine the pressures that may be on individuals stagnant earnings, no bonuses, stiff competition, irresponsive governments,  the possibility of job losses – all of these, and more, increase the likelihood of an individual and even organisations  to commit fraud.

Smaller business are overall more susceptible because they generally don’t have as many people in place to separate job functions and put controls in place. The culture is usually open and trusting. Layoffs have caused even more holes to exist. Potential fraudsters may find plenty of opportunities to launch their schemes.

Some of the Ways Occupational Fraud Occurs include:
-Skimming cash receipts
-Falsifying expense reports
-Forging or tampering with company checks
-Falsifying pay roll records
-Falsifying bills and invoices
-Stealing cash –Larceny
-Stealing other physical assets
-Stealing intellectual assets and information
-Corruption
-Financial statement fraud

Various Fraud Schemes and Targets

Fraud is as numerous as the languages under the sun! Let us compile the most popular ones taking our source from the Association of Certified Fraud Examiners 2012 Global Fraud Study:

Occupational Fraud – This type of fraud falls into 3 categories viz:

• Asset misappropriation schemes, in which an employee steals or misuses the organization’s resources (e.g., theft of company cash, false billing schemes or inflated expense reports) The targets here are the employers, private or public.

• Corruption schemes, in which an employee misuses his or her influence in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect benefit (e.g., schemes involving bribery or conflicts of interest) The targets are internal and external clients of the organization

• Financial statement fraud schemes, in which an employee intentionally causes a misstatement or omission of material information in the organization’s financial reports (e.g., recording fictitious revenues, understating reported expenses or artificially inflating reported assets) The targets are shareholders, the investing public, banks and financial institutions, suppliers, customers, inland revenue, and many other stakeholders.

BANK FRAUDS

Bank and banking related fraud can occur in many ways from cheque fraud to credit card fraud. 

Cheque Fraud is responsible for the loss of about $815 million yearly, which is nearly 12 times the amount robbed from banks each year. Many types of cheque scams exist and include:

·        Forged Signatures – involves forging a signature on legitimate blank check

·        Forged Endorsement – includes endorsing and cashing or depositing a stolen check

·        Counterfeit Checks – is on the rise with the advancement in color copying and desktop publishing

·        Altered Checks – where a person changes the name of the payee or dollar amount on a legitimate check

·        Uninsured Deposits: occurs when illegitimate companies persuade customers with high rates of interest or offshore secrecy to avoid paying taxes. These companies are not monitored or authorized by any federal bank or financial institution, meaning depositors do not receive protection or insurance on their investments from any state or federal institution.

·        Credit Card Fraud: is a common type of fraud that affects millions each year. Statistics show that credit card causes $500 million in damages to card companies and credit card holders. So, it’s wise to learn how to keep your credit card and bank documents safe to prevent credit fraud from happening to you. And, if you suspect that you’re a target of credit fraud contact your bank or credit card company immediately to check for fraud and to disable your card.

·        Falsification of Loan Applications: also known as Loan Fraud. It occurs when a person produces false information to qualify for a loan, such as a mortgage for their house. Sometimes, loan officers may be in on the fraud.

·        Stolen Checks

Some fraudsters obtain access to facilities handling large amounts of checks, such as a mailroom or post office or the offices of a tax authority (receiving many checks) or a corporate payroll or a social or veterans' benefit office (issuing many checks). A few checks go missing; accounts are then opened under assumed names and the checks (often tampered or altered in some way) deposited so that the money can then be withdrawn by thieves. Stolen blank checkbooks are also of value to forgers who then sign as if they were the depositor.

·        Demand draft fraud

Demand draft fraud is usually done by one or more dishonest bank employees. They remove few DD leaves or DD books from stock and write them like a regular DD. Since they are insiders, they know the coding, punching of a demand draft. These Demand drafts will be issued payable at distant town/city without debiting an account. Then it will be cashed at the payable branch. For the paying branch it is just another DD. This kind of fraud will be discovered only when the head office does the branch-wise reconciliation, which normally will take 6 months. By that time the money is unrecoverable.

·        Rogue traders

A rogue trader is a highly placed insider nominally authorized to invest sizeable funds on behalf of the bank; this trader secretly makes progressively more aggressive and risky investments using the bank's money, when one investment goes bad, the rogue trader engages in further market speculation in the hope of a quick profit which would hide or cover the loss.

Unfortunately, when one investment loss is piled onto another, the costs to the bank can reach into hundreds of millions of dollars; there have even been cases in which a bank goes out of business due to market investment losses.

Some of the largest bank frauds ever detected were perpetrated by currency traders John Rusnak, and Nick Leeson. Jérôme Kerviel, allegedly defrauded Société Générale of 4.9 billion euros ($7.1 billion) while trading stock derivatives. 

·        Fraudulent loans

One way to remove money from a bank is to take out a loan, a practice bankers would be more than willing to encourage if they know that the money will be repaid in full with interest. A fraudulent loan, however, is one in which the borrower is a business entity controlled by a dishonest bank officer or an accomplice; the "borrower" then declares bankruptcy or vanishes and the money is gone. The borrower may even be a non-existent entity and the loan merely an artifice to conceal a theft of a large sum of money from the bank.

·        Forged or fraudulent documents

Forged documents are often used to conceal other thefts; banks tend to count their money meticulously so every penny must be accounted for. A document claiming that a sum of money has been borrowed as a loan, withdrawn by an individual depositor or transferred or invested can therefore be valuable to a thief who wishes to conceal the minor detail that the bank's money has in fact been stolen and is now gone.

·        Bill discounting fraud

Essentially a confidence trick, a fraudster uses a company at their disposal to gain confidence with a bank, by appearing as a genuine, profitable customer. To give the illusion of being a desired customer, the company regularly and repeatedly uses the bank to get payment from one or more of its customers. These payments are always made, as the customers in question are part of the fraud, actively paying any and all bills raised by the bank. After time, after the bank is happy with the company, the company requests that the bank settles its balance with the company before billing the customer. Again, business continues as normal for the fraudulent company, its fraudulent customers, and the unwitting bank. Only when the outstanding balance between the bank and the company is sufficiently large, the company takes the payment from the bank, and the company and its customers disappear, leaving no-one to pay the bills issued by the bank.

