Fraud Prevention in

Local Government Presented at the 2012 MML Annual Conference September 18, 2012

Ron Steinkamp, CPA, CIA, CFE, CRMA 314.983.1238 | [email protected] 1050 N. Lindbergh Blvd. │ St. Louis, Missouri 63132 │ 314.983.1200 1520 S. Fifth St., Suite 309 │ St. Charles, Missouri 63303 │ 636.255.3000 2220 S. State Route 157, Ste. 300 │ Glen Carbon, Illinois 62034 │ 618.654.3100 1.888.279.2792 │ www.bswllc.com

What is Fraud?

Deliberate misuse of an organization’s resources or assets for personal enrichment • Three general categories: 

Asset misappropriation



Corruption



Financial statement fraud

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Agenda • 2012 ACFE Global Fraud Study • 2011/2012 Government Fraud Prevention Survey • Common Characteristics & Red Flags • How to Prevent Fraud in Your Organization • Fraud Protection Tools

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2012 ACFE Global Fraud Study

2012 Report to the Nations on Occupational Fraud and Abuse

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Summary of Findings 1. Typical fraud losses equal 5% of revenue 2. Asset misappropriation - the most common 3. Financial statement fraud - the least common 4. Frauds are most likely to be detected by tips 5. Small organizations are disproportionately victimized by occupational fraud 6. Fraud perpetrators often display warning signs © 2011-2012 All Rights Reserved Brown Smith Wallace LLC

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7. Government/public administration is one of the most victimized industries 8. Anti-fraud controls help reduce the cost and duration of occupational fraud 9. High-level perpetrators cause the greatest damage to their organizations

10.Nearly 50% of all victim organizations do not recover any losses © 2011-2012 All Rights Reserved Brown Smith Wallace LLC

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Conclusions & Recommendations •

Implement hotlines to receive tips from internal/external sources

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Organizations over-rely on audits

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Most frauds are detected by tips

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Anti-fraud training among employees and managers result in fewer fraud losses

•

Surprise audits are an effective fraud prevention tool

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Conclusions & Recommendations

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Using internal controls as your sole fraud prevention strategy is insufficient

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Employees exhibit behavior warning signs

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Employees should be trained to recognize common signs of fraud

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Effective fraud prevention measures are critical

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Local Government Fraud Survey Conducted by Brown Smith Wallace at the 2011 Missouri Municipal League Conference Objective: Determine the top fraud risks that concern local government and understand the extent of fraud prevention efforts

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Our Findings The Top 5 Fraud Risks 1. Non-Cash Assets – stealing or misusing non-cash assets 2. Billing – submitting or inflating invoices for fictitious goods, services, purchases 3. Skimming – stealing cash before it is recorded 4. Payroll – false claim for compensation resulting in payment 5. Bribery – receiving something of value to influence a decision

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Our Findings (continued) Other Fraud Risks Over 40% •

no effective internal audit function to audit fraud risks

Over 45% •

no effective code of conduct/ethics policy

Over 60% • • •

no training program on the code of conduct/ethics policy no established process to investigate and resolve potential fraud concerns no effective process for identifying significant fraud risks

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Our Findings (continued)

Over 70% •

no effective process for employees, citizens or vendors to report potential fraud

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Common Characteristics of Fraud

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Pressure or incentive

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Opportunity

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Rationalization

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Red Flags Pressure or Incentive (NEED) Rationalization

High personal debts Substance or gambling abuse Job frustration Resentment of superiors

• • • •

• • • •

Opportunity • • • •

Inadequate internal controls Weak management Excessive turnover Large amounts of cash on hand or processed

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Unfairly compensated Everyone else does it Intension of repayment Financial need

How to Prevent Fraud •

Create an anti-fraud environment

•

Know your fraud risks

•

Develop an oversight process

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Create an Anti-Fraud Environment Set the Tone at the Top •

Hold elected officials and management responsible

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Lead by example

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Behave ethically

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Openly communicate expectations to employees

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Maintain a zero tolerance policy

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Treat all employees equally, regardless of position

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Enforce a code of conduct founded on integrity

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Create an Anti-Fraud Environment

Create a Positive Workplace Environment • Poor employee morale can affect attitudes about committing fraud • HR is instrumental in helping to build a positive work environment • Employees should be empowered to help create a positive workplace

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Create an Anti-Fraud Environment

