Presentation of 2 days training program on Fraud Risk Management - Prevention and Detection by Tahir Abbas.

4. Tahir Abbas
Certified Fraud Examiner

5. Fraud- Salient Crime
Any intentional and deliberate act to deprive another of property/
money by guile, deception or any unfair mean(s).
A knowing misrepresentation of the truth or concealment of a
material fact to induce another to act to his or her disadvantage.

6. Type Of Fraud
• White collar Crime
• Organizational Crime
• Occupational Fraud

7. White collar Crime
Not every crime involves a smoking gun. Some crimes are
committed right under the victim's nose without a single shot
fired!

8. White collar Crime
• Misrepresentation of facts
• Concealment of fact
• Bribery
• Extortion
• Conflict of interest
• Forgery
• Embezzlement
• Theft
• Breach of fiduciary duty

9. Organizational Crime
Organizational crime is that committed by business particularly
corporations and governments.

10. Occupational Fraud

11. Why People Obey The Law
Why people obey the law while others chose to break it. Why is this so?
What make people to act the way they do?

12. Why People Commit Fraud
Pressure
Who could turn an opportunity for fraud into reality?

13. Pressure (Non-Shareable Financial Problems)
Trusted persons become trust violators when they believe that they
have such a problem
‘There was no need for it like there was this time.’
“The idea never entered my head.’
‘I thought it was dishonest then, but this time it did not seem
dishonest at first.’ ”10

14. Pressure (Non-Shareable Financial Problems)
• Violation of ascribed obligations
• Problems resulting from personal failure
• Business reversals
• Physical isolation
• Status gaining
• Employer-employee relations

15. Pressure (Non-Shareable Financial Problems)
Some common financial problems employees face include those
stemming from:
• Greed
• Living beyond one’s means or extravagant lifestyle
• High bills or personal debt
• Poor credit
• Personal financial losses
• Unexpected financial needs
• Substance abuse/addictions
• Gambling debt and addiction

16. Perceived Opportunity
• Perceived ability to commit fraud
• General information
• Technical Skill

17. Rationalization
• Understand his illegal behavior
• Before the crime takes place

18. Top 10 Thinking Errors (Fraudster)
• Rationalization
• Instant Gratification
• Disregard for Authority or Rules
• Being Overly Optimistic
• Entitlement
• Lack of Remorse
• Peer or Financial Pressure
• Inadequate Fear of Punishment
• Egoism
• Diffusion of Harm

19. Workplace Deviant Behaviors

20. Who is most likely to commit fraud?

21. Who is most likely to commit fraud?

22. Who is most likely to commit fraud?

23. Who is most likely to commit fraud?

24. Who is most likely to commit fraud?

25. Who is most likely to commit fraud?

26. Who is most likely to commit fraud?

27. Who is most likely to commit fraud?

28. Who is most likely to commit fraud?

29. Who is most likely to commit fraud?

30. Who is most likely to commit fraud?

31. Behavioral Symptoms
• Buying more material items
• Starts to carry unusual amounts of cash
• Creditors/Bill Collectors show up at work or call frequently
• Borrows money from coworkers
• Becomes more irritable or moody
• Becomes unreasonably upset when questioned
• Becomes territorial over their area of responsibility
• Won’t take vacation or sick time or only takes it in small increments
• Works unneeded overtime
• Turns down promotions
• Start coming in early or staying late
• Redo or Rewrite work to “make it neat”

32. Common Red Flags
• Wheeler and Dealer
• Domineering/Controlling
• Don’t like people reviewing their work
• Strong Desire for Personal Gain
• Have a “Beat the System Attitude
• Live Beyond Their Means
• Close relationship with customers or vendors
• Unable to Relax
• Often have a “too good to be true” work performance
• Don’t take vacation or sick time or only take leave in small amounts.
• Often work excessive overtime
• Outwardly, appear to be very trustworthy.
• Often display some sort of drastic change in personality or behavior

33. Factors- Organizational Environment
• Placing too much trust in key employees
• Lack of proper procedures for authorization of transactions
• Inadequate disclosures of personal investments and incomes
• No separation of authorization of transactions from the custody of related
assets
• Lack of independent checks on performance
• Inadequate attention to details
• No separation of custody of assets from the accounting for those assets
• No separation of duties between accounting functions
• Lack of clear lines of authority and responsibility
• Department that is not frequently reviewed by internal auditors
•

34. Financial Statement Fraud
FinancialStatement
Fraud
Timing Difference
Improper Revenue
Recognition
Improper Asset
Valuation
Overstated /Concealed
lability and Expenses
Improper Disclosure