·        Booster cheques

A booster cheque is a fraudulent or bad cheque used to make a payment to a credit card account in order to "bust out" or raise the amount of available credit on otherwise-legitimate credit cards. The amount of the cheque is credited to the card account by the bank as soon as the payment is made, even though the cheque has not yet cleared. Before the bad cheque is discovered, the perpetrator goes on a spending spree or obtains cash advances until the newly-"raised" available limit on the card is reached. The original cheque then bounces, but by then it is already too late.

·        Prime bank fraud

The "prime bank" operation which claims to offer an urgent, exclusive opportunity to cash in on the best-kept secret in the banking industry, guaranteed deposits in "prime banks", "constitutional banks", "bank notes and bank-issued debentures from top 500 world banks", "bank guarantees and standby letters of credit" which generate spectacular returns at no risk and are "endorsed by the World Bank" or various national governments and central bankers. However, these official-sounding phrases and more are the hallmark of the so-called "prime bank" fraud; they may sound great on paper, but the guaranteed offshore investment with the vague claims of an easy 100% monthly return are all fictitious financial instruments intended to defraud individuals.

IDENTITY FRAUD

Identity theft is a serious crime affecting as many as 10 million Americans a year (as estimated by the Federal Trade Commission) and accounting for the loss of $221 billion a year worldwide (as estimated by the Aberdeen Group) Identity theft occurs when someone uses your personally identifying information (like your name, social security number, or credit card information) to pretend to be you. The identity thief does this for his own personal gain at the expense of his victim.

This is fraud and it could result in serious consequences for the victim such as bad credit reports or even warrants for the victim's arrest, depending on what the thief chooses to do with the victim's personal information.

An identity thief may use your information to:

·        Open a new credit card, phone, or utilities account in your name and then run up the bills without paying them. The delinquent account then appears on your credit report.

·        Open a bank account and write bad cheques in your name, apply for a loan in your name, or use your bank information to drain your account.

·        File a fraudulent tax return, or apply for government benefits in your name.

·        Get a driver's license with your information but his own picture on it.

·        Give your personal information to police during an arrest. Then when he does not show up for the court date, a warrant of arrest is issued in your name.

There are a number of methods a skilled identity thief may use to steal your information. These include:

·        Shoulder Surfing: watching you from a nearby location as you punch in your pin codes or listening as you give someone else your personal information over the phone

·        Dumpster Diving: rummaging through your trash to find bills or other documents with your name and personal information on them

·        Stealing: stealing mail (including bills, credit card statements, credit card offers, and tax information), or even stealing wallets and purses to gain access to documents with your personal information on them

·        Bribing: bribing employees (such as government, bank, or credit card company employees) who have access to your personal information

·        Pretexting:  using false pretenses to obtain your personal information from banks, phone, credit companies, and other companies

·        Skimming: using a special storage device to scan and remember your credit and debit card numbers when you use your cards

·        Phishing: pretending to be a financial institution or other company (like a lotto company) and sending you spam or pop-up advertisements to persuade you to reveal your personal information

·        Changing your address: completing a change of address form to divert your billing statements and other mail to another location where this information is easily accessible

The following is a list of warning signals indicating that you may be a victim of identity theft:

·        Your credit card statement includes purchases you didn't make or your bank statement includes withdrawals you didn’t make

·        You receive a credit card that you did not apply for

·        You are denied credit or offered less favorable credit than your past spending deserves

·        You get a denial of credit that you didn't apply for

·        You receive credit card or bank statements in your name but you do not hold the account they're billing you for

·        You no longer receive credit card, bank, or utilities statements.

·        You applied for a credit card or bank account but you are not getting a card or statements

·        You notice some of your mail is missing

·        You receive notice of a mail redirection request you didn't make

·        You receive bills from companies you don't recognize

·        There are credit cards or loans that you didn't open listed on your credit history

·        Your credit report reveals inquiries from companies you never dealt with

·        Debt collection companies try to collect debts that aren't yours

·        You are arrested for a crime you didn't commit

COMPUTER FRAUDS

Computer fraud is the use of information technology to commit fraud. In the United States, computer fraud is specifically proscribed by the Computer Fraud and Abuse Act, which provides for jail time and fines.
Types of computer fraud vary and can be complex or simple. Simple types of fraud might include:

• Sending hoax emails intended to scare people.
• Illegally using someone else’s computer or “posing” as someone else on the Internet.
• Using spyware to gather information about people.

These actions are computer fraud because they are deliberate misrepresentations of the truth. They progress into more harmful actions as they grow more complex and include:

• Emails requesting money in return for “small deposits.”
• Pyramid schemes or investment schemes via computer with the intent to take and use someone else’s money.
• Emails attempting to gather personal information to be used to access and use credit cards or social security numbers.
• Using someone else’s computer to access personal information with the intent to use such fraudulently.
• Using the computer to solicit minors into sexual alliances.
• Violating copyright laws by copying information with the intent to sell information, like DVDs, CDs.
• Hacking into computer systems to gather large amounts of information for illegal purposes.
• Hacking into or illegally using a computer to change information, such as grades, work reports, etc.
• Sending computer viruses or worms with the intent to destroy or ruin someone else’s computer.

·         Even though there are stiff penalties for committing computer fraud, laws governing against it may be difficult to enforce. Some of the email scams for investment opportunities and get rich quick schemes originate outside of the US, and it may be difficult to instigate investigations on foreign soil. It’s therefore wise to be wary and commit to the following computer philosophy when you’re on the net:

1)    Do not give personal information to anyone or to any company you’ve never heard of before. This includes your full name, your address, your phone number, credit card number, social security numbers, or information about the people in your household.

