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Ethics SymposiumJune 10, 2016


Ethics Symposium

Agenda

• Introduction

• Learning Objectives

• Bias

• Forensic Update

• Ethics of Taxes

• Internal Audit Update

• Q&A


Ethics Symposium

Introductions

Jarrod VanDerwerken

Senior Manager, Assurance

508.926.2492

[email protected]

Marc Mercier

Senior Manager, Fraud & Forensics

617.848.5053

[email protected]

Adam Lehmann

Managing Director, TARAS

860.781.6720

[email protected]

Corey Bazylinski

Principal, BAS

617.848.4652

[email protected]

Kaila Kennedy

Senior Associate, BAS

617.848.4981

[email protected]


Ethics Symposium

Learning Objectives

• Understand and identify bias

• Understand FCPA requirements & enforcement actions

• Understand the forensic process and identify events and

circumstances requiring further review

• Understand the ethical implications of various tax strategies

and matters

• Understand importance of internal audit and response to

risks


BiasJarrod VanDerwerken, Assurance


Bias

What Is Bias?

• An inclination of temperament or outlook to present or hold

a partial perspective, often accompanied by a refusal to

consider the possible merits of alternative points of view.

• One-sided, lacking a neutral viewpoint, not having an open

mind.

• In accounting "bias" is often associated with intentional

manipulation of the financial statements. However, FASB

Concepts Statements No. 2, Qualitative Characteristics of

Accounting Information, includes the possibility that

accounting information may be affected by bias that is not

necessarily intended.


Bias

Bias in Financial Statements

• Accounting Estimates

– Allowances

• Accounts Receivable

• Inventory

– Fair Values

• Investments

• Share Based Compensation

– VSOE / BESP

– Purchase Accounting

– Income Taxes


Review and

Complete

Documentation

and Rationale

for the

ConclusionNothing's Ever That Easy


Review and

Complete

Documentation

and Rationale

for the

ConclusionExercising Good Judgment is a Circular Process


Identify

and

Define

the

Issue

Review and

Complete

Documentation

and Rationale

for the

Conclusion


anchoring

confirmation

hindsight

rush-to-solve

overconfidencemotivated-reasoning

self-serving explanations

limited resources

time pressure

availability groupthink


Professional Judgement

Identify and Define the Issue

• Intuitive

• Do not underestimate the importance

• Carefully define the primary issue

• Develop multiple perspectives

...this process is made more

challenging due to Bias


anchoring

confirmation

hindsight

rush-to-solve



limited resources

time pressure



Bias

Anchoring

• Tendency to make assessments based on an initial

value, and then fail to adjust accordingly

• Common throughout both work and personal life

Lets look at some examples!


Professional Judgment

Real Talk

Last month we sent out a survey…


Agenda Item/Topic

Question

Select a two (2) digit number:


Professional Judgment How Much Would You Pay

$38

$62 $66 $75

$89 $80

$89

$101

Favorite Book Nice Wine New Bag/ Purse Autograph

Low Values High Values


Professional Judgment Population of Brazil?

163,000,000

98,000,000

Hint 1:

More than 50 million

Hint 2:

Less than 250 million


Professional Judgment Population of Brazil?

Anchors are

powerful.163,000,000

98,000,000



Anchors

• Management's initials estimate provides an anchor

• Relying too heavily on one piece of information

• Stick with first answer – not considering

reasonable alternatives



Overcoming the Bias

• Solicit input from others

– But be wary of Groupthink

• Start with a clean slate

• Look for industry benchmarks

• Identify other relevant information

• Consider the potential for management bias


Gather the

facts and

information

and Identify

the

Relevant

Literature

Review and

Complete

Documentation

and Rationale

for the

Conclusion



Gather Facts and Information

• More than just inquiry – looking at the first result on

Google

• Includes readily available information, and

information from subject matter specialists

• Identify key assumptions & inputs

• Consider both corroborating & disconfirming

information

• Does engagement team have the expertise?


anchoring

confirmation

hindsight

rush-to-solve



limited resources

time pressure



Bias

Overconfidence

• Tendency to overestimate ability to perform tasks

or make accurate assessments of risk and

decisions

• No one believes they are overconfident

• Most are confident about the fact that they are not

overconfident



Overconfidence

On a scale of 1 – 10 rate yourself in these activities with your peers:

