GAIN FIRM FOOTING

WITH FRAUD RISK MANAGEMENT

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OVERVIEW

• Introduction • Fraud Considerations for Banks • Computer Fraud and Data Forensics • Questions and Discussion

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REFERENCE Statistics and charts in this presentation, unless otherwise noted, are from: The Report to the Nations - 2012 Global Fraud Study • Study of 1,388 cases of occupational fraud • Published by the Association of Certified Fraud Examiners

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BANKS HAVE MORE THAN THEIR FAIR SHARE

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WHAT TYPE OF FRAUD IS OCCURRING AT BANKS?

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DISTRIBUTION OF LOSSES

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DETECTION OF FRAUD SCHEMES

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IMPACT OF HOTLINES

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TYPES OF FRAUD External versus Internal Fraud • External – perpetrators are outside the bank • Internal – fraud is committed by bank personnel

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EXTERNAL FRAUD Primarily executed by customers and outsiders, examples include: • Wire Fraud • Mortgage Fraud (material misrepresentation or omission) • Check Fraud (forgery, check kiting, altered checks)

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INTERNAL FRAUD Two Types of Internal Fraud • Financial Statement Fraud Highest median loss per reported case, however lowest frequency of occurrence • Asset Misappropriation Lowest median loss per reported case, however the highest rate of frequency

Source: ACFE 2012 Report to the Nations

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FINANCIAL STATEMENT FRAUD • Asset/revenue overstatement • Liability/expense understatement • Timing differences • Concealed liabilities and expenses • Improper disclosures

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ASSET MISAPPROPRIATION • Unauthorized transfers/disbursements • Payroll schemes • Ghost employees • Expense reimbursement schemes • Theft of portable fixed assets • Others… GAIN CONTROL

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RECENT FRAUD CASES Bank Fraud Schemes: • Returned checks • Loan advances • Fictitious loans

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FRAUD TRIANGLE

PERCEIVED OPPORTUNITY

INCENTIVE/ PRESSURE

ATTITUDE/RATIONALIZATION GAIN CONTROL

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PREVENTING AND DETERRING FRAUD Prevention and Deterrence Perceived opportunity is the aspect of the fraud triangle that is most controlled by employers. Strong internal controls and segregation of duties • Review access rights on a consistent and periodic basis • Limit access to employee accounts (both solely owned or jointly owned) • Review employee account activity and teller activity • Dual control over wire transfers • Review of payroll change reports by someone independent of the payroll function GAIN CONTROL

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PREVENTING AND DETERRING FRAUD (CONTINUED) The list continues… • Robust review of suspense/clearing account activity – be certain the reconciliation makes sense and items are clearing timely and properly • Implement a fraud reporting mechanism that is anonymous • Maintain profession skepticism Attitude and rationalization can be improved within companies by strong “tone at the top” and employee appreciation efforts GAIN CONTROL

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PREVENTING AND DETERRING FRAUD (CONTINUED) Best practice is to have a fraud risk management program in place Brainstorming sessions: • Identify significant risk areas (multiple locations, business segments, etc.) • How is the importance of ethical behavior and appropriate business practices communicated? • What could go wrong?

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OVERVIEW OF DATA FORENSICS • What is Data Forensics? • Uses for Data Forensics • How We Work • Why Forensic Analysts? • Before An Investigation • The Right Knowledge • In the Right Hands

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WHAT IS DATA FORENSICS? • Forensics “Suitable for use in a court of law“. Forensic accountants generally work to this standard and toward this potential outcome. • Forensic Accounting The specialty practice area of accountancy that describes engagements that result from actual or anticipated disputes or litigation. • Data Forensics A branch of forensic science pertaining to legal evidence found in computers and digital storage media. Also known as digital forensics GAIN CONTROL

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USES FOR DIGITAL FORENSICS • Inappropriate and/or illegal activity • E-mail and Internet abuse • Unauthorized disclosure of information • Asset concealment or diminution • Financial mismanagement, theft and/or fraud • Wrongful termination, harassment, or discrimination • Liability due to infringement of copyrighted materials

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CASE STUDY – A LOCAL CREDIT UNION A trusted employee committed misappropriation of assets Assets Lost: $500,000

Cost of the Investigation: $250,000.

Results: Perpetrator pleaded guilty and went to jail.

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WHY USE DATA FORENSICS?

• How often are computers used to commit fraud?

• Some evidence is found ONLY on the perpetrator’s computer

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CASE STUDY – MANAGEMENT FRAUD • A VP of a satellite business embezzles $850,000 from the parent company; • Forensic accounting cannot track transfers of funds; • Collaborators are not discovered until data forensics is used

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HOW WE WORK • Forensic (suitable for use in a court of law) acquisition of digital/electronic evidence • Deleted file and document recovery (including email) • Corrupt or damaged operating system data retrieval • Documenting a history of internal network access & Internet activity (websites, postings, texting & chat) • Transfer of files to storage devices • Malware identification • Keyword searches of entire disks GAIN CONTROL

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WHY USE TRAINED FORENSIC ANALYSTS? • IT staff can unknowingly change critical information on the disk

• Seemingly “damaged” electronic data can be restored with the right tools

• Evidence found can make a BIG difference in the outcome – If it’s captured and documented properly

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BEFORE AN INVESTIGATION

• We review Privacy & Acceptable Use Policies from the entities involved

• Before seizing, duplicating or analyzing a storage device, we require specific authority for doing so, including what may or may not be permissible to examine

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BEFORE AN INVESTIGATION

• Identify what sector-specific handling of regulatory data (i.e., HIPPA, GLBA, PCI, FERPA, SOX, etc.) may be required

• Structure of notification and reporting process, including attorney/client privilege

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THE RIGHT KNOWLEDGE We use: • Software that is “commonly accepted” by the courts for Digital Forensics • Hardware (such as write-blockers) that is approved by government testing (NIST) to ensure no changes are made to the primary object (hard disk, USB, PDA, etc.) at the time of acquisition or during analysis • A standard Chain of Custody process for Electronically Stored Information (ESI) • An Evidence Preservation process - Secure storage of physical media GAIN CONTROL

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QUESTIONS? Todd J. Desjardins, CPA, CFE Senior Manager [email protected] 207.541.2381

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