35. Financial Statement Fraud
• Playing the accounting system
• Beating the accounting system
• Going outside the accounting system

36. Financial Statement Fraud- Case-Loss

37. Financial Statement Fraud- Case-Loss

38. Timing Difference
• Premature Revenue Recognition
• Sale With Conditions
• Long Term Contracts
• Channel Staffing
• Wrong period Recording of Expenses

39. Improper Revenue Recognition
• Overstated Revenue
• Understated Revenue
• Fictitious Revenue

40. Improper Assets Valuation
• Inventory Valuation
• Account Receivable
• Fixed Assets
• Business Combination

41. Overstated/Concealed Lability or Expenses
• Lability/ Expenses Omission
• Improper Cost Capitalization
• Warranty Cost and Provisions

42. Improper Disclosure
• Liability Omission
• Subsequent Events
• Management Fraud
• Related Party Transactions
• Accounting Change

43. FS Fraud Red Flags
• Domination of management by a single person or small group
• Tone at top
• Recurring negative cash flows from operations
• Rapid growth or unusual profitability,
• Significant, unusual, or highly complex transactions- Period End
• Significant related-party transactions
• Recurring attempts by management to justify marginal or inappropriate
accounting on the basis of materiality
• Overly Complex organization Structure
• BOD of audit committee absence/competency
• Unusual rations and variations

44. Prevention of FS Fraud
• An organizational environment that fosters control consciousness.
• Realistic organizational goals and objectives (as opposed to unrealistic ones).
• Written corporate policies (e.g., code of conduct) that describe prohibited activities and the
action required whenever violations are discovered.
• Appropriate authorization policies for transactions are established and maintained.
• Policies, practices, procedures, reports, and other mechanisms to monitor activities and
safeguard assets, particularly in high-risk areas.
• Communication channels that provide management with adequate and reliable
information.
• Policies and procedures that foster the establishment and enhancement of cost-effective
controls to prevent fraud.
• Thorough review of all post-financial-statement-date transactions, such as accounts
payable increases and decreases, to detect omitted liabilities in financial statements.
• Thorough review of the appropriateness of capitalization procedures.

45. Detection of FS Fraud
• Some questions we should consider include:
• Are the transactions overly complex?
• Has management discussed the transactions with the board of directors
and audit committee?
• Has management placed more emphasis on the need for a particular
accounting treatment than on the underlying economics of the particular
transaction?
• Do the transactions involve unconsolidated, unrelated parties (including
special purposes entities), or parties that do not have the substance or
financial strength to support the transaction?

46. Detection of FS Fraud
• Vertical Analysis
• Horizontal Analysis
• Ratio Analysis
• Interviewing

47. Detection of FS Fraud
• Revenue recognition—Performing substantive analytical procedures
relating to revenue using disaggregated data (e.g., comparing revenue
reported by month and by product line during the current reporting period
with comparable prior periods); confirming with customers relevant
contract terms; or questioning staff about shipments near the end of a
period.
• Inventory quantities—Examining inventory records to identify
locations or items that require specific attention during or after the physical
inventory count; performing a more rigorous examination of the count,
such as examining contents of boxed items

48. Punjab Bank Case-Study
The case start with one of the two directors of the bank, approved, on behalf of
the board of directors of BoP, unlawful credit proposals amounting to Rs1.1 billion
in July 2006. Investigation reveals that actual corruption at the BoP amounts to
Rs76.178 billion. While the bank shows profits from 2005 to 2008 on paper, it is
actually running in loss.
Bank was deprived of over Rs11 billion in advances and mark up by one Group
alone.
Millions of rupees had been doled out from the BoP, against negligible securities
and without any collateral, to non-existent clients like ABC Group. Despite having
no businesses, ABC Group opened accounts in the BoP by using fake identities and
documents and funds were sanctioned to them at their discretion. In more than 95
percent cases the sanctioned funds were withdrawn within a day after approval.