2)    Do not pay attention to get rich quick schemes. If they seem too good to be true, they absolutely   are.

3)    Do not open emails from strangers. Install anti-viral software and spam blocking programs on your computer and your email program.

4)     Don’t download attachments from people you don’t know.

5)    Teach your children about safe communication on the Internet to protect them from Internet predators.

6)    Don’t keep passwords on your computer, and do not use common passwords like the names of your kids, birthdays, or other guessable words. Never give your password to someone else.

CORRUPTION IN PUBLIC PROCUREMENT
Corruption is defined by the World Bank and Transparency International (TI) as “the misuse of public office for private gain.” As such, it involves the improper and unlawful behavior of public-service officials, both politicians and civil servants, whose positions create opportunities for the diversion of money and assets from government to themselves and their accomplices
There are two widely-acknowledged dimensions of corruption—supply and demand-side. Supply- side is the private sector that gifts or bribes the government officials who, in turn, constitutes the demand-side or the receivers. Over the past two decades, anti-corruption measures have targeted only the demand-side either by limiting the government officials’ vulnerability to bribes or in-kind gifts through enactment of laws or by empowering the people through advocacy against the demand-side corruption. Although legal measures against the demand-side corruption are important in their own right, we have often ignored the role of the private sector as a supplier of corrupt payments and a vulnerable sector for corruption itself

Previously, the private sector believed that corruption exists because the government officials are corrupt and did not consider itself as encouraging corruption. Over the years, the private sector has been established as an equal participant in corruption transaction, and efforts to limit its ability and vulnerability to engage in corruption are therefore, equally and urgently needed. In our mainstream corruption debate, demand-side often draws the attention while supply-side is hardly a matter of public concern. Though the activism against corruption in post-1990 period scaled up new heights in terms of awareness, capacity building and empowerment, yet there has not been much advocacy to address the supply side of corruption.

Over the years, the private sector has been established as an equal participant in corruption transaction. However, in our mainstream corruption debate, demand-side often draws the attention while supply-side is hardly a matter of public concern.

Corruption is a central and a growing challenge for businesses and society— from informal vendors in the least developed countries (LDCs) to multinational companies in the industrialized ones—for citizens, communities and countries, all over the world. Corruption in private sector directly impedes development and makes a few people rich at the cost of many. Lack of a coherent policy and an in-built system to prevent corruption within the corporate sector can distort the national economy and limit the growth of the private sector eventually.

As corruption takes place at the interface of the public and private sector, bringing one into the legal net and leaving out the other has made our anti-corruption fight one-sided. We have seen many corporate corruption scandals over the years. But, a few of them have come under the judicial hammer. The Petroleum Subsidy scandals and most recently Lawan/Otedola scam are some of the most notorious corruption swindles in or by the corporate sector. And in most of these cases, supply-side is hardly or inadequately penalized for the offence due to lack of a concrete policy. Taking into account the rapidly changing forms of corruption, we need to address the corruption in and by the private sector as seriously as in the public sector by widening the legal nets to tackle the menace.

Corruption has become so rampant that we now need to review the existing laws to prosecute even the bribers and the corporate corruption. Africa is no exception to this phenomenon as majority of the anti-corruption interventions worldwide have focused on the demand-side only. Though the supply-side doesn’t adequately figure in anti-corruption discourse, it has now become imperative to address this almost ignored dimension by mainstreaming it in governance policies and laws. Dealing with corruption through a two-pronged approach—supply-side and demand-side is now more urgent than ever given its magnitude and its adverse effects on economy, development and democratic system at large.

What causes and fuels corruption

Corruption distorts resource allocation and government performance. The causes are many and vary from one country to the next. Among the contributing factors are:

·        Policies, programs and activities that are poorly conceived and managed,

·         Failing institutions,

·         Poverty and Deprivation

·         Income disparities,

·        Inadequate civil servants’ remuneration,

·        Lack of accountability and transparency.

Political and or Economic Brigandage

EXAMPLES OF CORRUPTION AT VARIOUS STAGES OF PROCUREMENT

Pre-qualification and tender

1. Loser’s fee

2. Price fixing

3. Manipulation of pre-qualification

4. Bribery to obtain main contract award

5. Bribery during sub-contract procurement

6. Corruptly negotiated contract

7. Manipulation of design

8. Specification of overly sophisticated design

9. Inflation of resources and time requirements

10. Obtaining a quotation only for price comparison

11. Concealment of financial status

12. Intention to withhold payment

13. Submission of false quotation

14. Falsely obtaining export credit insurance

Project execution

15. False invoicing: supply of inferior materials

16. False invoicing: supply of less equipment

17. False work certificates

18. Excessive repair work

19. Overstating man-day requirements

20. Inflated claim for variation (1)

21. Inflated claim for variation (2)

22. False variation claim

23. Issue of false delay certificate

24. False extension of time application

25. False assurance that payment will be made

26. Delayed issue of payment certificates

27. Concealing defects (1)

28. Concealing defects (2)

29. Set-off of false rectification costs

30. Refusal to issue final certificate

31. Requirement to accept lower payment than is due

32. Extortion by client’s representative

33. Facilitation payment

34. Overstating of profits

35. False job application

Dispute resolution

36. Submission of incorrect contract claims

37. Concealment of documents

38. Submission of false supporting documents

39. Supply of false witness evidence

40. Supply of false expert evidence

41. Bribery of witness

42. Blackmail of witness

43. False information as to financial status

44. False statement as to settlement sum

45. Over-manning by law firm

46. Excessive billing by lawyer

47. Complicity by lawyer

To enable us do a thorough job on corruption in procurement, a whole week course might be required.

