ethics for auditors: understanding current issues in financial integrity

Copyright © 2013 FraudResourceNet™ LLC

Ethics for Auditors: Understanding Current

Issues in Financial Integrity"

June 26, 2013

Special Guest Presenter:Michael Palmer, JD


President and Founder of White Collar Crime 101

Publisher of White-Collar Crime FighterDeveloper of FraudAware® Anti-Fraud

Training Monthly Columnist, The Fraud Examiner, ACFE Newsletter

Member of Editorial Advisory Board, ACFE

Author of “Fraud in the Markets”Explains how fraud fueled the financial crisis.

About Peter Goldmann, MSc., CFE


About Jim Kaplan, MSc, CIA, CFE

President and Founder of AuditNet®, the global resource for auditors

Auditor, Web Site Guru,

Internet for Auditors Pioneer

Recipient of the IIA’s 2007 Bradford Cadmus Memorial Award.

Author of “The Auditor’s Guide to Internet Resources” 2nd Edition


Founder, Ethics By Design

Lawyer since 1980

Consultant to large and small companies

Author

Educator

About Mike PalmerAbout Michael Palmer


About Mike PalmerAbout Michael Palmer


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Disclaimers

6


Introduction: Fraud Statistics: The Growing Fraud Threat

Auditing for Fraud: Standards & Essentials Ethics vs. Fraud Your Questions Conclusion

Today’s Agenda


According to major accounting firms, professional fraud examiners and law enforcement:

Fraud jumps significantly during tough economic times

Business losses due to fraud increased 20% in last 12 months, from $1.4 million to $1.7 million per billion dollars of sales. (Kroll 2010/2011 Global Fraud Report)

Average cost to for each incident of fraud is $160,000 (ACFE) Of Financial Statement fraud: $2 million

Approx. 60% of corporate fraud committed by insiders (PwC)

Approx. 50% of employees who commit fraud have been with their employers for over 5 years (ACFE)

Fraud: The Big Picture


The Auditor’s Role

1200: Proficiency and Due Professional Care

1220: Due Professional Care

2060: Reporting to Senior Management and the Board

2120: Risk Management

2210: Engagement Objectives


Paul, Marta, & Paul’s Mother


Paul’s Deception


Paul’s Mother Chases Marta


Paul Eats the Tuber


Moral: The Talent to Deceive is in Our DNA


The Hebrew Myth of Adam, Eve, and the Serpent


Lead Us Not Into Temptation


“If men were angels, no government would be necessary. “

Federalist # 51.

Keeping us Honest


The Cheating Culture


Lying


Government Procurement

“There is no kind of dishonesty into which otherwise good people more easily and frequently fall than that of defrauding the government.”

Benjamin Franklin


Our Challenge


Our Challenge


Internal AuditorsWatch the

Watching System


Internal Auditors Watch the Watching System


Three Lines of Defense


Can We Make it Better?


Can We Make it Better?



What We’ve Learned


We Are Group Creatures: Lessons from Social Psychology

The role of Internal Auditors is to Watch the Watch System

What We’ll Go Over Next

The Importance of Reminders

Implications for Governance, Risk Management, and Control

Discussion


According to the IIA the 3rd Line of Defense in defending against fraud, theft and other ethical misconduct is

A. Internal controls

B. Risk management

C. Internal audit

D.

Polling Question 1


We Are Group

Creatures


Obedience to Perceived Authority


Few Thought Others Would Do It


Milgram Experiment Results


Lessons for GRC Design


Diffusion of Responsibility:The Bystander Effect




Seeing What Others See




Me or Your Lying Eyes?


The Fraud Triangle

Opportunity

Motivation Rationalization

‐$



Average of 4 Correct Answers


But They Reported Six (6) Correct Answers


The Fudge Factory




Willpower is Finite


Willpower Depletion


Self-Control is a LikeNeurological Muscle


Another term for Rationalization in the context of ethics and fraud is:

A. Absence of willpower

B. Illegal behavior

C. The fudge factory

D. None of the above

E.

