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Nowhere to Hide: Detecting and Investigating Fraud
Tuesday May 24, 2016 | 2:00pm – 3:15pm | 1.5 CPE
Sara Jantz, Director of Accounting, Sedgwick County, KS
Karin Smith, Partner, Heinfeld, Meech & Co., P.C.
Daniel Porter, Legislative Investigative Auditor, Comptroller of the Treasury, State of Tennessee
Session Review
Fraud -‐ Facts and Figures
Conduc5ng a Risk Assessment
Conduc5ng Effec5ve Interviews
FRAUD FACTS AND FIGURES
Report to the Na5ons on Occupa5onal Fraud and Abuse: 2016 Global Fraud Study ©Associa5on of Cer5fied Fraud Examiners, Inc. www.acfe.com
Types of Fraud
Fraud Detec5on
Control Weaknesses
Red Flags
The Fraud Triangle
Pressure/Incen5ve
Living beyond their means Overwhelming desire for personal gain
High personal debt Close associa5on with customers
Feeling pay not commensurate with
responsibility Wheeler-‐dealer aVtude
Strong challenge to beat the system Excessive gambling habits
Undue family or peer pressure
No recogni5on for job performance
Opportunity Placing too much trust in key
employees Lack of proper procedures for authoriza5on of transac5ons
Inadequate disclosures of personal investments and
incomes
No separa5on of authoriza5on of transac5ons from custody of
related assets
Lack of independent checks on performance Inadequate a[en5on to details
No separa5on of custody of assets from the accoun5ng for
those assets
No separa5on of du5es between accoun5ng func5ons
Lack of clear lines of authority and responsibility
Department that is not frequently reviewed by internal
auditors
Percep&on of detec&on is biggest deterrent to fraud
Ra5onaliza5on
Not about jus5fying the\ that has already
occurred
Necessary component of crime before it takes place
Part of the mo5va5on for the crime
A\er criminal act has taken place,
ra5onaliza5on will o\en be abandoned
Once line is crossed, illegal acts become
more or less con5nuous
CONDUCTING A RISK ASSESSMENT
Fraud Risk Assessment
Employee
Physical Controls
Skimming Check Tampering
Purchasing and Billing
Payroll Expenses
Conflict of Interest
Employee Assessment
Formal Wri[en Job Descrip5ons
Organiza5on Chart – Lines of Responsibility
Wri[en Accoun5ng Policies and Procedures
Ethics Statement
Fraud Policies and Procedures
Physical Controls Assessment
Restrict Access
Video Recording
Random Audits
Background Checks
Inves5gate Accusa5ons
Skimming Schemes Assessment
Inventory of receiving records
Segrega5on of Du5es
Uncollectable accounts
Review of Sales
Review of Write-‐offs
Safeguarding of Cash
Check Tampering Assessment
Unused Checks
Posi5ve Pay
Check Signers Bank Reconcilia5ons
Voided and Missing Checks
Purchasing and Billing Assessment
Organiza5onal Structure
Vendor Informa5on
Procurement Receiving Reports
Payroll Assessment
Segrega5on of Du5es
Terminated Employees
Payroll Register = GL Payroll Lists
Deduc5ons
Check Stock
Expenses Assessment
Expense Accounts
Employee Reimbursements
Receipts
Review
Conflict of Interest Assessment
Vendor vs Employee
Prior Employees Disclosure
Vendor Agreement
Vendor Audits
Fraud Interviewing
GFOA Daniel Porter, CFE
2016
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This presentation represents the opinion of the presenter only. The materials presented herein do not necessarily reflect the opinions of the State of Tennessee or any part thereof, and have not been reviewed or approved by the State of Tennessee or any part thereof.
The information presented does not constitute legal advice and is based upon the presenter’s personal experience conducting interviews and interrogations.
We all seek reliable information
(Parents, Managers, & Investigators)
My Purpose: To help you obtain
Reliable Information &
To help you recognize when you are Being Deceived (Plus have some fun)
25
Why Is Reliable Info Important to a Parent?
26
Why Is Reliable Info Important to a Hiring Manager?
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Why Is Reliable Info Important to a Fraud Investigator?
