h04- when fraud occurs from the top - scacpa...fraudster 16 acfe 2016 global fraud survey personal...
TRANSCRIPT
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When Fraud Occurs from the Top:The Drivers and Personality Traits of White-Collar Criminals
SCACPA Spring Splash, Greenville, SC
May 18, 2018
GreerWalker, LLP - Ramona Farrell, MBA, CFBA, CFE, CFCI
US Postal Inspection Service – Richard “Phil” Carter, Postal Inspector
Agenda
• Understand what fraud is and why businesses are a target of fraud
• Appreciate the profile of a white-collar criminal or fraudster
• Be aware of fraud prevention measures
• Know what to do when you suspect a fraud has occurred
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Fraud and Businesses
• Person or entity takes money or property, or uses them in an Illicit manner, with the intent to gain a benefit from it
• At the core of all fraud, there are decisions and actions by individuals
• Placing trust in employees is necessary, however, it also raises the risk of fraud
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The Fraud Tree - Occupational Fraud and Classifications
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ACFE 2016 Global Fraud Survey
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Frequency of Schemes Based on Perpetrator’s Department
ACFE 2016 Global Fraud Survey
The Fraud Triangle
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procurious.com
Tool to better understand rationalizations, opportunities and the reasons why people commit fraud.
Financial major bills, high level of debt, or simple greed.
Work-related feeling overworked and underpaid
Personal gambling or other addiction
Trustperson has reached a certain level
within the organization
Internal Controlseither weak or
nonexistent
Justificationperson has reached a certain level
within the organization
Lack of Ethics“Management isn’t honest,
so why should I be?"
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The Perfect Storm
Association of Certified Fraud Examiners
Company downsizing is weakening internal controls
/ segregation of duties
Layoffs increasing
Declining stock prices
Credit crisis
Company budgets are decreasing – do the same
work with less people
Increased pressure and decreased controls,
people may explore more ways to commit fraud
Internal Controls
Internal/External Pressure
Opportunity to Commit Fraud
Meet or exceed revenue goals
Weak corporate governance
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Fraud and Rationalize
• Morally acceptable rationalization necessary
• Justify his misdeeds before commits them
• View illegal behavior as acceptable, preserving self-image as trustworthy person
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Types of Fraudsters
The “Grifter”– Intentionally sets out to steal money– Highly creative, cunning, charming
The “Borrower”– Merely “borrowing” money; intend to pay it back
The “Opportunist”– In position to benefit; did not seek out the opportunity to engage in fraud– Easy money; low risk of detection
The “Crowd Follower”– Just going with the flow; consistent with industry practice
The “Minimizer”– Know act is illegal or unethical; justify actions by minimizing the impact
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www.sec.gov
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ACFE 2016 Global Fraud Survey
When Owners or Executives Committed Fraud, the Median Damage Was More Than 10X Worse Than When Employees Were The Perpetrators
$703,000
$173,000
$65,000
Employee Manager Owner/Executive
Owners as the Perpetrators
• C-Suite Executives• In the right position to override controls and take
advantage of fraud opportunities
• Ability to coerce others – power and authority to reward and punish subordinates to complete and conceal fraud
• Prior success and leadership responsibilities - high degrees of confidence (ego, good liar)
• Accustomed to dealing with high levels of stress given responsibilities
Assessing Top Management’s Capabilities
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Walter Pavlo – Tone at the Top
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Guess Who?
• When he became CFO, essentially an unknown, “delusions of grandeur after just a little time on the job” (Deutschman)
• Ordered PR people to lobby CFO magazine to make him CFO of the year
• “He was so mean in business but so personally delightful” (McLean & Elkind)
• Created financial structures to allow company to hit profit targets while stealing money directly from company
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Ethical and Unethical• Unethical, ruthlessly seek own selfish interests, self over all others
8 Traits (corporate psychopaths)1. Glibness and superficial charm2. Grandiose sense of self-worth3. Pathological lying4. Conning and manipulativeness5. Lack of remorse or guilt6. Shall affect (emotional displays to cover coldness)7. Callousness and lack of empathy8. Failure to accept responsibility for one’s own actions
Corporate Charismatic Leaders
Robert Hare, professor emeritus at Columbia
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Characteristics of the Typical Occupational Fraudster
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ACFE 2016 Global Fraud Survey
Personal Traits – Attributes Indicating a Trusted Person
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Overriding Motivation for Fraudster
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KMG International Profiles of the Fraudster 2016
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Barry Minkow, ZZZZ Best CEO
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Motivation
Collaborators and Collusion
• People sometimes help perpetrate a fraud not for any personal benefit but because they are told to.