·        Psychology of fraud: what motivates the fraudster

          

* Pressure or Incentive - Perceived need is often created by expensive addictions such as substance abuse, sex addiction, gambling addiction, and spending addiction. Typically, a person committing fraud has an incentive or is under some sort of financial pressure. There may be an unexpected financial crisis in the family or the individual may be living beyond her/his means.  Companies are limited in how much they can prevent this. However, companies should be aware of changes in behavior and spending that may raise red flags. Not to trivialize it, but please remember the four 'Bs' of perceived need: Beer, Boobs, Betting, and Borrowing.

Once begun, the fraud typically continues, and even grows. The fraudster gains confidence and becomes accustomed to the enhanced financial situation. Many fraudsters initially tell themselves that the scheme is only temporary. Once the current crisis (or after whatever drove the perpetrator to hatch the scheme in the first place) has passed, the illegal activity will stop. In fact, this rarely occurs. The fraudster grows confident and typically enlarges the scam.

 Perpetrators may believe that they will repay the funds after the current crisis passes. They might even develop a plan to save up the amount to repay the funds. Again, repayment of the stolen money rarely occurs, unless the court orders it.

Rationalization - Never underestimate the ability of the human mind to rationalize anything. The criminal mind can actually rationalize a crime as being a benefit to society. Great fraudster Frank Abignale bragged in his book, Catch Me If You Can, that he only bilked large corporations and not individuals. He was doing them a favor by exposing their weaknesses. Fraudsters must be able to rationalize their schemes to themselves or embrace an attitude that the fraud is somehow justified; thus, rationalization or attitude is a factor typically found in a fraud situation. People who commit fraud may be able to convince themselves that the wrongdoing is only temporary and will stop when the financial crisis does. They may believe that they will repay the money. Further, people who commit fraud might feel that they need the money more than the entity. Somehow, they are justified in taking the money or goods or services. They might believe that they deserve the extra money, perhaps to right a perceived injustice.

Opportunity - This is one area that companies have the ability to control. Opportunity is the means to steal whether it is leaving the supply closet unlocked or an inadequate system of internal control and segregation of duties. There may be a lack of adequate controls in place. The fraudster is able to take advantage of that shortcoming in the system of internal control and where suitable controls are in place, the individual may be able to override the system. The perpetrator may be at a high level in the organization and have the authority to bypass the system. The presence of all three factors or points of the triangle heightens the likelihood of fraud occurring in an organization. The higher the level of a specific factor that is present, the more likely it is that a fraud has occurred.

OCCUPATIONAL FRAUD

The term "occupational fraud and abuse" is broadly defined as "the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets”

This happens mostly through the under listed fraudulent schemes:

LARCENY

 Larceny, according to Black's Law Dictionary, is "felonious stealing, taking and carrying, leading, riding, or driving away with another person's property, with the intent to convert it or to deprive the owner thereof.

The key element in a larceny scheme is the fact that there is no effort to cover up the theft. Unlike the skimming schemes defined below, the cash has already been recorded on the books. In general, cash larceny schemes are not a high risk area for businesses. Presumably because adequate physical controls exist over the custody of cash in most organizations, these schemes accounted for only one percent of the total losses identified in the study

SKIMMING

"Skimming" is the embezzlement of cash from an entity prior to its being recorded on the books

GROUP CASE STUDY 1

Take a look at the result of the Association of Certified Fraud Examiners Survey on various cases of fraud in 2012

Summary of Findings of the ACFE in 2012 Report to the Nation

• Survey participants estimated that the typical organization loses 5% of its revenues to fraud each year. Applied to the 2011 Gross World Product, this figure translates to a potential projected annual fraud loss of more than $3.5 trillion.

• The median loss caused by the occupational fraud cases in our study was $140,000. More than one-fifth of these cases caused losses of at least $1 million.

• The frauds reported to us lasted a median of 18 months before being detected.

• As in our previous studies, asset misappropriation schemes were by far the most common type of occupational fraud, comprising 87% of the cases reported to us; they were also the least costly form of fraud, with a median loss of $120,000. Financial statement fraud schemes made up just 8% of the cases in our study, but caused the greatest median loss at $1 million.

Corruption schemes fell in the middle, occurring in just over one-third of reported cases and causing a median loss of $250,000

Occupational fraud is more likely to be detected by a tip than by any other method.

The majority of tips reporting fraud come from employees of the victim organization.

• Corruption and billing schemes pose the greatest risks to organizations throughout the world. For all geographic regions, these two scheme types comprised more than 50% of the frauds reported to us.

• Occupational fraud is a significant threat to small businesses. The smallest organizations in our study suffered the largest median losses.

These organizations typically employ fewer anti-fraud controls than their larger counterparts, which increases their vulnerability to fraud.

• As in our prior research, the industries most commonly victimized in our current study were the banking and financial services, government and public administration, and manufacturing sectors.

• The presence of anti-fraud controls is notably correlated with significant decreases in the cost and duration of occupational fraud schemes. Victim organizations that had implemented any of 16 common anti-fraud controls experienced considerably lower losses and time-to-detection than organizations lacking these controls.

Perpetrators with higher levels of authority tend to cause much larger losses. The median loss among frauds committed by owner/ executives was $573,000, the median loss caused by managers was $180,000 and the median loss caused by employees was $60,000.

• The longer a perpetrator has worked for an organization, the higher fraud losses tend to be. Perpetrators with more than ten years of experience at the victim organization caused a median loss of $229,000. By comparison, the median loss caused by perpetrators who committed fraud in their first year on the job was only $25,000.

• The vast majority (77%) of all frauds in our study were committed by individuals working in one of six departments: accounting, operations, sales, executive/upper management, customer service and purchasing. This distribution was very similar to what we found in our 2010 study.

• Most occupational fraudsters are first-time offenders with clean employment histories.

Approximately 87% of occupational fraudsters had never been charged or convicted of a fraud related offense, and 84% had never been punished or terminated by an employer for fraud-related conduct.

