Current Trends in Fraud

A practical look at how to mitigate risks, limit losses, and stay out of the crosshairs of fraudsters.

What are we going to talk about

Leading organizations are increasingly facing increased risks related to complex regulations and ever changing fraud schemes.

• The Evolution of fraud risks• The Impact of changes in the workplace on fraudsters and fraud schemes• The Potential Strategies for mitigating risks and losses

As part of this we will discuss; • Current fraud issues that organizations face • Some of the regulatory enforcement trends and limitations from an accounting and law

enforcement perspective• Where companies can focus their attention to mitigate risks and limit their losses • How we expect some of these risks to evolve and shift in the near term. • How to keep an organization out of the cross hairs of those willing to do harm. • Some basic procedures to reduce costs, recover funds, limit risk in an ever changing

landscape as it relates to fraud • Building a program that best protects you and your organization from fraud.

This will be an interactive session with real examples with questions embedded along the way.

Nirvana Where we all want to be

Fraud risk management framework – Flow of events

Prevention

Detection

Response $$$$$$

Fraud in Organizations

Research estimates claim that typical organizations lose about 5% of revenues in a given year to fraud

• Median loss from the ACFE’s 2016 Global Fraud Study was $150,000 but 23% of cases reported had losses of $1 million or more

• Breakdown of Occupational Frauds Reported (not mutually exclusive categories)• 84% of cases involved some form of asset misappropriation• 35% of cases involved some form of corruption• 10% of cases involved some form financial statement frauds

Sources: ACFE’s Report to the Nations on Occupational Fraud And Abuse 2016 Global Fraud Study

Asset Misappropriations

Asset Misappropriations is the most common type of fraud in organizations.

Sources: ACFE’s Report to the Nations on Occupational Fraud And Abuse 2016 Global Fraud Study

Corruption

Sources: ACFE’s Report to the Nations on Occupational Fraud And Abuse 2016 Global Fraud Study

Duration of Fraud Schemes

The amount of loss attributable to fraud schemes is significantly impacted by the length of time the fraud is perpetrated.

• The median duration of the frauds in the ACFE 2016 Global Fraud Study was 18 month

• Almost a third of the frauds lasted at least two years before they were detected

Sources: ACFE’s Report to the Nations on Occupational Fraud And Abuse 2016 Global Fraud Study

Concealment of Fraud Schemes

94.5% of respondents to the ACFE 2016 Global Fraud Study noted that the fraudster(s) tried to conceal their activities

Sources: ACFE’s Report to the Nations on Occupational Fraud And Abuse 2016 Global Fraud Study

Types of Organizations Impacted By Fraud

Two-thirds of cases reported as part of the ACFE’s 2016 Global Fraud Study were committed at privately held and publicly owned companies.

Sources: ACFE’s Report to the Nations on Occupational Fraud And Abuse 2016 Global Fraud Study

Types of Organizations Impacted By Fraud

Based on the ACFE’s 2016 Global Fraud Study, while mining and agricultural business reported fewer cases of fraud, the median loss was much higher.

Sources: ACFE’s Report to the Nations on Occupational Fraud And Abuse 2016 Global Fraud Study

Detection of Fraud Schemes

According to the ACFE 2016 Global Fraud Study, while tips are the most common method, only 51.5% of tips reported came from employees. Customers, vendors, and other parties played a significant role in reporting tips.

Sources: ACFE’s Report to the Nations on Occupational Fraud And Abuse 2016 Global Fraud Study

Some basic alerts from the field

Beware of Requests to Change a Supplier's Banking and/or Mailing Details

• Several businesses in the Toronto and Montreal were contacted by fraudsters claiming to be a supplier of the contacted business.

• In this scam, the fraudster typically made contact with the Accounts Payable area of a business and explains that the supplier's address and banking information have changed.

• The fraudster requests that all future payments for this supplier be sent to this new bank account and/or mailing address.

• These fraudsters have used a variety of methods to initiate this scam:• They send a false fax/email designed to look like a legitimate communication from the

actual supplier, or • They call an individual in the Accounts Payable area with the request, and follow up with

a false fax or e-mail, as described above

A Recent Headline

Website Offers Fake Receipts Accounts Payable best practices“Accounts payable, beware. Just when you thought every fraudulent

scheme that could be conceived already has been, you learn better. Yet another scam artist has devised a way to pilfer money from your

business. Maybe you're not surprised at all. After all, scammers never rest.”