Trait

Driving a Car

Modesty

Sympathy

Attractiveness

Friendliness

Intelligence



Overconfidence Bias

• Not considering or seeking out contradictory

information to what you think

• Too much information

• Believing your answer is right – not involving

others in making the decision

• Highly motivated by self-interest



Overcoming the Bias

• Challenge underlying assumptions

• Challenge opinions by experts

• Seek third party evidence when available

• Don't hesitate to consult with others

• Objectively review why you've made the decision

that you have


Perform the

Analysis

and Identify

Alternatives

Review and

Complete

Documentation

and Rationale

for the

Conclusion



Perform Analysis & Identify Alternatives

• Identify a reasonable set of plausible alternatives

• Dependent on how well the issue was defined

• Consider accounting literature

• Do others have experience with a similar issue?

• What evidence do I have to support or discredit my

position and alternatives?


anchoring

confirmation

hindsight

rush-to-solve



limited resources

time pressure



Bias

Availability

• Tendency to consider information that is more

easily available as being more relevant or likely

• Blink response- first thing that comes to mind is

likely right

• Dramatic events are more likely to come to mind

• "I just had something like this last year…"



More Leashes in Dallas?


Professional Judgment Where are the R's in Four Letter Words?

68%

32%

Where is the R more common?

First Third

8,955 22,809Fort, Bare, Hard

Ring, Rang, Rung



Let's Get Morbid

Event Guess* Actual*

Tornado 2,068 17

Fireworks 3,507 5

Snake Bite 590 <1

Drowning 3,363 3,553

Asthma 506 1,886

*per 100 million US residents

>>><<



Availability Bias


information to management's position

• Using the same as last year approach

• Consideration of easily retrievable information



Overcoming the Bias

• Consider why something comes to mind

• Obtain and consider objective data

• Consult with others

• Make the opposing case


Make the

Decision

Review and

Complete

Documentation

and Rationale

for the

Conclusion



Make the decision

• Make sure all alternatives were considered

• Confirm all steps have been followed and are

supportable

• Reconsider each bias

• Step back and evaluate from a big picture view


anchoring

confirmation

hindsight

rush-to-solve



limited resources

time pressure



Bias

Confirmation

• Tendency to default to our pre-determined

preference, ideas, or beliefs

• More heavily weight information that supports

existing position

• Avoid looking for information that contradicts what

we already know or believe



Flashback – Skepticism

Let's look at another form

confirmation bias can take:


INSERT QUESTION


Texas Sharpshooter Fallacy



Confirmation & Sharpshooter Bias


information to management's position

• Inquiries of management

• Researching an accounting issue

• Looking for trends when there are not any in

analytic work



Overcoming the Bias

• Make the opposing case

• Consider alternatives (and document it)

• Seek-out disconfirming or conflicting information

• Don't rely on prior year as a valid comparison


Review and

Complete

Documentatio

n and Rational

for the

Conclusion

Review and

Complete

Documentation

and Rationale

for the

Conclusion



Complete Documentation

• Not just a blow-off step at the end

• If it's not documented in the file, you don't get

credit for having done it

• Document how you've considered bias- both

management and your own

• Include that you've considered other reasonable

alternatives

• Inconsistent information should also be

documented, not ignored


anchoring

confirmation

hindsight

rush-to-solve



limited resources

time pressure



When reviewing, you think that the outcome was

more likely that it was when you started.

Don't have enough information available to make a

decision, people with correct expertise

Making a snap judgment- underestimating the

complexity

hindsight

rush-to-solvelimited resources


If the outcome is positive, you take credit;

negative it's someone else's fault

Filing deadlines, vacation looming, etc.

Interpreting information to reach a conclusion

you want

motivated-reasoning


time pressure



Complete Documentation

Ask yourself questions:

• Have I described the rationale for my selection?

• Did I consider disconfirming evidence?

• Is the level of work consistent with the significance and

complexity of the judgment?

• Is the documentation for each step in the process clear and

complete?


