State of New York Office of the State Comptroller Office of Operations Spring Training Event

1.  Fraud Red Flags Linda Giovannone Roz Watrobski Albany: April 29-May 2, 2008 New York City: June 23-24, 2008 State of New YorkOffice of the State ComptrollerOffice of OperationsSpring Training Event

2. FRAUD

3. Fraud in perspective Occupational Fraud 2006 1134 Fraud Cases between January 2004 and January 2006 The use of one�s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organizations resources or assets. The case involved occupational fraud; The fraud occurred within the last two years; The investigation of the fraud was complete; and The CFE was reasonably sure that the perpetrator had been identified. 1134 Fraud Cases between January 2004 and January 2006 The use of one�s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organizations resources or assets. The case involved occupational fraud; The fraud occurred within the last two years; The investigation of the fraud was complete; and The CFE was reasonably sure that the perpetrator had been identified.

4. Source: 2006 Report to the Nation on Occupational Fraud and Abuse A study conducted by the Association of Certified Fraud Examiners (ACFE) consisting of 1,134 cases of occupational fraud found the median length of time of the fraud scheme was 18 months. 5% of revenues�5% of revenues�

5. Source: 2006 Report to the Nation on Occupational Fraud and Abuse Definition 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.

6. What is fraud? Misstatement Mistake v Fraud Knowledge of falsehood/Intent Reliance Damage

7. How does fraud happen? Pressure or Motive Opportunity Rationalization

8. Red Flags A warning or sense that something isn�t right Should lead you to take a closer look at the transaction

9. Personal flags Weak ethics Wheeler-dealer personality Lack of stability Strong desire to beat the system Significant behavior changes Inadequate income for lifestyle

10. Personal flags Highly material personal values Success equated with $ Highly self-centered Conspicuous consumers Careless with facts Hostile Exempt from accountability

11. Personal flags Demand loyalty Have few real friends Inconsistent, vague or implausible responses Schmoozer Employee has outside business

12. Source: KPMG Profile of a Fraudster Survey 2007 Fraudster�s Motivation

13. Pressure Flags High debt Significant financial losses Excessive alcohol, drugs or gambling Extramarital affair Perceived organizational inequities Job frustration or resentment

14. Pressure Flags Peer group pressures Fear loss of status Single parent College tuition Sick family member

15. Opportunity Flags Familiarity with operations Ability to override controls No periodic rotation of key employees No uniform personnel policies

16. Opportunity Flags Not independently verifying delivery or pricing Lack of segregation of responsibilities Organizations with no fraud training program Dishonest or dominant management

17. Opportunity Flags Management does not emphasize the role of strong internal controls Management does not prosecute or punish fraud perpetrators Lack of independence of the Internal Audit function Operating in crisis mode

18. Opportunity Flags Close association with vendors Vendor invoice going anywhere other than accounts payable No documents to support invoices Not independently verifying delivery or pricing

19. Rationalization Flags They owe me I�m overworked I do the work of two people They�ll never miss it I�ll just borrow it I�m not really hurting anyone Everyone is a little dishonest

20. Profile of Occupational Fraudster

21. Source: 2006 Report to the Nation on Occupational Fraud and Abuse Education Level

22. Source: 2006 Report to the Nation on Occupational Fraud and Abuse Criminal History The perpetrators of occupational fraud are the people who use their positions within an organization for personal enrichment throughthe deliberate misuse ormisapplication of the organization�s resources or assets. The Perpetrators� Criminal Histories Nearly two-thirds of the victim organizations routinely conducted background checks on new employees at the time their frauds occurred. Background checks were a more common practice within these organizations than internal audits, fraud hotlines, anti-fraud training or surprise audits. While background checks can be a valuable anti-fraud tool and should be conducted on new hires who will have access to organizational assets, the vast majority of occupational fraudsters in our study had never been charged or convicted of any fraud-related offense before committing their crimes. This finding is consistent with other research suggesting that most occupational fraudsters are not career criminals. Our data suggest that organizations should not rely too heavily on background checks as a preventative measure for occupational fraud. While background checks may weed out the predatory employee, who seeks out employment with the goal of defrauding his or her employer, they will not catch the typical occupational fraudster who has no prior criminal record. Furthermore, when organizations do conduct background checks, our findings suggest that those checks should not be limited to criminal history checks. Other factors such as credit history and past job performance may be more predictive of whether an employee is likely to engage in occupational fraud.The perpetrators of occupational fraud are the people who use their positions within an organization for personal enrichment throughthe deliberate misuse ormisapplication of the organization�s resources or assets. The Perpetrators� Criminal Histories Nearly two-thirds of the victim organizations routinely conducted background checks on new employees at the time their frauds occurred. Background checks were a more common practice within these organizations than internal audits, fraud hotlines, anti-fraud training or surprise audits. While background checks can be a valuable anti-fraud tool and should be conducted on new hires who will have access to organizational assets, the vast majority of occupational fraudsters in our study had never been charged or convicted of any fraud-related offense before committing their crimes. This finding is consistent with other research suggesting that most occupational fraudsters are not career criminals. Our data suggest that organizations should not rely too heavily on background checks as a preventative measure for occupational fraud. While background checks may weed out the predatory employee, who seeks out employment with the goal of defrauding his or her employer, they will not catch the typical occupational fraudster who has no prior criminal record. Furthermore, when organizations do conduct background checks, our findings suggest that those checks should not be limited to criminal history checks. Other factors such as credit history and past job performance may be more predictive of whether an employee is likely to engage in occupational fraud.