Required:

1.     Against the backdrop of the above revelations, write a professional letter of recommendation to the appropriate minister, detailing how to deal with the problems of fraud in your country.

rEFERENCES/fURTHER READING:

·        http://legal.practitioner.com/regulation/standards_9_2.htm

·        www.acfe.com/fraud-triangle.aspx

·        http://en.wikipedia.org/wiki/Fraud

·        http://www.acfe.com/fraud-prevention-checkup.aspx

·        http://www.transunion.com/personal-credit/identity-theft-and-fraud/tips-to-prevent-fraud.page

·        Strategic Fraud Detection: A Technology-Based Model, Conan C. Albrecht and W. Steve Albrecht (Rollins Centre for e-Business)  

·        http://www.transparency.org/research/cpi/overview

·        Report to the Nation, 2012 by the ACFE

DAY 2

INTERVIEWING FOR FRAUD IN THE AUDIT PROCESS

WHAT THE STANDARDS SAY
Statement of Auditing Standards (SAS) no. 1, Responsibilities and Functions of the Independent Auditor, says, “The auditor has responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.” SAS no. 99, Consideration of Fraud in a Financial Statement Audit, reiterates that concept and places a heavy emphasis on making inquiries. Paragraphs 20 through 26 enumerate those questions that Auditors should ask management in checking for fraud risk.

Paragraph 27 is clear: “The auditor should be aware when evaluating management’s responses to inquiries…that management is often in the best position to perpetrate fraud.” Indeed, therein lies the challenge: Some people in positions of trust commit wrongdoing, and those committing wrongful acts and fraud can—and do—lie to auditors and/or managers/investigators.

Interviews are a useful audit tool to gather information about internal controls and fraud risks for several reasons. First, employees involved in the day-to-day operations of a functional area possess the best knowledge of that area. They are in an excellent position to identify weak internal controls and fraud risks. Second, although most employees are not directly involved in fraud, they may have knowledge of suspected, or actual, frauds that interviews can bring to light. Third, employees may be reluctant to tell management about needed internal controls and suspected or actual fraud, even when a company has an ethics hotline, a compliance officer, or other reporting mechanisms. When interviewed, however, employees are often willing, even relieved, to talk about these issues.

The Information Needed In Audit Process

A primary difference between SAS 82 and SAS 99, which superseded it, is that the latter includes expanded requirements for inquiries of management. Making inquiries of management is important because senior management is often in the best position to perpetrate and conceal fraud. In obtaining information necessary to identify the risk of fraud in a financial statement audit, SAS 99 requires auditors to ask the following questions:

• Does management communicate its views on ethical business behavior to its employees?
• Does management have programs and internal controls designed to prevent, deter, and detect fraud?
• Does management discuss with the audit committee of the board of directors how its internal control system serves to prevent, detect, and deter fraud?
• Does management understand the fraud risks specific to its business?
• Does management monitor fraud risks relevant to specific components or divisions within the entity?
• Does management have any knowledge or suspicion of fraud?
• Is management aware of any allegations of fraud?

In addition to management inquiries, SAS 99 also requires an auditor to inquire of the audit committee and of internal audit personnel about their views on the company’s fraud risks. Significantly, SAS 99 mandates that other individuals within the company also be questioned about the risk of fraud. Paragraph 24 of SAS 99 states:

The auditor should use professional judgment to determine those others within the entity to whom inquiries should be directed and the extent of such inquiries. In making this determination, the auditor should consider whether others within the entity may be able to provide information that will be helpful to the auditor in identifying risk of material misstatement due to fraud.

SAS 99 suggests that auditors inquire of operating personnel with varying levels of authority, of in-house legal counsel, and of others knowledgeable of fraud risk. Because employees are often aware of where specific fraud risks lie, auditors should understand employees’ views on the risk of fraud. Additionally, auditors should look for discrepancies in information received from various interviewees. Unusual situations or conditions identified through interviews with management and others can be revealing

The purpose of the interview is to learn new facts or to confirm previously obtained information. An interrogation, or “truth-seeking interview,” is in many ways the opposite. The primary difference is the state of mind of the interviewee. In an interview, the interviewee is generally a willing participant assisting the interviewer in the process of determining the facts. An interrogation occurs only when a suspected fraudster has been identified. The interviewer’s task is to persuade the individual to admit to an act or omission that he has no intention of divulging.

Interviewing requires the ability to organize thoughts and discussion along a logical path. Interrogation requires those skills coupled with the ability to persuade an individual to say something that runs contrary to his survival instincts.

Venue of the interview: The interview should have a tone that is formal, friendly, and nonthreatening; should follow a predetermined structure; and should result in meaningful fact-finding. An interviewer should prepare a set of questions and an introductory statement that explains the purpose of the interview. This preparation will set the tone for a serious, purposeful, and effective interview.

The interview should always be conducted in private. If the interviewee’s workstation is not sufficient, then the interviewer should use a meeting room. An interview is most successful when the subject is comfortable and at ease. Most people are more comfortable in their own work environment and when they can answer questions without concern that a coworker might be eavesdropping.

It is essential in the early part of the interview for the auditor to build a rapport with the interviewee in order to encourage an open discussion. Structuring questions to progress from the general to the specific allows the interviewer to first build a rapport, and then observe changes in an interviewee’s behavior that may signal a suspicious or sensitive topic as the questions become more focused. Skilled interviewers are always cognizant of indicators of deception that may be displayed by any individual attempting to mislead the interviewer. False statements, however, are not always indicators of fraud; they may be covering up an individual’s perceived personal or professional deficiencies.

Making a false statement during an audit interview is stressful for most people. When a false statement is made, the interviewee releases the stress verbally, nonverbally, or in both ways. Indicators of deception vary from individual to individual. They can be as subtle as a change in voice tone or as obvious as a sudden change in complexion. A skilled interviewer must be trained to identify these indicators and have a thorough understanding of their potential significance.