49. Assets Misappropriation

50. Assets Misappropriation

51. Assets Misappropriation - Cash

52. Skimming - Off Book Fraud
Sale
• Sale- No Show
• Amount Manipulation
• Off-site Sale
• False Discount
Receivables
• Forcing Account Balances
• Lapping
• False Account Entries
Inventory
• Inventory Padding
Short Term Skimming

53. Alert- Skimming - Off Book Fraud
• Inventory is lower than the records indicate
• Gaps in pre-numbered transactions or documents
• Differences between customer and company records
• Lower than expected revenues when a specific person is
working
• Lower than expected revenues in a specific location
• Excessive number of short shipments or receipts
• Vendor invoices do not match receiving reports
• Missing documents (e.g., no sales document for a shipping
document )

54. Alert- Skimming - Off Book Fraud
• The ability to remove assets from the premises without
appropriate documentation
• Scrap exceeds expected amounts, or the amount is rising without
good cause
• A rising trend in customers who never pay for merchandise
• An employee who frequently visits company sites after normal
business hours
• Material usage is higher than established standards, or higher than
materials used by other workers
• Fraudulent or altered documents (e.g., packing, shipping,
receiving.)
• Documents that do not agree (e.g., the receiving report sent to
accounts payable does not match the one kept by the receiving
department)

55. Prevention
• Segregation of Duties
• Authorization—approving transactions and decisions
• Recording—preparing source documents; maintaining journals,
ledgers, or other files; preparing reconciliations; and preparing
performance reports
• Custody—handling cash; maintaining an inventory storeroom;
receiving incoming customer checks; and writing checks on the
organization’s bank account
• Access Controls
• Reconciliations
• Customer Complaint

56. Detection- Broken Promises, Shattered Trust
• Receipt of Sale level; Detection- Analytical
• Journal Entry Review
• Payment vs Posting
• Confirmation

57. Fraudulent Disbursement

58. Register Disbursement Schemes
• False Refund
• Fictitious Refund
• Overstated Refund
• False Void

59. Alert: Fraudulent Disbursement
• Small Disbursement
• Record Destruction
• Photocopies
• SGD: Authorization –Approval of Refunds
• Missing Supporting Documents
• No Management Reviews
• Ineffective Reconciliations
• Inventory shrinkage is larger than it has been historically

60. Cheque Tempering Schemes
Check tampering
(1) fraudulently preparing a check drawn on the organization’s account for
his own benefit, or
(2) intercepting a check drawn on the organization’s account
• Forged Marker
• Free Hand Forgery
• Photocopied Forgery
• Interception Cheque before delivery
• Forged Endorsement Schemes
• Authorized Maker Schemes

61. Red Flags and Detection
• Fraudster Reconciling the Bank Statement
• Voided Cheque
• Missing Cheque
• Excessive Returned Cheque
• Frequent Address Changed
• Customer/Vendor Complaints

62. Billing Schemes
Billingschemes
Invoicing Via Shell
Company
Pass Through Schemes
Pay and return Schemes
Personal Purchase
False Purchase Requisition

63. Prevention Billing Schemes
• Segregate these duties: purchase requests, purchasing goods and services,
purchase authorization, merchandise receipt, payment authorization, and vendor
payment.
• Require appropriate documentation on all transactions. For example, use pre-
numbered, multi-copy purchase orders, receiving reports, etc. Make sure all
documents are completed properly. Periodically account for numerical document
sequences. Periodically review all documentation for completeness and accuracy.
• Require appropriate supervisory approvals on all purchase orders, cash
disbursements, write-offs, credit memos, etc.
• Keep a list of approved vendors, and only purchase goods from approved
vendors. Control the vendor approval process so that those buying the goods or
services (and others in a position to commit fraud) cannot approve a vendor.
• Promptly log in goods received, and complete the appropriate receiving reports
to avoid merchandise loss.
• Match the data on purchase orders, receiving reports, and vendor invoices
before making vendor payments. Investigate all unmatched documents for
appropriateness

64. Detection- Billing Schemes
• Analytical Review
• Computer Assisted Review
• Statistical Sampling
• Vendor Survey

65. Payroll Fraud Schemes
• Ghost Employee
• Fictitious Sale
• Altered Sales
• Falsified Hours and Salary
• Commission Schemes

66. Prevention- Payroll Fraud Schemes
• Require all timekeeping information (hours worked, etc.) to be authorized before an employee is
paid.
• Separate the duties of hiring employees, entering timekeeping information, authorizing timekeeping
information, processing payroll, authorizing payroll, distributing payroll, transferring funds to the
payroll accounts, and reconciling the payroll bank account. Someone independent of the sales
department should prepare data used to calculate sales commissions.
• If automated timekeeping systems are used, a supervisor should be present at the beginning and end
of shifts to ensure that no one clocks another employee in or out of the system.
• Stringent access controls, all of whom have closely guarded passwords; all changes reviewed and
authorized by someone else; changes only made from specific terminals during business hours, etc.)
should be placed over the payroll database so that unauthorized employees cannot create ghost
employees or change their hours, pay rates, salary, or commissions.
• Install an automated timekeeping system that requires employees to use ID cards or some other
physical form of identification. This makes it more difficult to perpetrate fraud since a bogus ID
must be obtained, and the perpetrator must be present to log the ghost employee in and out of the
system every day.