These receipts are available to people both internal and external to your organization.

What you are up against?

Fake Receipt Generators that work

• http://www.smileygenerator.us/fake_receipt/index.php• http://redoreceipt.com/dyn/index.htm• http://losthotelreceipt.com/• http://expenseasteak.com/

What is available in the Fake receipt space?

Fake Receipt AIR Application November 01st 2008 Posted to AIR, Actionscript 3, Work"Testimonial”Here is a fun little AIR application that I made to create fake receipts. Actually I use it to create receipts when I lose the originals. Our new expense system allows us to submit JPEGs of our receipts online. Lots of times I lose small receipts for things like meals or coffee so this does the trick nicely. You simply edit the dynamic text fields and then click Export JPEG to save it to the desktop. This application could be taken a lot further so feel free to grab the source files and use it as the base for something bigger.

Fraud Case: #1

Company X• Method of Detection: Tip / External Audit

• Internal whistleblower tip related to revenue recognition issues, IP ownership, contingent liability accruals, asset misappropriation, obstruction of justice, misleading investors

• External investigation:• Reviewing sales transactions• Email and text message review• Review of accounting• Multiple Interviews

• Findings:• High-pressure environment with poor tone at the top• Sales utilizing various concessions such as rebates, payment term extensions, free

samples to induce customers • Poor communications to finance/accounting function regarding sales terms• Pressuring of distributors to act as financing agents • Poorly documented procedures • Company resources utilized for personal purposes

Fraud Case #2

Travelling in Style, the Subject (RR)A forty-nine year old male.• Senior position.• Earning in excess of six figures.• One year away from full medical benefits and being able to draw on

retirement income.• Involved with numerous small defalcations totaling for the four-year period

close to $100K.

Fraud Case #2 (cont.)

What did RR do?• Falsified and altered receipts• Claimed fictitious expenditures• Double-claimed expenditures • Claimed personal expenditures as business expenditures.• Failed to provide documentation for about $17k of expenditure.• Etc.

How did we find it?• Despite the fact that he had expense reports that had been approved, we

noticed significant cash reimbursements.• The reimbursements received appeared odd when looked at in context.• The first report reviewed revealed altered invoices.

Fraud Case #2 (cont.)

Why Was it Able to Continue for So Long?• It started small and increased over time.• The supervisor was conducting perfunctory reviews only.• The supervisor had a significant number of direct reports.• The individual in question was a longstanding and trusted employee of the

company.

Profile of a Fraudster

In short who does this stuff in todays environment

Fundamental characteristics of a FraudsterAutocratic,3x more likely to be regarded as friendly as not

Well respected

(38%), nearly 4x more likely than someone with a low reputation

Has a sense of superiority

79% male

Has unlimited authority

44%

36–55years of age

Holds an executive level position

(38%)Manager (32%);

Staff (20%)

65% of fraud lasted between 1 and 5 years

Type of Fraud:Misappropriation of Assets (47%); Financial reporting fraud (22%).

Cost of Fraud:Cost to company exceeding $1M (27%).

Source: Global Profiles of the Fraudster, KPMG International, 2016

Fundamental characteristics: Rationalization

Source: Global Profiles of the Fraudster, KPMG International, 2016

What was the overriding motivation for fraudster?

66% 27% 13% 12%

For personalfinancial gain

and greed

Eager/”BecauseI can”

Organizationalculture driven

Desire to meettargets/hide lossesto receive bonus

12% 11% 10% 5%

Desire to meetbudgets/hide

losses to retain job

Desire to meet targets/hide losses to

protect the company

Other notlisted above

Other motives (less than 5%) include: Loss of confidence, avoidance of

regulatory compliance, ratings driven, publicity driven, disruption of

operations

Fundamental characteristics: Gender

Primary FunctionFinance

Level of SeniorityStaff member

Alone or in CollaborationAlone

Has debt20%

Primary FunctionVaried

Level of SeniorityExecutive

Alone or in CollaborationCollaboration

Has debt8%

Source: Global Profiles of the Fraudster, KPMG International, 2016

Types of fraud: Collusion

North America

41% — Mixed31% — All internal21% — All external

Latin America& Caribbean

55% — Mixed31% — All internal13% — All external

Africa & Middle East

49% — Mixed26% — All internal24% — All external

Oceania44% — Mixed44% — All internal11% — All external

Asia

42% — Mixed35% — All internal13% — All external

Europe

40% — Mixed38% — All internal17% — All external

Source: Global Profiles of the Fraudster, KPMG International, 2016

Types of fraud: CollusionWhistle blowers and tip-offs have the highest incidence of uncovering groups of five or more colluders. Other forms of detections may be ineffective in detecting sizeable collusion schemes.