Because the main purpose of the fact-finding interview is to seek information, open-ended questions should be emphasized. Questions should be structured to encourage the interviewee to volunteer information. For example, “What internal control problems do you have in your department with respect to cash receipts?” will likely provide more information than the closed-ended question, “Are all daily cash receipts deposited intact?” Interviewers should be good listeners and never interrupt an open-ended response. One of the last questions asked in each interview should be very open-ended; for example, “Is there anything else you would like to tell me regarding the operations of your department?” or “Have I failed to discuss an important topic with you?” Joseph Wells, chairman and founder of the Association of Certified Fraud Examiners, advises that the last question should be whether the interviewee has participated in any fraudulent activities against the company. Asking this question provides documentation that may prove invaluable if a lawsuit involving financial statement fraud or asset misappropriation occurs later.

To minimize legal risk, auditors should gear the discussion solely toward fact-finding questions or statements and away from accusatory questions or statements. For example, asking, “Have you stolen any inventory from the company?” is acceptable, but asking, “You have stolen inventory in the past from the company, haven’t you?” is not, due to the embedded accusation.

Interview Subjects

SAS 99, paragraph 6, identifies the two types of fraud that auditors should be aware of as “misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets.” As a result, inquiries should be directed toward individuals concerned with financial reporting as well as those with direct or indirect access to the company’s assets.

The CEO and the CFO should be carefully interviewed by a partner or experienced audit manager about their knowledge or suspicion of fraud. These executives have the power to override internal controls, and therefore are in a position to perpetrate and conceal fraud. Their administrative assistants may be privy to sensitive information and may suspect or be aware of fraudulent activity, and should also be interviewed. Individuals may be aware of fraudulent activities but not disclose them unless specifically asked.

DAY 3: FRAUD INVESTIGATION

INVESTIGATION AND EXPERT WITNESS TESTIMONY

PRE-READING NOTE

A fraud investigation can cover a wide variety of issues and actions. Fraud investigations and forensic enquires may not involve actual fraud or corrupt behavior but may instead be concerned with a breach of company policy, a problem with health and safety, harassment, or an investigation into security. Fraud itself is defined as a misrepresentation that is intended to deceive a person or business. Companies can be accused of fraud if they make claims about a product they sell that are untrue or made up only in order to make a profit. Fraud investigations are carried out to determine whether fraud has taken place or whether there is evidence of the fraud. Fraud can cause serious problems not only concerning loss of money but physical harm to people and harm to reputations. Fraudulent behavior or unethical actions can impact strongly on a business. Unethical behavior can bring emotional as well as financial trauma from which a business may take years to recover. 

Fraud investigations occur when fraud is suspected, and the fraud investigator meets with the client to find out what is alleged to have happened. When fraudulent behavior is known to have taken place, the investigator focuses on why and how it occurred and what can be done to prevent it happening again in the future.

Fraud investigations cover a number of procedures, including the thorough analysis of electronic data. Computer forensics is vitally important when dealing with fraudulent or unethical actions in businesses today.

It can reveal evidence that would otherwise never have come to light — evidence can be hidden within mountains of electronic data, and only professional computer forensic investigators will be able to uncover it. Computer forensics is one of the first procedures to be carried out in a fraud investigation — making sure that dates and time stamps on files are not changed, and that critical information is not overwritten.

A fraud investigation should always be carried out from an objective position and supported by documented evidence. The investigation should be carried out by a neutral professional, so that the company can ensure it is seen to be complying with a commitment to objectivity. The practices used within a fraud investigation should be consistent and thorough.

INVESTIGATION AND EXPERT WITNESS TESTIMONY

Forensic Accountants are often called upon to initiate a fraud investigation for the primary purpose of determining whether a fraud has occurred. Other reasons for initiating a fraud investigation include the following: a tip or concern received (from an employee, a vendor, a customer, or other source), an accidental discovery, fraud uncovered as a result of an audit, or a concern from the business as to the adequacy of their internal controls system.

 Fraud Investigation

A fraud investigation is the systematic examination to obtain the truth as to:

1. Whether a fraud has occurred

2. Who is involved

3. How it was perpetrated

4. How much is involved

 Fraud Investigation versus Accounting Audit

While a fraud investigation requires the use of both accounting and investigatory skills, it is vastly different from an accounting audit. Joseph T. Wells, the founder of the Association of Certified Fraud Examiner (ACFE), has said, “A good fraud examiner is part accountant, part psychologist, and part lawyer,” There are four key areas in which a fraud investigation differs from a financial statement audit. Target, Purpose, Techniques employed, and Required Standards.

Example - Key Areas of Fraud Investigation Differing From Financial Statement Audit.

	Target	Purpose	Techniques Employed	Required Standards
Financial Statement Audit	Examination of financial ,data, i.e financial statements	Express an opinion on the financial data i.e, financial statements	Audit sampling examination of financial data confirmation	SAS No.99 requires auditors to approach audits using professional skepticism
Fraud Investigation	Resolve one or more very specific allegations of fraud	Determine if fraud has occurred, who is involved, and what do they know		Sufficiency of proof in order to either prove or disprove the fraud allegation

The differences between forensic accounting/fraud investigation and auditing can be explained by how they vary by scope, nature, purpose, frequency, methods used, and presumption.

Steps in Conducting a Fraud Investigation

 Overview

The process known as a fraud investigation, or fraud examination, is best described as a thorough inquiry. The forensic accountant is searching for information in order to determine the truth. There are five key steps in conducting the investigation:

-gathering record,

-looking for patterns,

-determining possible fraud theories,

- interviewing witnesses,

- and the report.

            Gather the Records

Forensic accountants are well-acquainted with the activities of this step, mainly to gather documents used within the organization. Records would include vendor invoices, customer invoices, cancelled checks and bank statements, purchase orders and receiving reports.

            Look for Patterns and Irregularities

After gathering the necessary organizational document, the forensic accountant will review and analyze the documents to look for patterns and irregularities. The accountant may use analytical procedures, sampling techniques, and ratio analysis in order to determine if patterns or irregularities exist within the data.