Bias

Final Reminders

• Remember that you are susceptible to bias - no

matter your experience

• Documentation of what you considered is key

– Make sure you include all relevant information

– Include alternative view considered

– Clearly state how any contrary information to your

decision was evaluated


Where Law Defines Ethics – the FCPAMarc Mercier, Fraud and Forensics


Where Law Defines Ethics – the FCPA

Best of Class



Top 10 FCPA Enforcement Actions

1. Siemens (Germany, 2008) - $800 million

2. Alstom (France, 2014) - $770 million

3. KBR/Halliburton (USA, 2009) - $580 million

4. BAE (UK, 2010) - $400 million

5. Total SA (France, 2013) - $400 million

6. VimpelCom (Holland, 2016) - $400 million

7. Alcoa (USA, 2014) - $380 million

8. Snamprogetti/ENI S.p.A. (Holland/Italy, 2010) - $370 million

9. Technip SA (France, 2010) - $340 million

10. JGC Corporation (Japan, 2011) - $220 million

$4.6 BILLION since 2008



Top 10 FCPA Enforcement Actions

-

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000

1,600,000,000

1,800,000,000

2,000,000,000

2008 2009 2010 2011 2012 2013 2014 2015 2016

Total US Enforcements, Corporate and Individual

Over $7.2 Billion in Fines and Disgorgements



How does the government view their role?

Bribery of foreign officials to gain or retain a business advantage poses a

serious systemic criminal problem across the globe. It harms those who

play by the rules, siphons money away from communities, and undermines

the rule of law. The Department's demonstrated commitment…should send

a message to wrongdoers that FCPA violations that might have gone

uncovered in the past are now more likely to come to light.

Andrew WeissmannChief, Fraud Section, Criminal Division

April 5, 2016

Violations that might have gone uncovered in the past

Now more likely to come to light



Heritage Foundation

Freedom from Corruption Index



Heritage Foundation

Freedom from Corruption Index

Denmark

New Zealand

Finland

Sweden

Norway

Belize

North Korea

Somalia

Sudan

Afghanistan

Best: Worst:

United States is ranked #17 out of 185See http://www.heritage.org/index/explore



FCPA Recent Guidance

September 9, 2015, Yates Memo

1. Focus on individuals

– No credits unless full disclosure of individual(s') activities

– Investigate individuals at inception

– Civil attorneys should focus less on ability to pay

2. Improve communication across civil and criminal

departments

3. Corporate cases – increase timely resolution and

memorialize declinations




April 5, 2016, FCPA Enforcement Plan & Guidance Memo

1. DOJ is substantially increasing its enforcement resources

– increasing FCPA unit by more than 50%, including 10 new

prosecutors

– FBI has also established 3 new squads of special agents devoted

to identifying and investigating FCPA violations

2. U.S. enforcement is strengthening its relationships and

coordination with foreign counterparts

3. "New" FCPA enforcement pilot program – Effective April 6




• NEW FCPA pilot program seeks to:

– encourage self reporting

– motivate full cooperation with the Fraud Section of DOJ

– remediate flaws in corporate controls and compliance programs

• Will exchange "mitigation credit" for participation, with the

purpose of achieving improved opportunity to prosecute

individuals

• Must fully disclose all relevant facts about the individuals

involved in the wrongdoing

• Disgorgement of profits are REQUIRED



Anti-Corruption Compliance Certification

ISO 37001 – Anti-bribery Management Systems

• Final draft was voted on this past month

• Seeks to establish first certification of anti-bribery compliance

• "Reflects the widely shared expectation that organizations

need to ensure integrity in their daily decisions"

• "Demonstrates that there is a commonly agreed set of

measures needed to detect and prevent bribery"

• "First step towards leveling the playing field"

• Will recognize companies that are committed to doing

business with integrity regardless of where their HQ is located




Requirements for ISO 37001 Certification

• Assessment of bribery risks

• Implementation of an anti-bribery policy

• Compliance function to monitor the program

• Communication of policy

• Training (personnel and associates)




Requirements for ISO 37001 Certification

• Verification of employee compliance

• Monitoring of benefits granted/paid

• Implementation of specific controls

• Implementation of whistleblowing procedures

• Bribery detection and response process


Most Common Infractions

Faced by International Organizations

Bribes of foreign officials to:

• obtain regulatory approvals

• secure government contracts

• obtain licenses and permits

• involved in resolving company's disputes

• obtain favorable import/export treatments (reduced tariff/import of illegal goods)

• receive lucrative tax benefits

• accept false documents

• retain existing business

• influence product design specification requirements

• failure to account for and have sufficient controls surrounding illicit payments to

foreign officials



How are FCPA issues identified?