Weak internal controls are a bigger factor for solo fraudsters than colluders (66 percent versus 58 percent for colluders). More solo fraudsters are caught by accident (19 percent versus 10 percent for colluders).

Enablers: Technology the sands are shifting

Source: Global Profiles of the Fraudster, KPMG International, 2016

16%

26%

47%8%

Yes, the fraud could nothave been perpetrated

without using technology

Somewhat, but the fraud could likely have occurred without

technology

Technology was not used to perpetrate the

fraud

Yes, to a large degree technology was used to enable the fraud

Was technology used as an enabler to perpetrate the fraud?

Enablers: TechnologyCreated false or

misleading information in

accounting records

Abused permissible

access to organization’s

computer systems

Provided false or misleading information via email or other messaging platform

Obtained access to organization’s computer systems without permission

20%

8%

3%13%

24%

Other

Source: Global Profiles of the Fraudster, KPMG International, 2016

Types of fraud: CyberCharacteristics

Tend to be younger

Less years of service

More likely to act alone

More likely to have a sophisticated Modus operandi

More likely to have conducted the fraud over shorter span (83% less than one year)

Source: Global Profiles of the Fraudster, KPMG International, 2016

Enablers — weak controls

Collusion circumventing good controls

Reckless dishonesty regardless of controls

Other

Weak internal controls

5%

61%

11%

21%

Source: Global Profiles of the Fraudster, KPMG International, 2016

When is the last time you did a fraud risk assessment?

Primary Internal Control Weaknesses

According to the ACFE 2016 Global Fraud Study, more than 29% of respondents cited a clear lack of controls as the primary reason that the fraud was able to be perpetrated, another 20% noted that the internal controls had been overridden.

Sources: ACFE’s Report to the Nations on Occupational Fraud And Abuse 2016 Global Fraud Study

Preventative and Detective Measures to Deter Fraud

What Can I do at a basic level?

How Forensic Reviews can Drive ROI (think how do I reduce my 5%)Leading organizations are increasingly leveraging forensic compliance services as a means to enhancing efficiencies through increased revenues , reclaiming cash, and reducing costs.

• When tailored to an organization’s business model and operating environment, there are many forensic compliance activities that can unlock significant value in addition to the benefits associated with strong functioning internal controls and an effective compliance program.

• There is the opportunity for companies to conduct a simplified self/gap assessment to evaluate how well they manage various aspects of their business and leverage their compliance programs to create revenue-generating opportunities and take advantage of cost reduction possibilities.

Immediate F/S Impact Services

Accounts Payable Review • Service Type: Many companies have the opportunity to strengthen their cash position

by reviewing contractual payment terms with key vendors to prevent premature payment. Reviews should include an analysis of contractual payment terms against actual payment schedules. Additionally, this can help identify problematic vendors or duplicate payments.

• Potential ROI Impact: Positive cash flow impact on extension of payment terms.

Immediate F/S Impact ServicesCustomer Credits and Credit Card Refunds

• Service Type: In some companies, certain employees have the authority to issue customer credits or establish credit balances. These credits can potentially be issued back to a different entity or destination (e.g., a credit card refund or manual check) which might allow an employee or colluding employees to extract cash from a company. Conduct a review of credit balances, credits issued, payments on those customer credits, and roles and segregation of duties which might enable an employee to perpetuate and hide a customer credit scheme.

• Potential ROI Impact: Reduction in customer credit balances owed, termination of unethical employees, and possibly reclamation of inappropriate amounts paid out.