            Determine Possible Fraud Theories

After inspecting and analyzing the documents, the forensic accountant will be able to develop a possible fraud theory (or multiple theories). The theory will identify potential schemes and methods used. As theories are developed, the accountant will need to “test” the theory to determine likely scenarios for the fraud.

            Interview the witnesses

This step is undertaken usually to support an allegation of fraud. Before beginning this step, the forensic accountant should recommend that the clients advise their legal counsel. There may be additional considerations to include, for which the attorney can be a resource.

            Write the report

Great care needs to be given to writing the report, and a separate chapter of this text addresses the critical elements of a written report.

 Fraud Interview Questions

A fraud interview is nothing more than a structured meeting in which questions are designed to elicit information from witnesses. The interviewer may be scheduled to ask only one question, but more often, the interview is comprised of a series of questions. There is an art to asking questions, and the means to acquiring the artful skill is through practice.

·        Fraud examiners should conduct the interview in a manner so as to ensure the individuals privacy, and the interview should be conducted under reasonable circumstances. They must ensure that they are not accusing the individual of the fraud in the course of the interview.

·        The fraud examiner should be direct in asking the subject specifically if she/he has committed the fraud. If the case should go to litigation and the examiner is attacked professionally, she/he would be able to respond that all individuals in question, during the course of the investigation, were asked if they were involved with the fraud. This establishes that the fraud examiner did not avoid her/his professional responsibility.

INTERVIEWING FRAUD SUSPECTS

Good Fraud Interview

A good interview should be succinct, but last long enough to disclose the significant facts. The interview should also occur as soon after the event as possible, in order to avoid losing key details. The interview should be conducted privately, so that others can neither hear nor observe the interview.

 Forensic Accountants

Forensic accountants can increase their success as interviewers by advocating these seven key attributes:

1. Organized

The interviewer should know, in advance, the primary questions to ask. She/he should write them down and spend time reviewing them prior to the interview. The interviewer should be sure to organize and review the records, documentation and be familiar with the specific areas needing to be examined. Most fraud investigations include interviews with those who have general knowledge and interviews with others who will have specific knowledge, so be sure to give consideration to the source of information each witness can provide.

The interviewer should be organized and focused. The interviewer should stay on task and not use diversionary tactics to trick the witness.

2. Engaged

Outward demeanor is vital in establishing rapport. The interviewer should wear appropriate attire, and when the interviewer first meets the interviewee, she/he should introduce her/himself in a friendly manner. The interviewer should try to put the other person at ease with a warm smile, friendly handshake, and pleasant eye contact. The interviewer should keep in mind that most witnesses will want to share what they know with her/him, so allow the interviewees to “tell their story”.

3. Thoughtful

The interviewer should ask the interviewee if she/he is comfortable, or whether she/he needs something to eat or drink. Showing consideration for the other person, especially if she/he is a suspect, will allow the building of cooperation. It is good for the interviewer to establish a rapport before beginning the question. It is good idea to spend a few minutes engaging the interviewee in some “small talk” before explaining the purpose of the interview.

Example - Poor Example for Interviewer’s Introduction

Hi, miss Brennan, I’m Dr. Richard, and I’m with Richard & Linus Forensic Accountants, I’m here to find out what you know about the recent employee embezzlement case. I believe you know a lot about what happened, and I’m here to find it out.

Example – Good Example for Interviewer’s Introduction

Hi, miss Brennan. I’m Dr. Richard. I’m not sure we’ve met before, but I appreciate you taking some help and wondered if you might have a few minutes to spend with me?

4. Listening

The interviewer should be careful not to talk too much. The interviewer is there to glean details of what the witness knows, so she/he should provide information and then allow the witness to answer. A good balance of time for the interviewer is 20 percent talking and 80 percent listening.

5. Flexible

While some interviewers like to have their questions written down, it is good to remain flexible during interview process. As the witness provides information, new details may be disclosed. If the interviewer strictly follows a script of questions, she/he will, most likely, miss asking questions about the uncovered information, which could be crucial to the investigation. It may be good instead, to have key thoughts noted in a short version. This would also help guard against the witness reading your questions in advance.

6. Observant

Another reason to omit having a script of questions is that it allows the interviewer to be observant to the nonverbal behavior of the witness. Individuals have a relaxed body language that charges when they are under stress. The interviewer will want to watch for the changes and note their body language when the witnesses are responding to the easy questions, and how behavior changes when they are replying to the more difficult questions. Understanding the changes will help assess whether the witness is responding truthfully.

7. Non-Threatening

If the witness perceives she/he is a target of the inquiry, she/he will be less likely to cooperate. The interviewer should appear fair in the line of questioning and phrase the questions in a non-accusatory manner. The interviewer should not interrupt the witness as she/he is answering the questions. The witness will be more compliant if the interviewer expresses interest in hearing her/his story, appears non-judgmental, and displays respect.

 Understanding Body Language

Communication with others is expressed not only through our words and tone, but is also represented through our body language, As fraud examiners, we want to focus on charges within the behavior, as change may be an indicator of deception. When an individual attempts to deceive, her/his body experiences stress. As she/he increases her/his deception, so does the level of stress increases. The more stress created in the body, the easier it is to observe the stress.

The presence of physical indicators (see list below) may not indicate a witness acting in a deceptive manner. The subject may just be extremely nervous; however, it is necessary to watch the changes (or clusters of changes) within the indicators.

The following is a list of some physical indicators:

1. Placing hand in front of mouth when speaking

2. Excessive blinking or blinking too quickly

3. Frequent touching of the nose (the nose is especially sensitive to stress)

4. Raising of eyebrows

5. Crossing of arms or legs

6. Lack of eye contact (or an excess of eye contact)

7. Tapping of fingers feet

8. Frequent swallowing

9. Constant touching of hands to face or head

10. Holding tightly to arms of chair

11. Sweating

12. Shifting posture 

It is not uncommon for someone who is innocent to display some of the above indicator behaviors, especially as the interview first begins. The role of a fraud examiner is to reduce the amount of anxiety the witness is experiencing. Then, as the interview continues, note any changes, which signal changes to the subject’s level of stress.