• Investigations

– Reactive – FCPA Issue identified or suspected

– Can identify compliance needs

• Due Diligence

– Proactive – Acquisition assessed for FCPA risks and issues

– Can lead to investigations or identify compliance needs

• Compliance

– Preventative – Transactions and processes assessed for issues

– Surprise "audits" and site visits

• Whistleblowers



Frequency and Types of Hotline Reports

0.00% 20.00% 40.00% 60.00% 80.00% 100.00% 120.00%

Accounting, Auditing, Financial Reporting

Environment, Health, Safety

Misuse/Misappropriation of Assets

Business Integrity (Including FCPA)

HR, Diversity, Workplace Respect

Accounting, Auditing,Financial Reporting

Environment, Health, SafetyMisuse/Misappropriation of

AssetsBusiness Integrity (Including

FCPA)HR, Diversity, Workplace

Respect

Series1 1.00% 2.30% 3.99% 6.15% 27.69%

Series2 2% 5% 7% 15% 71%

Hotline Benchmarking for 2015 (Navex Global)

Median of 1.3 reports filed for every 100 employees

Range of 0.3 to 10.3


Current/Recent Enforcement

ActionsOverview


Current/Recent Enforcement Actions

VimpleCom

In February 2016, VimpleCom agreed to pay $230 million criminal penalty

to the DOJ, $168 million in disgorgement and pre-judgement interest to the

SEC, and $398 million to Dutch prosecutors.

• DOJ alleged conspiracy to violate anti-bribery and books and records

provisions of the FCPA. Also violation of internal controls provision.

• In a Deferred Prosecution Agreement, agreed to implement vigorous

internal control programs, and retain independent monitor for 3 years.

• Had reserved $900 million for settlements, per disclosures.

• With Unitel admitted to having, 'bribed an Uzbek government official,

who was a close relative of a high-ranking government official and had

influence over the Uzbek governmental body that regulated the telecom

industry."



Mead Johnson

In July 2015, Mead Johnson agreed to pay $12 million to settle civil

charges with the SEC.

• SEC alleged a majority owned subsidiary, Mead Johnson China, made

improper payments to Chinese state hospital health care professionals to

induce them to recommend MJs infant nutrition products to expectant mothers.

• Without factual allegation of such, MJ was found in violation of the books and

records clause because MJ China's books and records were consolidated into

the parent.

• SEC further found that MJ 'failed to maintain sufficient internal controls over MJ

China to prevent and detect the improper payments'. YET, also found that they

had 'established internal policies to comport with the FCPA and local laws, and

to prevent related illegal and unethical conduct. Mead Johnson's internal

policies include prohibitions against providing improper payments and gifts to

HCPs…'



BNY Mellon

In August 2015, BNY Mellon agreed to pay $8.3 million disgorgement, $1.5

million in prejudgment interest, and a $5 million penalty to settle civil

charges with the SEC

• "An SEC investigation found that BNY Mellon did not evaluate or hire the family

members of officials (affiliated with a Middle Eastern sovereign wealth fund)

through its existing, highly competitive internship programs…"

• "Failed to devise and maintain a system of internal accounting controls around

its hiring practices sufficient to provide reasonable assurances that its

employees were not bribing foreign officials…"

• Violated anti-bribery clause because; "The internships were valuable work

experience, and the requesting officials derived significant personal value in

being able to confer this benefit on their family members."



BHP Billiton

In May 2015, BHP Billiton agreed to pay a $25 million penalty to resolve SEC

FCPA matter. Largest ever civil fine imposed by SEC in FCPA case.

• BHP failed to have sufficient internal controls over its global hospitality program

connected to its sponsorship of 2008 Summer Olympics in Beijing

• SEC believed BHP’s compliance program created the potential for bribery even though

actual bribery not alleged to have occurred

• BHP invited 176 foreign officials to attend the Olympics. Package included free event

tickets, hotel rooms, meals, sightseeing tours, valued at 12-16k. Some also offered

roundtrip airfare for them and spouse. 60 attended plus 24 spouses

• Many invited from African and Asian countries with “well-known histories of corruption”

and who were directly involved with or in a position to influence pending negotiations with

BHP

• Company had multiple internal controls to prevent corruption and a written Guide to

Business Conduct and compliance overseen by Legal Department

• Significant cooperation and remedial action yet record $25 million fine


UK Bribery ActOverview



UK Bribery Act of 2010

• "The purpose of the Act is to reform the criminal law of bribery to provide for a

new consolidated scheme of bribery offences to cover bribery both in the United

Kingdom (UK) and abroad."

