Fraud….It Happens…. Here?

1. Fraud….It Happens…. Here?

2. Today’s Topics • Who We Are • Fraud In a Nutshell Definitions Statistics Why it Happens How to (Try to) Prevent It • Fraud in the A&M System

3. Internal Audit’s Responsibilities • Develop an annual audit plan based upon a system-wide risk assessment process • Conduct audits in support of the plan • Report results to the Board of Regents, the Chancellor, and the Chief Executive Officers • Coordinate audit efforts with external and state auditors • Investigate suspected fraud, waste and abuse

4. Fraud A willful or deliberate act or failure to act with the intention of obtaining an unauthorized benefit such as money or property, by deception or other unethical means. Occupational Fraud The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.

5. Examples • Theft • Embezzlement • Kickbacks/Bribes • Travel reimbursement schemes • Falsification of government documents • Misappropriation/misuse of property • Misappropriation/misuse of confidential information • Unauthorized manipulation of IT system/network • Conflict of interest • Falsification of financial statements

6. Statistics • U.S. organizations lose approximately 5% of their annual revenues to fraud * • This is $165 million in fraud losses for the A&M System in fiscal year 2011 (based on budgeted revenues of ~ $3.3 billion) • This is ~$8,893 from each employee annually *The Association of Certified Fraud Examiner’s 2010 Report to the Nation

7. Statistics The more authority an individual has, the greater their access to the organization’s resources and the greater their ability to override controls to conceal fraud. • 42% of fraudsters were employees, resulting in a median loss to the organization of $80,000 • 41% of fraudsters were managers, resulting in a median loss to the organization of $200,000 • 17% of fraudsters were owners/executives, resulting in a median loss to the organization of $723,000 *The Association of Certified Fraud Examiner’s 2010 Report to the Nation

8. Why People Commit Fraud Motive Opportunity Rationalization Fraud Triangle Association of Certified Fraud Examiners

9. Motive • Incentive – Increase “bottom line” to receive a bigger bonus • Need – To pay for child’s college, new car, new house • Problem – To pay for unexpected medical bills • Pressure – Everyone does it

10. Opportunity Every fraudster is typically given the opportunity to take advantage of the organization. • Poor internal control design • Lack of internal controls • Trust • Loyalty

11. Rationalization Most fraudsters consider themselves to be good, honest people, and can usually rationalize their behavior. • Entitlement (underpaid/overworked) • Just Borrowing (I’ll pay it back later) • Just this once • Company has plenty of money • Disagree with the rules

12. Methods of Detecting Fraud • Tip 40% • Internal Controls 30% • Internal Audit 14% • By Accident 8% • External Audit 5% • Police Notification 2% *The Association of Certified Fraud Examiner’s 2010 Report to the Nation

13. Red Flags • No segregation of duties • Inadequate/missing records • Lack of account reconciliations • Management attitude • Financial pressures • Complex accounting system • Small number of employees with all of the knowledge • Breaks or bends the rules (ends justify the means) • Few/no vacations/time off

14. Prevention versus Detection • Detection Reactive Responsibility delegated to Internal Audit Costly & Time Consuming • Prevention Proactive Every employee’s responsibility Cost effective Processes in place to keep the honest people honest

15. Preventative Steps-General Do the little things right every day • Follow the rules & expect others to do the same • Do what you are paid to do Be aware of your “surroundings” • Is this how things are supposed to work ? • What are others in the process supposed to be doing & are they? Ask questions • Ask if you DO know & ask if you DON’T know • Get a second opinion

16. Preventative Steps-Travel Does the position require travel Are the expenses reasonable • Are they supported by receipts (originals, not copies) • Do the receipts “fit” the vendor (handwritten, etc.) • Are the expenses allowable & work related • Do receipt dates agree with travel dates (rental car, gasoline, etc.) • Do the expenses/documentation “fit” the travel Has a registration fee been paid if attending conference High mileage on rental car during a conference

17. Preventative Steps P-Cards Should this person be making purchases Does the card belong to the employee • Does cardholder know of usage • Were the appropriate procedures followed for borrowing the card Are items purchased reasonable for the employee/department/unit

18. Preventative Steps P-cards (con’t) Are the expenses supported by receipts • Are the receipts originals (if not, why) • Do the receipts “fit” the vendor (handwritten, etc.) • Are there other items on the receipt • Does the receipt date match the statement date Is there a history of “accidental” usage Are the approval signatures original (not electronic, a copy or “on behalf of”)

19. A&M System Policy 21.04, Control of Fraud, Waste & Abuse Employees are required to report factual information suggestive of fraudulent, wasteful or abusive activities that may involve the A&M System or any of its members. Internal Audit is responsible for investigating allegations of fraud, waste and abuse.

20. How to Report Suspected Fraud • Immediate Supervisor or any supervisor in your chain of command • A&M System Risk, Fraud & Misconduct Hotline (link on every member’s home page) • A&M System Internal Audit Department • State Auditor at www.sao.state.tx.us/siu All reports can be made anonymously

21. Contact Information • Risk & Misconduct Hotline: • Telephone 888.501.3850 • Internet Hotline link on every member’s homepage • Investigative Audit Services: • Robin Woods robin-woods@tamu.edu • Debi Fincher dfincher@tamu.edu • Lauro Garza lgarza@tamu.edu