23. Source: 2006 Report to the Nation on Occupational Fraud and Abuse Position in Organization

25. Source: KPMG Profile of a Fraudster Survey 2007 Fraudster Details In 91 percent of profiles the perpetrators did not leave it at one single fraudulent act, but committed repeated acts of fraud.

26. Fraud Detection

27. 27 2006 Report to the Nation on Occupational Fraud and Abuse Fraud Detected By:

28. Source: 2006 Report to the Nation on Occupational Fraud and Abuse Source of Tips

29. Document Flags Missing documents Inadequate, copied or apparently altered documents Homemade invoice No letterhead

30. Document Flags PO Box, suite number, mail drop address Multiple addresses for a single vendor No phone number or fake phone number No TIN

31. Document Flags Unknown company name Company name includes initials or personal name Misspellings on document

32. Document Flags Vague information No supporting documentation Higher than usual quantities ordered Unusual items ordered

33. Document Flags Sequentially numbered or inconsistently numbered invoices Recurring identical amounts from same vendor Round amounts or amounts under approval levels Increased amounts to vendor for no apparent reason Unexplained items on reconciliations

34. Contracting Flags Restrictive specifications Low number of bidders Regular bidders don�t bid Bids/quotes received from the same fax number around the same time Similar letterheads of bidders Large difference in bid amounts

35. Inventory Flags Missing inventory or assets Unrestricted access to inventory No minimum, maximum or reorder levels for inventory Lack of regular physical inventory counts

36. Other Flags Unwillingness to provide needed data Missing data Managers regularly do subordinate duties Chronically low morale Limited access to people Unusual delays in providing information

37. Shell Company Flags You have never heard of this company Company receives many small dollar payments Company name includes initials or personal name Company sells intangible services � difficult to confirm

38. Shell Company Flags No phone number or fake phone number on invoices Address is a post office box or suite number No receiving reports

39. Bribes and Kickbacks Flags Unjustified favoritism of a certain vendor Unexplained increase in wealth of employee Receipt of personal enrichment to influence a public official to commit fraud or violate the law Receipt of personal enrichment to influence a public official to commit fraud or violate the law

40. Conflict of Interest Flags Unexplained or unusual favoritism of particular vendor Close socialization with and acceptance of inappropriate gifts Vendor address or identification number matches employee�s personal information Employee declines promotion or job movement from current job Use VESID example Having an undisclosed financial interest in the process Use VESID example Having an undisclosed financial interest in the process

41. Travel and Expense Reimbursement Flags Altered or fake receipts (document flags) Questionable address Consistently over per diem allowances Business or first-class instead of coach Receipts continuously for the same place High airline prices SIF Fraud exampleSIF Fraud example

42. Credit Card Flags Personal type of purchases vs. business-related Shipping address differs from billing address No reconciliation of credit card charges Larger than normal order Unauthorized use of a credit card to make purchases including Personal, State procurement and State Travel credit cards Commodities & gasUnauthorized use of a credit card to make purchases including Personal, State procurement and State Travel credit cards Commodities & gas

43. Medical Fraud Flags Gender specific drugs/services billed for the wrong gender Bills for services that couldn�t realistically be done in certain time frame Unbundled services

