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Financial Fraud in Government:

What Happened to Ethics?

Robert W. Walter, Esq. The views expressed by Robert W. Walter do not necessarily represent the views, positions, or opinions of the COCPA. These materials, and the oral presentation accompanying them, are for educational purposes only and do not constitute accounting or legal advice or create an accountant-client or attorney-client relationship. © 2015 Robert W. Walter

Our Learning Objectives ● Recall the different types of public sector frauds ● Analyze how high-profile public sector frauds were committed ● Assess the fraudster’s characteristics, including rationalizations ● Identity the factors that led to discovery of the fraud ● Recognize how tone at the top and building an ethical culture can impact your organization

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The Origins of Fraud

FRAUD

Pressure/Motivation

Opportunity Rationalization The concept of the Fraud Triangle was developed by Donald Cressey, a noted criminologist who first

wrote about the Fraud Triangle in 1953.

Contrasting the Different Types of Fraud

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Asset Misappropriation Fraud

● Stealing entity assets > False billing schemes

> Inflated expense reports > Check tampering > Payroll and ghost employees > Cash skimming and stealing

● Asset misappropriation frauds result in financial statement misstatements – but these are a by-product of the asset misappropriation

Financial Statement Fraud ● Employee intentionally

>Causes misstatement or > omission of

● material financial information and/or disclosure, in the financial statements and reports

● to deceive financial statement users

Note: this type of fraud is described as being conducted on behalf of the entity”

ACFE 2014 Report to the Nations

n  Asset misappropriation frauds accounted for 85.4% of frauds > Median Loss: $120,000

n  Financial statement fraud: only 9% of frauds studied > Median Loss: $1 million

KPMG Int’l 2013 Global Profiles of the Fraudster

n  70% of fraud committed by persons ages 36-55

n  61% of fraud committed by employees

n  70% of frauds involve collusion with others

n  93% of frauds involve multiple transactions

Studies and Statistics

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Fraud Duration in Months

Source: ACFE 2014 Report to the Nations

How is Fraud Detected?

Source: ACFE 2014 Report to the Nations

The Impact of Collusion

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Who Commits Fraud in the Public Sector?

Source: Seventh PwC Global Economic Crime Survey 2014

2014

2012

Internalactor

Externalactor

Unknown

Hot Topics in Public Sector Fraud

● Rita Crundwell and the DC Tax Office frauds ● Cyber fraud ● Identity theft to obtain tax refunds ● Welfare and healthcare benefits fraud ● Procurement fraud ● Bribery and corruption

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Rita Crundwell and the City of Dixon

n  Background Ø  Rita’s employment history Ø  Relationship with audit firms

n  How the fraud grows and is concealed n  How the fraud is discovered n  Outcomes for stakeholders

n  Losses over $52 million

n  Lessons

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Another Record Fraud:

The DC Office of Tax and Revenue

n  Background Ø  Harriette and co-conspirators stole $48 million Ø  Fraud lasted 20 years

n  From 2004 through 2007, fraudulent property tax refund checks for over $15 million are issued to corporate accounts controlled by Harriette and her relatives

n  How the fraud is discovered n  Harriette is sentenced to 17½ years, and

Jayrece Turnbull sentenced to 9 years n  Lessons Slide

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Another Record Fraud:

The DC Office of Tax and Revenue

n  Here is how her attorney explained Harriette’s conduct:

"The ability to play the role of benefactor was a particularly strong motivating factor in the continuation of the scheme While [Harriette] recognizes that spreading the wealth she obtained through illegal conduct does not justify or excuse the conduct, it is equally clear that Ms. Walters was genuinely desirous of helping others."

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Cyberfraud

Percentageofrecentmajorbreachesinvolvetheuseofvalidcredentials(eginsidersorcompromised

insidercredentials)

Averagenumberofdaysfromcompromise

todetection

2/3ofdetectionscamefromexternalsources,thatis,thecompromisedorganisationdidnotdetecttheevent(s)

Averagenumberofsystemsare

touched/involvedaspartofasignificant

breach

Thekeymessagehere?Organisationshavealongwaytogobeforetheirdefencescan

40

2/3

229

100%

Merza M., 2014, “Operationalizing advanced threat defense,” and Goldberg J, “Good guys vs bad guys – using data to counteract advanced threats,” papers presented at Splunk.Conf2014, Las Vegas, August 2014, and PwC Seventh PwC Global Economic Crime Survey 2014.

Recent Cyberfraud Cases n  OPM suffers massive loss of data on

approximately 4 million current and former federal employees

n  Charles Eccleston, former employee of U.S. Department of Energy and NRC, charged in May 2015 with spear-phishing attack on DOE employee email accounts n  Spear-phishing is sending a convincing email to recipients that

appears to be from a trusted source that infects the recipient’s computer with a virus

n  Eccleston was seeking access to classified information that he intended to pass on or make available to foreign governments

n  Charges include wire fraud (up to 20 years imprisonment) and unauthorized access to computers (10 years)

Identity theft to obtain tax refunds n  On August 14, 2015, Colorado Attorney General announces

criminal charges against Zanthia Woodard (a.k.a. Zanthia Finley), Jordan Shead, Sorletta Capri Shead and Janae Cruz

n  The defendants posed as a legitimate tax preparation service, and used this cover to obtain tax and personal identification information

n  The defendants inflated income to maximize earned income credits and refunds

n  CO Department of Revenue Discovery staff discover fraud

n  Victims include Colorado, U.S., and Wells Fargo n  Losses over $1 million

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The Violet Jones Case: Benefit Fraud at its Worst

n  Violet works at Florida DCF n  Violet issues electronic benefit cards to herself

and her two sisters in names of families whose cases should have been closed

n  Scheme lasts almost three years and results in

losses of over $1.54 million – enough to feed 8,810 needy families for a month

n  Violet sentenced to 17 years, and her sisters

each get sentenced to 10 years n  The case of Susan Wolfe

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Procurement Fraud in the Public Sector

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Source: Seventh PwC Global Economic Crime Survey 2014; percentages add to more than 100% due to overlapping forms of procurement fraud

The Case of the Former Colonels

n  Four retired Army National Guard (ANG) colonels charged in July 2015 with bribing an active duty colonel to direct $5.5 million in contracts to their company, Military Personnel Services Corporation (MPSC)

n  Alleged bribes were to be concealed by MPSC hiring active

duty colonel after he retired from ANG and calling the payments “incentive fees” or “bonuses”

n  Active duty colonel provided inside pricing information that

enabled MPSC to raise one bid by $800,000 n  Active duty colonel paid $55,000 and pled guilty in September

2014 n  Indictment recites conversations at meetings (!)

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Ethics

n  How can you create and encourage an ethical environment?

n  How is “tone at the top” created?

n  Adelphia forensic audit

n  “Walk the walk”

n  What creates fraud incentives?

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Fraud Deterrence

n  Why not prevention?

n  The importance of prosecuting perpetrators

n  Analytics and controls n  Whistleblowing

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Questions & Conclusions

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