Physical Asset Register Review • Service Type: Many companies fail to effectively monitor key physical assets, which

makes them susceptible to loss and theft, and inhibits their ability to file timely insurance claims. A review may include walkthroughs to determine whether assets can be found (e.g., art). Additionally, reviews may include checks to confirm that expenditures were made based on needs, at fair value, and at arm’s length.

• Potential ROI Impact: Insurance claims processed for lost or damaged assets and identification of areas of asset vulnerabilities to remediate future losses.

Immediate F/S Impact ServicesIP Licensing Royalty Review

• Service Type: Many companies license intellectual property (patents, trademarks, etc.) to other companies (licensees) for use in licensee products. Oftentimes the companies are competitors. Licensors struggle to review licensee calculations of royalties owed due to lack of resources and competitive concerns (e.g., corporate espionage). Engage a mutually agreeable third party to conduct an audit. We find underreporting in approximately 70% of our reviews, and our clients generally achieve an ROI on this type of work greater that 10:1.

• Potential ROI Impact: Recovered unremitted or underreported licensing royalties.

Channel Incentive Review • Service Type: Verify amounts paid as incentives (e.g., rebates, price protection) to

business partners (e.g., distributors or resellers). These efforts are often hugely data intensive and highly specialized. Both channel incentives paid and recovery through our work can be significant.

• Potential ROI Impact: Recovered channel incentives paid.

Event-Driven EffortsLeasehold Improvements

• Service Type: Major leasehold improvements offer unique opportunities for fraud and abuse due to the scale and complexity of certain projects. Reviews may include contract reviews and walkthroughs to determine whether improvements were actually made and that they satisfy contractual requirements. Additionally, reviews may include checks to confirm that expenditures were made based on needs, at fair value, and at arm’s length.

• Potential ROI Impact: Cost recoveries for leasehold improvements that do not satisfy contractual requirements as well as potential leverage with respect to future contract renegotiations.

Post-Acquisition Close “hit team” • Service Type: Many times post the close of a transaction there are calculations around

working capital to be completed. It is imperative that the acquirer of an entity promptly assess all items impacting working capital which could result in a reduction in the purchase price, and potentially consider the validity of factors resulting in an increased price. Review areas of concern such as inventory receivables and other accounts that are part of the working capital calculation. Ensure the contracts are vetted not just from a legal perspective but also from an accounting perspective.

• Potential ROI Impact: Reduced purchase price for the entity being acquired resulting from a reduction in working capital.

Event-Driven EffortsThird Party Contingency Audit Defense

• Service Type: Companies in business relationships often are subjected to audits (examples: pricing agreement compliance, invoicing accuracy) conducted by a third party working on contingency. These third parties are incentivized to aggregate as many findings as possible that the paying party will agree to, whether or not those findings are relevant or have an explanation. Think through what materials to provide in response to the initial data request and to refute, provide explanation for, or provide a partial rebuttal to, the third party’s findings.

• Potential ROI Impact: Reductions in refunds/corrective payments owed to counterparties in business relationships.

Efficiency and Cost-Reduction EffortsMarketing Budgets and Expenditures

• Service Type: Marketing expenses, specifically those that are international in nature, have been commonly used as a vehicle to conceal fraudulent payments as a result of the difficulties associated with the collection and verification of proof of performance. Perform analyses of market development fund (MDF) budgets against expenditures. Reviews may include analysis of pre-payments, parked funds, proper use confirmations and red flags associated with side agreements. Companies should exercise their “right to audit” the records of marketing/advertising vendors.

• Potential ROI Impact: Cost savings on reduction in marketing spend and claw back of improper expenditures.

Travel and Expense Reviews • Service Type: Travel and entertainment expenses can be a significant cost for many

organizations in today’s environment. Good controls and monitoring can result in lower costs resulting from errors, waste policy violations and fraud and abuse. Perform analyses of the overall expense reporting process and at the individual expense report level and test for various anomalies to reduce improper expenditures and possibly recoup improper expenditures.

• Potential ROI Impact: Cost/loss prevention potential recoveries of improper expenses and overall reduced expenses for the organization.