44. What If You Suspect Fraud? Why don�t people report their suspicions? You should contact the Office of the State Inspector General.� The Office of the State Inspector General is responsible for uncovering corruption in New York State government. The Inspector General�s Office has the authority to investigate misconduct in executive branch agencies, departments, divisions, offices, boards, commissions, public authorities and public benefit corporations -- any entity of State government that is headed by an appointee of the Governor and that does not have its own statutory Inspector General. Corruption is a term that encompasses a wide range of misconduct.� In addition to criminal acts such as fraud, bribery and theft, corruption includes activities that constitute a conflict of interest or simply an abuse of office.� If it looks wrong, it may be wrong, and therefore should be reported to the Inspector General�s Office so it can be reviewed and investigated.� By reporting misconduct to the Inspector General�s Office, you will help to ensure that State employees meet the highest standards of integrity and accountability. Here are some examples of conduct that must be reported: The giving or receiving of bribes or unlawful gifts; Theft or misuse of State property or funds Inappropriate use of State computers Fraudulent conduct such as falsification of records, material misrepresentations of fact, or irregularities in awarding contracts or grants Fraud committed against the State by private individuals and companies Serious or systematic leave and travel abuse Conflicts of interest Discrimination Other criminal or inappropriate conduct You should contact the Office of the State Inspector General.� The Office of the State Inspector General is responsible for uncovering corruption in New York State government. The Inspector General�s Office has the authority to investigate misconduct in executive branch agencies, departments, divisions, offices, boards, commissions, public authorities and public benefit corporations -- any entity of State government that is headed by an appointee of the Governor and that does not have its own statutory Inspector General. Corruption is a term that encompasses a wide range of misconduct.� In addition to criminal acts such as fraud, bribery and theft, corruption includes activities that constitute a conflict of interest or simply an abuse of office.� If it looks wrong, it may be wrong, and therefore should be reported to the Inspector General�s Office so it can be reviewed and investigated.� By reporting misconduct to the Inspector General�s Office, you will help to ensure that State employees meet the highest standards of integrity and accountability. Here are some examples of conduct that must be reported: The giving or receiving of bribes or unlawful gifts; Theft or misuse of State property or funds Inappropriate use of State computers Fraudulent conduct such as falsification of records, material misrepresentations of fact, or irregularities in awarding contracts or grants Fraud committed against the State by private individuals and companies Serious or systematic leave and travel abuse Conflicts of interest Discrimination Other criminal or inappropriate conduct

45. What If You Suspect Fraud? Supervisor Internal Auditor State Comptroller (888)OSC-4555 State Inspector General (800)DO-RIGHT You should contact the Office of the State Inspector General.� The Office of the State Inspector General is responsible for uncovering corruption in New York State government. The Inspector General�s Office has the authority to investigate misconduct in executive branch agencies, departments, divisions, offices, boards, commissions, public authorities and public benefit corporations -- any entity of State government that is headed by an appointee of the Governor and that does not have its own statutory Inspector General. Corruption is a term that encompasses a wide range of misconduct.� In addition to criminal acts such as fraud, bribery and theft, corruption includes activities that constitute a conflict of interest or simply an abuse of office.� If it looks wrong, it may be wrong, and therefore should be reported to the Inspector General�s Office so it can be reviewed and investigated.� By reporting misconduct to the Inspector General�s Office, you will help to ensure that State employees meet the highest standards of integrity and accountability. Here are some examples of conduct that must be reported: The giving or receiving of bribes or unlawful gifts; Theft or misuse of State property or funds Inappropriate use of State computers Fraudulent conduct such as falsification of records, material misrepresentations of fact, or irregularities in awarding contracts or grants Fraud committed against the State by private individuals and companies Serious or systematic leave and travel abuse Conflicts of interest Discrimination Other criminal or inappropriate conduct You should contact the Office of the State Inspector General.� The Office of the State Inspector General is responsible for uncovering corruption in New York State government. The Inspector General�s Office has the authority to investigate misconduct in executive branch agencies, departments, divisions, offices, boards, commissions, public authorities and public benefit corporations -- any entity of State government that is headed by an appointee of the Governor and that does not have its own statutory Inspector General. Corruption is a term that encompasses a wide range of misconduct.� In addition to criminal acts such as fraud, bribery and theft, corruption includes activities that constitute a conflict of interest or simply an abuse of office.� If it looks wrong, it may be wrong, and therefore should be reported to the Inspector General�s Office so it can be reviewed and investigated.� By reporting misconduct to the Inspector General�s Office, you will help to ensure that State employees meet the highest standards of integrity and accountability. Here are some examples of conduct that must be reported: The giving or receiving of bribes or unlawful gifts; Theft or misuse of State property or funds Inappropriate use of State computers Fraudulent conduct such as falsification of records, material misrepresentations of fact, or irregularities in awarding contracts or grants Fraud committed against the State by private individuals and companies Serious or systematic leave and travel abuse Conflicts of interest Discrimination Other criminal or inappropriate conduct

46. Report Detailed Information Describe the alleged wrongdoing Identify when the alleged wrongdoing started and if it�s still occurring Identify who may be involved Identify other potential witnesses or victims

47. Report Detailed Information Identify who you may have already notified (i.e., supervisor or other agency/personnel or law enforcement) Describe what evidence is available and where it can be found Identify what laws or agency regulations have been violated, if known

48. Source: 2006 Report to the Nation on Occupational Fraud and Abuse Encourage Fraud Reporting Conduct anti-fraud training to educate employees on how to recognize and report illegal conduct Maintain open lines of communication among employees and management to bring questionable conduct to light before it develops into outright illegal activity Impress upon employees that fraud acts will not be tolerated

49. QUESTIONS

50. Contact Us Linda Giovannone, CIA, CGAP Auditor-in-Charge lgiovannone@osc.state.ny.us (518)486-6492 Roslyn Watrobski, CFE, CIA, CGAP Audit Supervisor rwatrobski@osc.state.ny.us (518)402-4228