GROUP CASE STUDY

In late December,  Emeka Yaqoob, a former loan officer with Suwegbe Bank (N254 billion in assets) of Shrine Estate, Okija., reached a plea agreement in Ajirebi District court after being indicted on 18 counts of bank fraud stemming from his employment at Suwegbe. According to the Department of Justice, Yaqoob falsified loan documents between 2004 and 2005. He is reportedly facing up to 41 years in a federal prison now.

Internal fraud such as that committed by Yaqoob occurs every day in banks across the world. Typical U.S. organization loses 5 percent of its annual revenue to internal fraud, and the banking industry is the hardest hit, according to the 2012 Report to the Nation on Occupational Fraud and Abuse published by the Association of Certified Fraud Examiners. The ACFE reports that 14.3 percent of all internal fraud cases occur at banks, with a median loss of N41.2million per case.

Still, “Banks continue to focus most of their investment and attention on external fraud applications, despite the fact that internal fraud is the larger problem," contends Christine Barry, an analyst who says 60 percent of bank fraud cases are committed by employees. "Internal fraud is a serious problem and one which they are not paying enough attention to”.

Required:

1.     Recommend a company-wide approach aimed at eliminating this menace or at least minimizing such incidents.

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EXAMPLE OF AN EXPERT WITNESS TESTIMONY IN NIGERIA

IN THE HIGH COURT OF LAGOS STATE

IN THE LAGOS JUDICIAL DIVISION

HOLDEN AT LAGOS

                                                                                                SUIT NO: LD/?/201?

BETWEEN:

OJORO BANK PLC               …………………………………….             CLAIMANT

AND

JAGUDA INTERNATIONAL LIMITED       …………………...........                        DEFENDANT

WRITTEN STATEMENT ON OATH OF THE WITNESS BROUGHT PURSUANT TO ORDER 3 RULE 2 (1) OF THE HIGH COURT OF LAGOS STATE (CIVIL PROCEDURE) RULES 2004

I, DR. RICHARD MAYUNGBE, Male, Christian, Certified Forensic Accountant, Financial Expert and Fraud Examiner of 135, Igbosere Road, Lagos, Lagos State, Nigeria do hereby make oath and state as follows:

1.     That I am a Financial Expert, having qualified as a holder of the Doctorate Degree (PhD) with specialization in Finance.

2.     That I am further qualified as a Financial Expert by holding the Master of Business Administration (MBA) with specialization in Finance.

3.     That I am a  Certified Forensic Accountant and a Fraud Examiner and hold the Professional Certification(CPFA) of the Institute of Certified Forensic Accountants of Canada, and the Associate of the Institute of Certified Fraud Examiners, (ACFE) of Texas, U.S.A.

4.     That I am a Fellow of the Institute of Company & Commercial Accountants, Fellow of the Institute of Credit Administration, and an Associate of the Institute of Credit Management , (UK).

5.     That I am duly licensed by the Securities and Exchange Commission (SEC) to offer professional advisory services in Nigeria and my firm F.A.R Mayungbe & Co is registered with the Corporate Affairs Commission (CAC) to carry out these services.

6.     That I am an Adviser to Messrs. JAGUDA International Limited,  the Defendant, on matters of accounting, finance, credit, investment, and management.

7.     That I have the consent and authority of the Defendant to depose to this affidavit and by virtue of my position, I am conversant with the facts of this case.

8.     That the Defendant called for my services through its Chief Accountant Mrs. Elizabeth Shoocushoocu sometimes in April 2010 in respect of its Account with Ojoro Bank of Nigeria Plc. Account Number 00000/001/001/000, which was becoming worrisome.

9.     That I demanded for the Letter of Offer of the Bank Facility together with the Statements of Account of the Defendants, which was produced by the Claimant and handed over to me to enable me establish the true position of the account and advise the Defendant appropriately.

10.                         That I carried out my work as engaged and produced a Report for the Defendant’s easy reference.  This document shall be relied upon at the trial of this suit.

11.                         That While I was going through the statement of account of the Defendant, together with the letter of offer, I discovered that N150 million was approved by the Claimant for the Defendant.

12.                         That the agreed and approved interest rate was 17% per annum and the interest on PRINCIPAL should be MONTHLY SERVED.

13.                         That the draw-down took place on 30/07/07.

14.                         That surprisingly, the Claimant debited the first interest charges on 31/07/07 (the second day of the draw-down) against item 12 above.

15.                          That rather than calculating interests as offered, interests were charged arbitrarily as per the attachments to the Forensic Accounting Reports. The attachment shall be relied upon at the trial of this suit.

16.                         That the average monthly interest as agreed was 1.42%, but the average monthly interest charged was 1.75% in contravention of the offer and acceptance of the facility.

17.                         That by their letter of February 23, 2009, ref: U/C/OO/T/00/0/09, the Claimant approved a concessionary sum of N169,849,119.63 as full and final payment to the Claimant.

18.                         That this is about 4.2% rebate, although on an incorrectly calculated balance by the Claimant.

19.                         That subjecting this rebate to a clean balance of N169,251,000 as at January 2009, the new concessionary balance as full and final payment for the Defendant now stands at N162,142,458.00

20.                         That the above balance is after taking into consideration all the re-payments to the Claimant, totaling N17,030,000

 That I swear to this affidavit in good faith.

                                                                                    …………………………………………………………

                                                                                                         DEPONENT

SWORN TO AT

THE HIGH COURT OF LAGOS REGISTRY

LAGOS THIS………….DAY OF DECEMBER 2010

                                                                        BEFORE ME

                                                      COMMISSIONER FOR OATHS

End of Example

References/Further Reading:

• www.aicpa.org/.../FraudPreventionDetectionResponse

• www.journalofaccountancy.com
• www.smallbusiness.chron.com 
•  www.cfe-in-practice.com/lossprevent/fraudprevent.htm