67. Detection- Payroll Fraud Schemes
• Independent Payroll Disbursement
• Duplicate Account number
• Duplicate address
• Duplicate Identification Code
• Overtime Authorization
• Commission Analysis (Correlation)
• Trend Analysis

68. Other Assets- Fraud Schemes
• The first is to steal the asset with no intention of ever returning
it. The second is to “borrow” the asset, to misuse it, or to use it
in a way that the employer never intended it to be used.
• Noncash assets that are typically stolen or misused include
inventory, supplies, tools and equipment, raw materials,
computers and other office equipment, telephones (personal
long distance calls, etc.), company cars, an individual’s time,
and information

69. Initial Detection of Fraud

70. Initial Detection of Fraud- Source

71. Initial Detection of Fraud- Tip

72. Anti-Fraud Control

73. Control Weaknesses That Contributed to Fraud

74. Procurement Fraud- Red Flags
• Sequential invoices paid
• Unusual/large/round-dollar amounts paid
• Payments just under authorization level
• Employee-vendor address match
• Multiple invoices paid on same date
• Slight variation of vendor names
• Non-Monitoring of high risk employees and process
• Splitting one purchase into multiples to avoid the approval process

75. Bid Rigging
• Pre-solicitation Fraud
• Need Recognition
• Specification Tailoring
• Solicitation Fraud
• Bid pooling
• Bid-splitting
• Fictitious supplier
• Time advantages
• Limited scope of solicitations

76. Alert Bid Rigging
• Specifications tailored to a particular vendor
• Unreasonably restrictive pre-qualifications
• An employee who defines a “need” that could only be met by one supplier
• An employee who justifies a sole-source or noncompetitive procurement
process
• Changes in a bid once other bidders’ prices are known, sometimes
accomplished through deliberate mistakes “planted” in a bid
• Bids accepted after the due date
• Low bidder withdraws to become a subcontractor on the same contract
• Falsified documents or receipt dates (to get a late bid accepted
• Falsification of contractor qualifications, work history, facilities, equipment,
or personnel

77. Corruption Red Flags
Recipient
• The Big Spender
• The Gift Taker
• The “Odd Couple”
• Success Champion
• The Rule Breaker
• The Hospitality Master
• The Complainer
• Genuine Need
Payer
• The Too-Successful Bidder
• Poor Quality, Higher Prices
• The One-Person Operation
• The Cash Cow

79. Fraud Risk Assessment
Risk, reward and objectives vs Scenarios and Schemes
The process of proactively identifying and addressing organizational
vulnerabilities both internal and external
Factor Influence risk assessment process
• The Nature of the business
• The Operating environment
• The Effectiveness of Control System and Process
• The Control Environment

80. Objective - Fraud Risk Assessment
Do you have the answer?
• How might a fraud perpetrator exploit weakness in System of
IC?
• How Could a perpetrator override or circumvent IC?
• What could a perpetrator do to conceal a fraud?

81. Objective - Fraud Risk Assessment
• Improve communication and awareness about fraud
• Identify what activities are most vulnerable to fraud
• Know who puts the organization at greater risk
• Develop plan to mitigate fraud risk
• Develop techniques to know if fraud has occurred in high risk
area
• Assess Internal control and business processes
• Comply with regulator and compliance requirement

82. Good Fraud Risk Assessment
• Collaborative effort of Management and Auditors
• The Right Sponsor
• Independence and Objectivity of Team
• Working Knowledge of Business
• Access to People and Processes at Level
• Engendered Trust
• Ability of Think the Unthinkable
• Plan to keep it Alive and Relevant
• One size does not fit all

86. Techniques- Fraud Risk Assessment
Organization structure and Culture will determine the best technique.
Don’t try to fit others best.
• Interviews
• Focus Group
• Survey
• Anonymous feedback Mechanism
• Process-flow Analysis
• Self-assessment

87. Addressing/Reporting identified Fraud Risk
• Risk Appetite- Establish the Acceptable Level of Risk
• Ranking and Prioritizing Risk
• Estimate Likely cost of Risk
• Heat map
• Respond to Risk
• Report Objective not Subjective
• Keep it simple
• Focus on what really matters
• Identify actions, clear and measureable

88. Fraud Risk Assessment . Self Assessment

89. Fraud Prevention

90. Elements of a Fraud Prevention Program
• Roles and responsibilities
• Commitment
• Fraud awareness
• Affirmation process
• Conflict disclosure
• Fraud risk assessment
• Reporting procedures and whistleblower protection
• Investigation process
• Corrective action
• Quality assurance
• Continuous monitoring

91. ERM Framework
Enterprise Risk Management defined:
“Enterprise Risk Management (ERM) is a process, affected by the organizations
leadership, applied in a strategy setting, and across the organization, designed
to identify potential events that may affect the organization, and manage risk(s) to
be within its risk appetite, to provide reasonable assurance regarding the
achievement of the organization’s objectives.”