Efficiency and Cost-Reduction EffortsIn-House Sales / Commissions Reviews

• Service Type: Sales employees often make a significant portion of their income through commission. A commission structure may be intended to incentivize the sales force to achieve business objectives. However, depending on the nature of the business, sales employees may identify opportunities to increase commissions unethically. Examples might include channel stuffing during a promotional period, holding sales for the next period, selling product to a conspiring party with the expectation it be returned, or selling to related parties at a discount. Analyze sales and commission data, conduct trending and detailed data analysis, and other procedures to help identify situations where sales personnel have manipulated commission unethically.

• Potential ROI Impact: Reductions in sales commission expenses, termination of unethical employees, and possibly reclamation of inappropriate commissions paid out.

Receivable Write-offs and Thresholds for Write-Offs • Service Type: Perform an analyses of thresholds and behaviors related to receivables

and review the process for collections of receivables that were written off. • Potential ROI Impact: Reduced write-offs and potentially increased recoveries.

Efficiency and Cost-Reduction EffortsDelivery/fleet expenses

• Service Type: Delivery and other fleets offer several opportunities for fraud: inappropriate use of vehicles (moonlighting), kickbacks in maintenance/parts expense, extending vehicle maintenance unnecessarily to justify using a third party for kickbacks, theft of parts or vehicles, and theft or personal use of maintenance equipment. Review historical trending for metrics, conduct interviews, review invoices, review service records, and review vendors and employees to identify related parties.

• Potential ROI Impact: Cost reductions due to eliminating waste and abuse.

Fleet Card and Mileage Reviews • Service Type: Fleet fuel cards are often misused to buy personal fuel or non-work items

(e.g., food) either for the card holder, or for others possibly in exchange for a kickback. Fleet vehicles intended only for work use can be used for personal purposes. Also, trip-related expenses can be inflated for a longer trip than actual mileage would indicate is reasonable. Conduct reviews of various aspects of fleet card usage from a data and analytics standpoint to identify outliers, and compare other metrics to mileage data to do the same.

• Potential ROI Impact: Cost savings from reductions in waste and abuse, and possibly reclamation of funds from employees prior to termination.

Efficiency and Cost-Reduction EffortsVendor Master Testing Review

• Service Type: Once a company is added to a vendor master, it may become much easier for a variety of fraud schemes to be enacted successfully, both internally and in collusion with outside parties. A fraudster might set up a false vendor or a vendor named similarly to a legitimate vendor, and help process payments to those entities which amount to fraud. Companies must review controls over their vendor master, review records in the vendor master, and cross-reference with other company data (e.g., employee master, payroll data, manual payments) to identify problematic conduct.

• Potential ROI Impact: Reduction in fraudulent accounts payable and manual check activity, termination of unethical employees, and possibly reclamation of inappropriate amounts paid out.

Physical Security Integration and Standardization • Service Type: Nonstandard and uncoordinated systems and service providers are utilized

throughout many organizations to help safeguard people and assets. Conduct assessments of the physical security processes and protocols to find areas for cost savings, streamlining of processes and improving overall security while reducing costs.

• Potential ROI Impact: Cost reductions arising from standardization and improved processes through the use of more cost effective solutions.

Efficiency and Cost-Reduction EffortsBackground Check Procedures (employees and third parties) Hire the right people 3X

• Service Type: Many companies have not implemented effective screening processes to control the frequency and scope of external background checks requested. Perform analyses of employee background check and third party background check procedures. These reviews may include analyses of frequency, detail level and triggers of third party background check reports. Analysis can help detect potentially fraudulent or sham vendors, companies in financial distress, etc.

• Potential ROI Impact: Cost savings from reduction in scope and number of background checks run while maintaining quality and focusing on higher risk persons and entities.

Demo Equipment • Service Type: A lack of controls and processes around the distribution and monitoring of

demo equipment may result in companies unintentionally losing significant profits to their channel partners. Perform analyses of distribution of demo equipment/showroom models. Reviews may include testing to determine if demo equipment is being prematurely sold on as new product to customers and channel partners outside of policy.

• Potential ROI Impact: Cost savings from reduction in demo equipment distributed (typically sold at low or no margin).

Efficiency and Cost-Reduction EffortsScrap

• Service Type: Leading companies have controls and processes around scrap that allow them to maximize the monetization of these materials. Conduct analyses of how scrap is handled throughout the supply chain. This includes how scrap values are maximized. Review mays include testing to ascertain whether sale of scrap is being conducted at fair value and at arm’s length as well as the controls that govern the sale of scrap materials.