Polling Question 2


Self-Control is a LikeNeurological Muscle


Meet With Your Parole Board in the Morning or Just After Lunch


Willpower Depletion Also Reduces Honesty


Willpower Depletion Also Reduces Honesty




We Are Group Creatures Part B


Was the Challenger Launch Decision a

Failure of Governance, Risk Management, and

Control Systems?



Morton-ThiokolUtah

NASA HeadquartersWashington,

D.C.

Marshall Space Flight Center

AlabamaJohnson Space Center

Texas


The Decision to Launch


Icicles on the Launch Pad




Huntsville Alabama

Ogden Utah



Roger Boisjoly



“My God, Thiokol,'' Mulloy says. ''When do you want me to launch, next April?''



A Management Decision?



As Feared, The O-rings Failed



The Challenger disaster is a dangerous example of groupthink

A. True

B. False

Polling Question 3



NASA

Engineers

Morton-Thiokol

Managers


No hierarchy of values No explicit mention of pressures that

could distort judgment Engineering expertise subordinated to

“management” concerns No one objected to Mason’s direction to

put on management hat. The question was poorly framed Intuitive expertise was disregarded

Disorganized Decision Making


Organizational Integrity Failure

Diffusion

Responsibilityof

Safety

Criticality 1

Task Force


Corporate Integrity




VISION

MISSION

EFFECTIVE ETHICS

PROGRAMVALUES


Hierarchy of Values



Diffusion of Responsibility

Conformity to what we think others are doing

Focus theory of normative conduct

Normalization of deviance (Challenger)

Summary


As the Challenger episode showed, a failure of organizational integrity can lead to a risky incident of….

A. Dishonesty

B. Negligence

C. Incompetence

D. Rationalization

E.

Polling Question 4


Other Ways to Improve GRC

Systems


Two Areas to Start With

Institute Smart Habit-building Programs

Build Reminders Into the System


Smart Habit-building Programs


Make them Operational By Creating Checklists


Nurture Relationship of Trust With The Checklist of Trustworthy Behavior™

1. Is it our best?2. Is it the truth?3. Is it fair?4. Is it polite?5. Is it what we promised?6. Is it legal?7. Have we exercised

due care?


Create Your Own Checklists

integrity?Will this violate our

integrity?

first?How does this put the customer

first?


Checklists Assist Thinking


Auditors Know Checklists


The Role of Reminders


The Role of Reminders


Build Moral RemindersInto the System


The following report contains only my actual expenses.


Financial and Sales Reports

I will report only the truth in this financial statement.


Performance Evaluations

This evaluation is accurate to the best of my information and belief...


Pressure Cooker Safety Valve


Defective Pressure Cookers Can Explode


A Safe Place to Talk


A Safe Place to Talk


Effective Ethics & Compliance Programs Have Many Parts


Code of Conduct

WORKFORCE

TRAINING

Ombuds Office

The Pieces Need to Come Together


RECRUITING

CODE OF

CONDUCT

Ombuds Office

Internal Control System

SOX

FSG

FAR

FCPA

CORE VIRTUES

TRAINING

Into A Comprehensive Program


Reminding people to conduct themselves with integrity and honesty is pointless

A. True

B. False

C.

Polling Question 5


Other Possibilities


Any Questions?Don’t be Shy!

Questions?


[email protected]

www.ethicsbydesign.com

802 870 3450

Thank You!


Thank You!

Website: http://www.fraudresourcenet.com

Jim KaplanFraudResourceNet™

800-385-1625 [email protected]

Peter GoldmannFraudResourceNet™

[email protected]


Coming Up….

Fraud Auditing versus Fraud Investigation: Important Distinctions July 10

Bribery, Corruption and the FCPA: What Auditors Need to Know July 24

Essentials of Effective Fraud Risk Assessments, July 26

ethics for auditors: understanding current issues in financial integrity

Economy & Finance