• Fraud often too complex for one person to execute• Requires others to:
– Turn a blind eye– Provide passwords– Falsify documents
• Collusion – both inside and outside organizations– Insider takes the lead – identifies opportunity and knows
“soft spots” in company
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Petters, $3.2 Billion Fraud
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Petters Scheme, 1998 - 2008
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Petters – Collaborators and Collusion
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Rita Crundwell - City of Dixon, IL
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Fraud Prevention
• A small fraud, left undetected, becomes a BIG FRAUD
• Red flags existed prior to the discovery of a fraud but were not identified or adequately followed up on
• Nature and extent of policies, processes and controls employed by companies to identify and mitigate fraud risks varies greatly based on– Attitude of leadership, and– Its assessment of the level of perceived risk.
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Behavioral Red Flags
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ACFE 2016 Global Fraud Survey
Cultural Red Flags
• Focus on performance with little regard to how results were achieved
• High performers are allowed to operate outside established policies
• Frequent “near misses” of adherence to code of conduct, risk appetite limits, etc., requests for exceptions to meet performance targets
• Excessive focus on consensus/collegiality leading to prevalence of “go along to get along” attitudes
• Relationships outweigh skills and/or performance in determining promotions or other recognition of an inappropriate degree
• Sharing bad news is discouraged (bearers of bad news punished)
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NACD Blue Ribbon Commission Report on Culture as a Corporate Asset, Oct. 4, 2017
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Cultural and Governance Flaws
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• An organizational ethos that permits or encourages fraud.
• Management pressure to achieve overambitious business goals regardless of regulatory requirements and ethical standards.
• Lack of support for anti-corruption objectives and inadequate assessment of progress toward them.
• Little or no management commitment to learning from an organization’s past ethical lapses.
• A C-suite and board of directors out of snyc with each other and the workforce.
Consider:
• In uncertain situations, or when people are under pressure, what do they do instinctively?
• What decisions and trade-offs do they make?
Tone-Deaf at the Top, ACFE Fraud Magazine July/August 2017
Consider Capability
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Know and understand your people:
1. Who has the requisite expertise to commit this fraud?
2. Who has access to the asset, people and/or systems needed to commit the fraud?
3. Who as the ability to rationalize wrongdoing, lie, coerce others and manage the stress associated with the fraud?
4. Understand Collusive behaviors – insiders who collude with other employees
1. Among individuals within an organization, or
2. Across organizations (collusion can be internal and/or external)
Tone-Deaf at the Top, ACFE Fraud Magazine July/August 2017
Kevin Co – Wire Fraud, Embezzlement
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http://sacramento.cbslocal.com/2016/12/13/man-spent-millions-from-fraud-on-game-of-war-luxury-cars-sports-tickets/
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Best Practices
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• Nature of wrongdoing, benchmarking
• Anonymous hotline reporting (internal/external)
• Social media assessment
• Employee surveys
• Tone of management communications
• Group discussion
• Facility rotations
• Exit interviews
• Interviews and focus groups
• Client complaints
Dannible & McKee, LLP
A Company Should
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Suspect Fraud - 10 Things to Do
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1. Don’t panic
2. Do something
3. Be discreet
4. Lock down relevant data
5. Prepare to rehire
6. Defend your reputation
7. Money isn’t everything
8. Set an example
9. Get help
10. Make positive changes
www.clarknuber.com
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Documentation of Financial Losses
• Save all paperwork related to crime• Letters of solicitation
• Prospectuses
• Canceled checks
• Cash receipts
• Receipts for cahier’s checks or money orders
• Bank statements
• Wire transfers
• Investment statements
• Medical statements
www.justice.gov/usao-wdwa
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Prosecution of Fraud Crimes
Either state or federal level, a number of factors:
• Type of fraud scheme and amount of money stolen
• Laws violated (federal, state or both)
• Method of operation
• Use of public services that fall under federal or state regulation and authority
• Location of the crime
www.justice.gov/usao-wdwa
In looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don’t have the first, the other two will kill you.
Warren Buffet, Chair, Berkshire Hathaway
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In Closing