• Potential ROI Impact: Increased revenues from the sale of scrap and reductions in waste inventory write-offs.

Defensible Deletion • Service Type: IT storage costs for many companies are increasing as we enter the “big

data” era. Often companies have a plan for storing data but not for deleting it, opting instead to save everything or rely upon users to delete unused files. Identify old or duplicative files, determine whether those files need to be retained, and purge the files in a defensible manner.

• Potential ROI Impact: Reduced data storage costs and reduced risk of losing confidential or sensitive information in case of a breach reduced litigation risks.

Efficiency and Cost-Reduction EffortseDiscovery Cost Reduction

• Service Type: eDiscovery costs continue to escalate as companies deal with the ramifications of Dodd-Frank’s whistleblower protections and incentives and increasing regulatory focus on corporate activities. Companies should optimize their document retention policies around emails, backups, and other records to respond efficiently to inquiries rather than providing huge amounts of data.

• Potential ROI Impact: Reduced costs to respond to inquiries and limitation of liability from records that could be purged.

On-Call Investigations • Service Type: Many companies have a need for outside professionals to assist with or

conduct investigations on a regular basis, often in multiple jurisdictions. Setting up engagements for multiple investigations requires effort in negotiating rates and agreeing on terms, and does not offer any rate discount for volume of work. On-Call Investigations create benefits from pre-negotiated rates, a signed engagement letter containing terms, and immediate response time from service providers around the world.

• Potential ROI Impact: Reduced hourly rate for investigations, reduced burden on legal and procurement staff, improved response time.

Conclusions

This is not hard:• An ounce of prevention is worth a pound of cure.• There is no one size fits all solution to maximizing ROI and ensuring adequate

fraud mitigation.• There are likely a number of untapped areas of focus that could be leveraged

as part of an organization’s annual fraud risk assessment, which could provide immediate returns to the business. .

• A well designed system or process can save you millions.• Don’t think it won’t happen in your company because it will. Your job is to

have systems to mitigate, prevent and investigate.• Learn from each incident and pass this knowledge on throughout your

organization.• Always be vigilant.

Questions

Thank You

Presenter’s contact details

Guido van Drunen

KPMG LLP

206-579-8107

gvandruren@kpmg.com

www.us.kpmg.com

Appendices

Analysis of Little Turtle Country Club

Report Date Transaction Date Check Number Amount Guests Description7/11/1996 7/1/1996 (Golf Shop) 22021 256.14$ 6 Origional date looks like7/11/1996 7/1/1996 35792 30.14$ Snacks for Golf

12/24/1996 12/11/1996 35793 275.24$ 6 Dow (T. Lacey, K. Wolfgram, J. Patin, B. ?, T. Wardle)3/20/1997 3/10/1997 35795 410.43$ 12 Lunch w/Dow8/6/1996 8/5/1996 35796 246.58$ 10 Dinner w/Customers 2/3/1997 1/21/1997 35797 130.85$ 3 Dinner w/Customers

9/24/1996 9/16/1996 35798 321.89$ 6 Team meeting w Dow (K. Wolfgram/T. Lacey/T. Wardie/ J. Patin/ L. Bollinger)8/19/1996 8/9/1996 35799 375.72$ 4 Golf & Dinner w/Habit for Humanity

11/18/1996 11/12/1996 35800 292.89$ 6 Dinner w/Elf Autochem and J.Johnson(Dow), Alan Shoaf (Dow)3/20/1997 3/12/1997 35800 301.38$ 7 Dinner w/Dow

11/18/1996 10/31/1996 63658 62.25$ Dinner w/ J. Blum of PIMA7/11/1996 6/20/1996 75491 45.87$ Dinner w/D. Crooker of AutoChem4/24/1997 4/17/1997 100948 423.55$ 8 Dinner w/ Dow6/29/1997 6/24/1997 100949 393.00$ 4 Golf & Dinner w/Customers5/10/1997 5/6/1997 100954 326.07$ 6 Dinner w/Dow4/24/1997 4/24/1997 101455 48.71$ 2 Dinner w/ Customer5/10/1997 4/26/1997 101489 34.53$ 2 Dinner w/Customers

3,975.24$

Note that the check numbers are in sequential order, however the dates do not match that order.