I figure out what she did She tells me what she did
28
What is an Interview?
“A conversation with an agenda”
What’s the Agenda?
“to Gather Information”
Data is Raw Facts
30
Information is Processed Data Cash Overage / Shortage Report
Dept. 2/1 2/2 2/3 Balance Shoes $(20.00) $15.00 $0.00 $(5.00) Men’s $0.00 $5.00 $0.00 $0.00 Children’s $2.25 $(2.00) $0.00 $0.25 Jewelry $0.00 $(67.58) $0.00 $(67.58) Fragrance $(12.00) $7.00 $19.00 $14.00
$(58.33)
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Establish Rapport Atmosphere of mutual trust and understanding
• If relaxed, you get better index of truthful behavior
• If trusted, more likely to get good information
You attract more flies with honey
than you do with vinegar
• Polite • Make a connection
How Do I Establish Rapport?
Get Them Communicating Hi Steve, I’m Daniel and I’m with the State Comptroller’s Office. Can I call you Steve? Sure. Steve, we’re her to do an audit of the city’s records. You don’t mind helping us out do you? Not at all. Great. Now what is your title. I’m the Controller. We know you do a lot, so just tell us about what you do here. Well, I open the mail, pay the bills, reconcile bank statements, collect payments, handle the deposits, purchasing. Wow, that is a lot. Sounds like you don’t have much help around here. Nope, I pretty much do it all.
5
Talk a Little
Listen A Lot
Hearing & Listening Hearing
• Perceiving sounds
• Automatic
• “I hear you”
Listening • Processing sounds
• Requires effort
• “I’m listening”
• Daydreaming
Conference Listening
• Processing very little
Husband Listening
• Not processing content.
• Too busy moving on to the next question
• Creating reply
Bone on Your Nose Listening
• Processing • Understanding content • Interested • Encouraging
Active Listening
Don’t Ask Closed Questions
John Candy & Macaulay Culkin in Uncle Buck
8 Closed Questions 1. Where do you live? 2. Do you have a house? 3. Own or rent? 4. What do you do for a living? 5. Where’s your office? 6. Where’s your wife? 7. Do you have kids? 8. Are you my dad’s brother?
20
seconds
1 Open Question Tell me about yourself… Well…I had a little too much fun in college and decided I wanted to take a break. I moved to the city to drive a cab, but me and the boss got into it… I was married but she never appreciated that I was finding myself…
Closed Questions May Lead Your Subject
• Did you see the red car run the light? • Did you see the drunk guy get out of the driver’s seat?
• Do you think the red car was speeding? OR
• What did you see?
45
Closed Questions • Can be answered in a single word or a short phrase • Don’t require thought
Do you count the drawer? Yes. Do you put the cash in a deposit envelope? Yes. Does the head cashier verify your count? Yes.
5 words = 83% 1 word = 17%
9 words = 90% 1 word = 10%
7 words = 88% 1 word = 12%
Open Questions • Likely to receive a long answer • Requires thought • Socratic method - asking questions to draw out answers What are your closing procedures? At 4:00 PM I count my drawer, then I put the cash in a deposit
envelope and give it to the head cashier to count while I go take a smoke break. When I come back she tells me if my count was right or not. If it was right, then I initial it and leave.
5 words = 10% 52 words = 90%
Open Questions • How does this work?
• What is the process?
• Who is involved in this process?
• What is your normal day like?
Information Seeking Predicates
• Tell me about…
• Help me understand…
• Explain how this works…
• Walk me through…
• Describe…
?
What if they lie? Former Rep. Anthony Weiner
50
People lie to protect themselves from:
• Uncomfortable situations
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Why Do We Lie?
Lies are the lubricant of coexistence
People lie to protect themselves from:
• Embarrassment
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Why Do We Lie?
People lie to protect themselves from:
• Consequences
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Why Do We Lie?