Hire and Promote Appropriate Employees •

Conduct background investigations; verifying education, employment history and references

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Give regular performance reviews

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Perform an objective compliance review of your code of conduct and ethic policies at consistent intervals Address violations immediately

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Create an Anti-Fraud Environment Fraud Awareness / Training • All new employees should be trained upon hiring on values and code of conduct • Offer periodic refresher training for all employees

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Create an Anti-Fraud Environment

Confirmation • Clearly articulate that all employees are held accountable to act within the code of conduct • Have a written Code of Conduct statement

Discipline • Actions should be taken in response to any alleged incident of fraud • Expectations about the consequences of committing fraud must be clearly communicated throughout the entity

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Know Your Fraud Risks

•

Identify and measure fraud risks

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Mitigate fraud risks

•

Implement and monitor appropriate internal controls

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Develop An Oversight Process

To effectively prevent or deter fraud, an entity should have an appropriate oversight function in place that includes the following: • Audit committee • Management • Internal auditors

• Independent auditors • Certified fraud examiners

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Fraud Protection Tools

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Code of Conduct

(AKA – Antifraud Policy)

• Should be based on the organization’s core values • Established by executive management and a board with input from employees • Written documentation consisting of:

 Clear guidance on what behaviors and actions are/are not permitted  Detailed documentation of employee responsibilities in the prevention and detection of fraud  Procedures on how employees should seek additional advice when faced

with uncertain ethical decisions  Process for communicating concerns about known or potential wrongdoing • All employees should be trained on the code of conduct when hired, and annual refresher training with affirmation should be provided

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Anti – Fraud Hotline Communication system that enables employees, vendors, customers and others to communicate concerns about known or potential/suspected wrongdoing •

Telephone, email, web site

•

Anonymous

•

Adequately publicized

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Fraud Prevention Checkup •

ACFE tool

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High level assessment of an organization’s fraud health

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Identifies major gaps in fraud prevention processes and fixes them before it is too late

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Focus of a Fraud Prevention Checkup is:  Fraud risk oversight  Fraud risk ownership  Fraud risk assessment  Fraud risk tolerance and risk management policy  Anti-fraud controls  Proactive fraud detection

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Should be completed by a Certified Fraud Examiner (CFE)

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Fraud Risk Assessment • Assists management in systematically identifying where and how fraud may occur and who may be in a position to commit fraud • Focuses on fraud schemes and scenarios to determine whether or not the current internal controls can be circumvented

• Five general steps:  Identify relevant fraud risk factors  Identify potential fraud schemes and prioritize based on risk  Map existing controls to potential fraud schemes and identify gaps  Test operating effectiveness of fraud prevention and detection controls  Document and report the fraud risk assessment © 2011-2012 All Rights Reserved Brown Smith Wallace LLC

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Data Analysis

Data Analysis is great for analyzing trends and identifying

unusual items and changes to operations • A systemic and efficient way of verifying 100% of transactions and reducing risks

• Highlights red flags and identifies errors, fraud, inefficient operations and audit targets

• Identifies control weaknesses/breakdowns before they cause too much damage

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Fraud Review / Investigation • Results from a concern or suspicion of wrongdoing • Consists of gathering sufficient information about specific details and performing procedures necessary to determine:  Whether fraud has occurred  The loss or exposure associated with the fraud  Who was involved, and how it happened

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Fraud Review / Investigation • Must prepare, document and preserve evidence sufficient for potential legal proceedings • Must carefully manage in accordance with laws • Include legal counsel • Include internal audit • Include expertise – Certified Fraud Examiner (CFE)

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Who Is Brown Smith Wallace? • Celebrating 40 years • 6th largest accounting firm in St. Louis • 2nd largest locally based firm in Missouri • 200 professionals and growing • A ‘Fastest Growing Firm’ in the Midwest per INSIDE Public Accounting • Only St. Louis-based firm recognized multiple times by Accounting Today as ‘Best Accounting Firm to Work For’ • Winner of the Missouri Society of CPA’s Work/Life Balance award • Independent firm associated with Moore Stephens International • Diverse service mix and expanding

• High touch, energized firm with a focus on quality

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Contact Information Ron Steinkamp, CPA, CIA, CFE, CRMA Principal, Risk Advisory Services Brown Smith Wallace LLC 314.983.1238 (Direct) [email protected]

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