Beyond Internal Controls: The Role of Your Trusted Advisors in Preventing Fraud

1. Beyond Internal Controls:The Role of Your Trusted Advisors in Preventing Fraud Arlen S. Lasinsky, CPA/CFE/CFF/CTP – Frost, Ruttenberg & Rothblatt, P.C. Kristen Saranteas, CTP – Wintrust Commercial Banking

2. Speaker Biography Arlen S. Lasinsky, CPA, CFE, CFF, CTP, has more than 34 years experience as an auditor, controller, CFO and treasurer, consultant and fraud investigator. As director of Frost, Ruttenberg & Rothblatt’s litigation and forensic services, he uses his expertise to support legal counsel and their clients through contentious situations such as civil and criminal litigation and fraud investigations. In addition to being a certified public accountant, Arlen is a certified fraud examiner, certified in financial forensics and certified treasury professional. He is widely recognized as a trusted adviser on preventative maintenance, implementing new procedures, and uncovering and assessing damages. He also has provided pre-litigation investigations of damages, as well as consultation and testimony on behalf of both plaintiff and defendant clients for dozens of litigation matters. Arlen’s investigations and testifying experience have served to uncover and prove fraudulent activity, facilitate settlements of lawsuits and shareholder disputes, and present how defendant clients were innocent of allegations of offenses and charges. A frequent speaker on the topic of fraud and cash management, Arlen has authored articles pertaining to cash management, safeguards and warning signs of embezzlement and check fraud and has also been interviewed and quoted as an expert for periodicals, radio and television. He earned a Bachelor of Science degree in accounting with honors and distinction from the University of Illinois. He is a member of the AICPA, the Illinois CPA Society, the Association of Certified Fraud Examiners, the Association for Financial Professionals and American Society of Appraisers, and an associate member of the ABA.

3. Speaker Biography Kristen L. Saranteas, CTP, Senior Manager – Treasury Sales, Solutions & Support, has more than 20 years in sales and management experience in the treasury management industry.  At Wintrust, Kristen leads the Treasury Management Sales, Solutions & Support teams, bringing solid expertise and unique skills well-suited for a sales and service discipline.  With this role, she is responsible for the entire sales cycle and on-going support of the bank’s prospects’ and clients’ day-to-day experience.  Kristen’s educational background includes a Bachelor of Arts degree in International Studies and a Bachelor of Arts degree in Spanish from Miami University in Oxford, OH.  In addition to her membership in the AFP and a frequent speaker at the Windy City Summit, Kristen has also been a speaker at several other industry conferences across the country, including the National Automated Clearing House association, Payments Authority, Northeast OH Treasury Management Association, Treasury Management Association of New England, Ohio GFOA TEXPO, and Windy City Summit. 

4. Your Are a Victim of Fraud(true for all of us). So, now what…? • What’s been taken? • Cash • Inventory • Trade secrets • Other intangibles • Quantified? • Method? • Who is the perpetrator? • How can you recover?

5. Do you know what to do? • Notify fraud management team, internal audit and security, where appropriate • Contact law enforcement • Most insurance policies require it • Contact in-house counsel and outside counsel, if appropriate • Attorney may have court intervention • Freeze perpetrator’s assets • Seek other remedies

6. Do you know what to do?...continued • Insurance broker aware of theft • Contact insurance company • Notification is extremely important • Engage forensic accountant • In-house auditors • Must have forensic experience • Engage computer forensic experts • IT personnel should have limited involvement • Secure computers involved • Maintain integrity of documents • Chain of custody

7. Do you know what to do?...continued • Notify all financial institutions • May be instructed to close accounts and open new that will shadow activity of the old • Limit users of online systems • Ensure overall workflow has appropriate checks and balances, with appropriate oversight • Discover return recourse / timeframes that may be possible to enlist

8. Recovery Sources • Insurance coverage • Type of insurance • Cyber crime coverage • Proof of loss • Types of losses • Procedures • Restitution from perpetrator • Criminal prosecution • Law suit-civil tort • Restitution from others

9. Insurance Coverage • Insurance coverage • Review all relevant insurance policies • Be certain to follow proper procedures for each policy • Fidelity policy • Dishonesty policy • Commercial crime policy • All-risk policy • Cyber crime coverage • Notification required within 30 days of discovery; shorter on some policies • Notice is critical • If notice is later, insurance company will contest coverage

10. Insurance Coverage…continued • Proof of loss • Usually within six months; shorter on some policies • Describe the facts accurately • Gather appropriate supporting documentation • Story to explain scheme to insurance company • Clear and concise • Insured must have arguments to support the coverage and the damages sustained • Be certain to reference documents, affidavits and other analyses and worksheets • Insurance company must be able to trace • If litigation, a concise and easily to follow proof of loss