• Lying causes stress in most people
Stress is the Result of Lying
Stress
Consequences Truth
Truthful No Stress
Lie
Lie Lie
Lie Lie Lie
A. Dig B. Analyze C. Get Out D. Interview E. Interrogate
Lie
Lie
Lying Causes Stress and You Communicate That Stress
How We Communicate
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7%
Verbal
38%
Paralinguistic
55%
Non-verbal Mehrabian, Albert (1971) “Silent Messages”
Note whether she changes color while you are giving her my message . .
note her every action and movement… exterior signs of this sort are the most
reliable couriers that there are, bringing news of what goes on inside
the heart.
Don Quixote to Sancho, 1605
Nonverbal Communication
Nonverbal Communication 55% Body Language TRUTHFUL
• Upright • Open and relaxed • Lean forward on occasion • Casual posture changes • Others?
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DECEPTIVE • Slouching/closed • Very rigid • Runner’s position • Lack of interest • Erratic and rapid posture changes • Others?
Nonverbal Communication 55% Body Language
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Behavior is Universal
That’s cool, but so what?
TRUTHFUL TRUTHFUL TRUTHFUL
Observe the Behaviors that Accompany Truthful Responses
And Create an Index of Those Behaviors
TRUTHFUL TRUTHFUL TRUTHFUL
Then Look for Changes in Response Behaviors
Paralinguistic Behavior Symptoms 38%
• Behavior that accompanies a response
70
Are You a Right Brain or Left Brain Person?
Do you see the dancer turning
clockwise or counter clockwise?
COUNTER-CLOCKWISE LEFT
BRAIN FUNCTIONS
uses logic detail oriented
facts rule words and language math and science
knowing acknowledges reality based
forms strategies practical
CLOCKWISE RIGHT
BRAIN FUNCTIONS
uses feeling "big picture" oriented
imagination rules symbols and images philosophy & religion
believes appreciates
fantasy based presents possibilities
impetuous
Exercise Left = Recall Right = Create Up = Visual Down = Feelings
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Visual Recall
Auditory
Recall
Feelings Recall
Visual Create
Auditory
Create
Feelings Create
76
Joey’s Tell
77
What’s your hire date?
Latency in Response
• Do I Lie? • Do I tell the truth? • How much truth? • What do they know?
Gestures
Grooming Created job Head nod or shake Posture shifts Leg bounce Rocking
80
John Edwards says yes but shakes head no…
Verbal Behavior Symptoms 7%
82
Qualifiers
“If my memory serves me right,” “I may be mistaken, but…” “It is my understanding,”
“As far as I know,”
Protective Verbal Coating 83
No. 1: Equivocation
• Avoiding the question • Not answering the question asked • Providing an answer they think you’ll accept
84
Stress
Consequences Truth
Equivocation
Sarah Palin equivocates Do you agree with the Bush doctrine?
YES or
NO
In what respect? His world view?
Don’t Accept the Wrong Answer
• Wrong does not mean INCORRECT
• The Wrong Answer does not answer YOUR Question
Getting the Right Answer
Getting the Right Answer
Getting the Right Answer Q: Did you approve her to use the credit card for personal purchases?
A: We’ve got a policy against that.
Q: I understand that, but did you approve her to use the credit card for personal purchases?
A: We shouldn’t be doing that.
Q: Okay, so you DID approve her to use the credit card for personal purchases?
A: Well, no I didn’t do that.
…So, no he didn’t.
…So, no he didn’t.
Reinforcers
I swear this is the truth I am a good Christian I’m going to heaven.
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What did you learn?
Verbal Non-verbal
Paralinguistic
Listen & Look For Clusters
55 % Nonverbal
Slouch
Closed
38 % Paralinguistic
Grooming
Eye shift
7 % Verbal
Equivocation
No contractions Equivocation
Eye shift
Would she be lying?
Shift
Don’t Try This on Your Significant Other
• 20/20
• 48 Hours
• Kids
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Summary Obtain reliable information by: • Establishing rapport • Asking open-ended questions Observe and Listen for deceptive behaviors: • Non-verbal • Verbal • Paralinguistic
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Questions? Karin Smith, MBA, SFO, CFE Partner Heinfeld, Meech & Co., P.C. CPAs and Business Consultants (602) 277-9449 [email protected] Daniel Porter, CFE Legislative Investigative Auditor Special Investigations Unit Comptroller of the Treasury State of Tennessee (615) 401-7905 [email protected]