92. ERM Framework
• Process – ongoing and fluid throughout the organization structure
• Affected – every person at every level
• Applied in Strategy Setting – you have to have a game plan
• Applied Across the Organization – no one is left out
• Designed to Identify Events – good and bad
• Reasonable Assurance – yes management; it works
• Geared to Achieve Objectives – touches every department, every
school

93. ERM Framework

94. Fraud Prevention
Perception of Detection
Proactive Audit Procedures
Analytical Review
Fraud Assessment Questioning
Surprise Audit
Employee Anti-fraud Education
Cascading Training
What is Fraud what is not
How Fraud can hurt to all
How, when, how can
What to do
Why to do

95. Fraud Prevention

96. Fraud Prevention
• Fraud Prevention Policy
• Hiring Policies
• Mandatory Vacations
• Job Rotation
• Effective Management Oversight
• Reporting Program- Hotline
• Rewards
• Open door Policies
• Organization structure
• Performance management
• Minimize Employee Pressures
• Fair personal Polices and Procedures
• Employee Support programs/ Morale

97. Fraud Prevention Policy
• Scope
• Actions Constituting Fraud
• Non Fraud irregularities
• Investigation
• Reporting Procedures
• Communication
• Employee Trainings
• Ethical Programs

98. Fraud prevention
Employee Morale
• Provide organization-sponsored social events
• Recognize employees for good work
• Offer flexible work arrangements
• Offer organization-sponsored team-building
events
• Exhibit a strong ethical tone at the top
• Engage individual contributors in the decision-
making process
• Keep staff well-informed of the organization’s
activities
• Offer cross-functional training and career
advancement opportunities
• Offer small perks such as coffee, soda, or food
• Make the work environment attractive and
comfortable
• Empower employees
• Set realistic goals
• Take time to celebrate accomplishments
• Listen to employee grievances and settle them as
soon as possible
• Tune into employees’ emotional needs
• Offer competitive compensation and benefits
• Train employees to develop positive attitudes
• Show employees the results of their work

99. Hotline, Code and Whistle Blower

100. Hotline, Code and Whistle Blower
• “one who reveals wrongdoing within an organization to the public or to
those in positions of authority ”
• The power of a hotline lies in its ability to open the lines of
communication with employees and create a venue for real-time
interaction, especially with anonymous parties.
• Hotline as an integral part of company’s corporate compliance and ethics
program

101. Elements of Hotline and Whistle Blowing
The first step in any new whistleblower program is sitting down with your
employees to discuss the program
• Anonymity and confidentiality
• No retaliation
• Whistleblower incentives
• Positive “tone at the top
• Educate, publicize and make hotline available
• Multiple uses for hotline, including a helpline
• Record and analyze statistics
• Benchmark
• Hotline managed by third-party provider
• Allow multiple methods for submitting tips
• Evaluate, test and audit
• Educate other stakeholders and grant access to hotline

102. Whistle Blower

104. Fraud Detection and investigation

105. Tradition Data Analysis and Reporting
Big Data- High Volume, High velocity, high variety complex information
Sorting
Joining
Compliance Verification
Duplicate Search
Fuzzy login Matching
Gap Test

106. Fraud Detection and investigation
Case for Data Analysis

107. Detecting Anomalies
• Lack of self-reference
• Verb tense(events were occurring in the present
• Answering questions with questions
• Equivocation (Statements made by guilty parties often include mild or
vague words )
• Oaths
• Euphemisms- missing" instead of "stolen,"
• Alluding to actions
• Lack of Detail
• Narrative balance- prologue, critical event and aftermath
• Mean Length of Utterance (between 10 and 15 words )

108. Verb tense
"After closing the store, I put the cash pouch in my car and drove to the
Olympia Bank building on Elm Street. It was raining hard so I had to
drive slowly. I entered the parking lot and drove around back to the
night depository slot. When I stopped the car and rolled down my
window, a guy jumps out of the bushes and yells at me. I
can see he has a gun. He grabs the cash pouch and runs away. The last
I saw him he was headed south on Elm Street. After he was gone, I
called the police on my cell phone and reported the theft."