11. Insurance Coverage…continued • Types of losses • Fidelity insurance - Loss arising form dishonest or fraudulent acts committed by employee • “On Premises” insurance - Loss of property that was located on insured’s premises • “In-Transit” insurance - Loss of property while in transit with a messenger of armored car • “Forgery or Alteration” insurance - Forgery or alteration of negotiable instruments including forged delivery instructions • “Securities” insurance - Covers, forged, altered, lost or stolen securities, titles, mortgages, etc. • “Counterfeit Currency” insurance - Covers loss arising from receipt of counterfeit currency

12. Insurance Coverage…continued • Steps to include regarding insurance recovery • Timely notification • Receive dated written or electronic confirmation that insurance company has been properly notified • Proper investigation • Forensic accountant • Computer forensics • Attorney • Notify law enforcement

13. Insurance Coverage…continued • Steps to include regarding insurance recovery, continued • Maybe necessary to notify: • U.S. Attorney office • U.S. Department of Justice • State’s Attorney office • Other regulatory agencies

14. Insurance Coverage…continued • Steps to include regarding insurance recovery, continued • Costs of investigation • Policy may cover costs - keep proper recordkeeping • Insured educates insurance company; better the results • Continued communication • Insurance company can properly position themselves • Insurance company can set proper reserves • Can result in easier settlement discussions • Discuss complex issues as they come to light

15. Restitution from Perpetrator • Very few perpetrators actually pay restitution • Perpetrators may rather pay more in costs against extradition than paying back victim • Criminal prosecution • United States Attorney • State’s Attorney • District Attorney • Seek own counsel for assistance

16. Restitution from Perpetrator …continued • Civil Recovery • Also difficult to get restitution • Funds in off-shore trust • May have to re-litigate in trust location • Does not preclude criminal prosecution • Third-party subpoenas • Records • Depositions • Perpetrator civilly liable for loss sustained by victim • Small claims court

17. Recovery - Preventing Future Disasters • Lessons learned • Look for fraud • Warning signs • Fraud management program

18. Lessons Learned • Weaknesses in system • Prevention in the future • Mistakes made in the past • Review internal controls • Strengths • Improve various areas (workflow processes) • Evaluate bank products • Determine strength of systems (anti-virus software, etc.) • Insurance Coverage • Supplemental insurance • Increase coverage • Deductibles

19. Look for Fraud • Internal audit department • Separate security department • In-house forensic accountants • Positions of trust • Listen, observe and act upon • Fraud risk assessment

20. Warning Signs • Most common • Life style • No vacations or vacations coordinated • Individual against cross training • Messy office or workstation • Fire drills • Many, many more • Think outside the box • What could be happening that is not known • That is exactly what is “thinking outside the box” • Don’t be too busy expanding your business

21. Fraud Management Program • Put together a team • Inherent risks identified • Assess each risk • Likelihood? • What is the impact? • What are the current internal controls? • Are they doing what they are supposed to do? • Residual risk after everything is in place • Actions to take for that residual risk

22. Construct the Team • Accounting department • Outside counsel • General counsel • Banker / Treasury Management Representative • Insurance broker • Internal audit • Human resources • Security • Outside forensic accountants

23. Inherent Risks Identified • How can the controls be overridden? • What types of fraud can be perpetrated? • Fraud triangle • Opportunity • Motivation • Rationalization • Where are the pressures in the company? • Who has the opportunity? • IT Risks • Outside risks

24. Assess Each Risk • Type of industry • Economic assessment • Past occurrences • How many times in the past? • Methodology • Experiences in the profession

25. Assess Each Risk…continued • Fraud schemes occurring presently • Complaints • Customers • Employees • Competitors • Worst case scenarios • Economic impact • Lost contracts • Reputation • Lost customers • Lost vendors

26. Assess Each Risk…continued • Government/Criminal issues • Department of Justice • Fines • Survival of the company

27. What Are the Current Internal Controls? • Controls currently existing • Walk-through of controls • Interviews • Staff • Exit interviews • Testing • Results • Trends from testing

28. Residual Risk Remaining After Everything Is In Place • Residual risk is the risk that still exists after controls in place are considered (the net risk or risk after controls) • What can still occur after all of this work? • What is the vulnerability and costs of residual risks?

29. Actions to Take for Residual Risk • Risks not mitigated by internal controls • Additional controls • Aggressive in pursuing other testing • Stop the activity • Outsource activity • Do nothing-observe the activity for fraud • Evaluate if risk becomes greater over time

30. Questions?