White Collar Crime & Internal Controls

1. White Collar Crime & Internal Controls Betsy Bowers, CIA, CFE, CGFM, CIG Associate Vice President, Internal Auditing University of West Florida

2. Session 1: Overview • What is White Collar Crime? • Fraud Examinations • Fraud Triangle • Association of Certified Fraud Examiners • 2010 Report to the Nation • Internal Controls to Mitigate Fraud in Small Business

3. Defining White Collar Crime • Dr. Edwin Sutherland “committed by a person of respectability and high social status in the course of his occupation.” It’s the status of actors and whether their acts are committed in the context of their occupations.

4. FBI definition “. . . those illegal acts which are characterized by deceit, concealment, or violation of trust and which are not dependent upon the application or threat of physical force or violence. Individuals and organizations commit these acts to obtain money, property, or services; to avoid the payment or loss of money or services; or to secure personal or business advantage.” http://www.fbi.gov/whitecollarcrime.htm

5. What the use of fingerprints was to the 19th century and DNA was to the 20th, forensic accounting will be to the 21st century Gordon Brown, Chancellor of the Exchequer, 10 October 2006

6. Auditing vs. Fraud Examination

7. Fraud Theory Approach • Analyze available data • Createa hypothesis • Test the hypothesis • Refine and amend the hypothesis

8. Elements of Fraud • A materialfalse statement • Knowledgethat the statement was false when it was uttered • Relianceon the false statement by the victim • Damages resulting from the victim’s reliance on the false statement

9. Fraud Triangle

10. Types of WCC Asset Misappropriations Fraudulent Statements Corruption Conflicts of Interest Cash Financial Bribery Inventory & All Other Assets Nonfinancial Illegal Gratuities Economic Extortion

11. Source: FBI, Criminal Justice Information Services

12. White Collar Crime Areas • Crimes Against Consumers • Unsafe Products • Environmental Crime • Institutional Corruption: Mass Media & Religion • Securities Fraud • Corporate Fraud • Fiduciary Fraud • Crimes by Government • Corruption of Public Officials • Medical Crime • Computer Crime

13. 2010 ACFE Report to the Nation Worldwide -100 countries 5% annual revenue to fraud; hence for 2009 World Gross Product = $2.9 TRILLION 18 months Small organizations; banking/finance, manufacturing; government/public service Perpetrator characteristics Types: asset misappropriation, corruption and financial statement fraud Owners tend to over-rely on audits

14. ACFE Report to Nation • Employees are source of most tips • Private companies are victim 40%, with average loss of $231,000 • Not for profit organizations are victim 10%, with average loss of $90,000 • Small business (less than 100 employees) suffered the greatest percentage of fraud 30% and a higher median loss $155,000 • 80% frauds committed by someone in: accounting, operations, sales, exec/upper management, customer service, or purchasing

15. ACFE Report to Nation • Control Weaknesses that contributed to fraud: • Lack of Internal Controls 38% • Override of controls 19% • Lack of management review 18% • Poor “Tone at the Top” 9% • Internal Controls Modified or Implemented in response to fraud: • Increased segregation of duties 61% • Management review of internal controls 51% • Surprise Audits 22%

16. What does a White Collar Criminal look like? If you were to put an APB out, what would it say?

17. ACFE Report to Nation • Demographics of Fraudster: • Gender Male 57% Female 42% • Median Loss $232,000 $100,000 • Most work alone • 75% are over the age of 35 • As age increases, median loss increases • Tenure with company~1-5 years (40%) ~6-10 years (60%) • 73% have annual income < $100,000 • 52% have college degrees • Highest median loss – individuals with post graduate degrees

18. Fraud Prevention and Detection • Monitoring Activities • Conduct Annual credit checks on key employees • Mandatory time off/surprise days off • Rotate duties among staff • “Trust but verify”

19. Internal Controls to Mitigate Fraud in Small Organizations

20. Why should you care about internal controls? IT’S YOUR JOB TO CARE FGFOA

21. Organization Financial Policy #xx “Role of Fiscal Officer, Account Manager and Account Supervisor” • Account Supervisor has a leadership or executive role. • Account Manager has an operational role. • Fiscal Officer has an oversight role.

22. What is InternalControl? Internal control is a PROCESS of specific policies and procedures designed to provide reasonable assurance that organization’s objectives will be met • Provide reliable financial reporting • Promote efficientand effective operations • Helps ensure compliance with policy • ProtectOrganization’s Assets

23. Control Environment for Small Businesses • Management Philosophy and Operating Style • Organizational Structure • Nature of Business • Financial Reporting competencies • Methods of Control (board, audit, policies, practices) • Management Experience • Conditions within the industry

24. Implement and Monitor Internal Controls • Communicate expectations • Lead by example • Physical controls • Reward integrity • Method to report violations (confidentiality)

25. Internal Control Types Corrective: work to try and fix the problem which may have arisen Detective: find out and discover the different errors or irregularities Preventive:aimed at preventing any errors or irregularities from occurring

26. COSO* challenges • Resources • Management Domination • Financial Competence • Running the Business • Board Expertise Note: COSO Update 2012 http://www.ic.coso.org *COSO = (1) control environment, (2) risk assessment, (3) control activities, (4) information and communication, and (5) monitoring activities.

27. Indicators of Internal Control Weaknesses • Do financial records sometimes disappear from the office, only to reappear later? • Does an employee known to be frugal or of modest means suddenlyseem to have a lot of money? • Is there a marked change in behavior, either happier or more disturbed than usual? • Are there any employees who dislike being supervised? • Do you have any employees who want to keep things “private,” where no one else can come into the area they spend most of their time in while at work? • Does the business have employees who never take vacation? (This can also be a sign of fraud.)

28. Two Person Office Source:

29. Three-Person Office

30. Four Person Office

31. Top 10 Internal Controls • System of checks and balances (no one person) • Reconcile bank accounts monthly • Restrict use of credit cards; verify all charges • Owner oversight of operations • Have all fiscal policies in writing • Ensure all assets (e.g. cars, cell phones, etc.) are used for business • Protect petty cash and other funds • Protect check stock • Protect cash and check collections • Avoid/discourage related party transactions Source: KPMG Fraud Survey

32. Using Internal Controls to strengthen your Organization • Hire people with experience or trainable • Segregate duties reduces opportunity for fraud • Stress clean, organized workspaces • Stress efficiency (fewer mistakes = more profit) • Do not cut payroll expenses until LAST resort (community goodwill)

33. Class Exercise

34. Class Exercises • Analyze the consequences. • Who will be helped by what you do? • Who will be harmed? • What kinds of benefits and harms will there be? • Analyze the actions. • Consider all the options from different perspectives. • How do the actions measure up against moral principles like honesty, fairness, equality, respecting dignity of others, people’s rights? • Is there a conflict between the rights of different people involved? • Which option is least problematic? • Make a decision.

35. Final Thoughts Internal controls are always dynamic • Good internal control system: • Reduces careless mistakes and risky business • Increases staff’s efficiency • Teaches responsibility/accountability for money • It is #1 deterrent for fraud

36. Betsy Bowers, CIA, CFE, CGFM, CIG Associate Vice President Internal Auditing & Management Consulting University of West Florida 11000 University Parkway, Bldg 20W Pensacola, FL 32514 850-474-2636 or bbowers@uwf.edu