• The Act covers two general offences:

1. " the offering, promising or giving of an advantage (broadly, offences of bribing

another person)"

2. "requesting, agreeing to receive or accepting of an advantage (broadly, offences of

being bribed)"

• Penalties include, "a maximum of 10 years imprisonment for all the offences,

except the offence relating to commercial organizations, which carry an

unlimited fine"

• There is also, "extra-territorial jurisdiction to prosecute bribery committed

abroad by persons ordinarily resident in the UK as well as UK nationals and UK

corporate bodies"


UK Bribery Act

Recent UK Bribery Act Happenings

• August 2015 – UK founded the International Corruption Unit

– Funded with £21 million

– Intended to focus on 28 international "poorer" countries

– A supplement to the Serious Fraud Office, not a replacement

The message to individuals and companies who see developing countries

as fair game is that the UK has ZERO TOLERANCE for overseas bribery

and corruption.

Jon BentonJoint Head, ICU


UK Bribery Act

Recent UK Bribery Act Happenings

• November 2015 - Sweett Group PLC - First successful

corporate prosecution, under Section 7 of the Act

– "Failing to prevent associates from committing fraud"

– Former employee paid $3 million to a Vice Chairman of Al Ain Ahlia

Insurance company, owned in part by Abu Dhabi.

– Payments were intended to secure contract for building a hotel

• December 2015 – ICBC Standard Bank – First DPA

– $16.9 million fine, $8.4 million disgorgement, $7 million in

compensation to Tanzania

– Stanbic Bank Tanzania allegedly paid $6 million to a local partner to

"influence members of the government in $600 million private

placement."


Compliance ProgramsMitigating Risks


Compliance Programs

FCPA Compliance is a Must!

• Corporations must have comprehensive anti-corruption compliance programs in

order to protect themselves

– Judges use the US sentencing guidelines as a guide in determining the amount of

fines to be levied against companies accused of violating the FCPA statute

– Authoritative UK Bribery Act Guidance provides additional compliance guidance

– The recent passage of Dodd-Frank has caused companies great concern in

motivating employees to go to the DOJ with allegations of corporate misconduct

• Size of company and scope of international activity will drive level of compliance

program and proactive monitoring

– Not all companies are held to the same standard

• Whistleblower provisions will continue to drive more FCPA investigations


Compliance Programs

Anti-Corruption and Governance

• To deal with corruption risks, a company needs to

establish an ethical corporate culture and

implement a strong anti-corruption policy &

program

• "Tone at the top" is a critical component


Compliance Programs

Key Elements to an Effective Anti-Corruption

Program (US Sentencing Guidelines – SEC/DOJ)

• No formulaic requirements for compliance programs

• DOJ & SEC focus on– Is program well designed?

– Is program applied in good faith?

– Does program work?

• Code of conduct, tied to corporate values

• Officer responsible for compliance

• Proper due diligence on new customers

• Effective communication of the code

• Effective internal controls

• Provide mechanism to report suspicious activity (anonymous hotline)

• Monitor for compliance

• Appropriate response


Compliance Programs

Key Elements to an Effective Anti-Corruption

Program (Other Considerations)

• Adequate training of people at home office and in the field

• Policies are easily accessible and understandable

• Know who you do business with – background searches

• Surprise visits/audits

• Annual certifications by employees of compliance

• Focused diligence on FCPA compliance during acquisitions

• Consistent communication from C-suite to organization on

importance of strong compliance culture


Compliance Programs

Contracting with Third Parties

• Include anti-corruption provisions in all contracts with

agents, consultants and distributors

– Express prohibition on corrupt payments to foreign government

officials

– Require annual certification of FCPA compliance

– Prohibit third party from hiring subcontractors without consent

– Require audit rights over books and records

– Provide that FCPA violation is material breach of contract, voids

contract and no further payments required


Compliance Programs

How are You Doing Business?

• Perform proper due diligence on agents

• Monitor charitable and political contributions

• Perform due diligence that consider FCPA

implications prior to mergers and acquisitions


Compliance Programs

Where are You Doing Business?

• Controls needed to take into account the countries

that you are conducting business in:

– Perform risk assessment

– Proper training for employees?

– Are you monitoring properly?


Compliance Programs

Who are You Doing Business With?

• Controls should include identifying government

officials and monitoring all business entertainment

– Document who you are meeting with

– Document the purpose of the meeting

– Document the type of entertainment and the dollar

amount

– Conduct background searches where appropriate


Compliance Programs

What Can I Do To Protect My Organization?

• Mitigate liability through a comprehensive and

vigorous anti-corruption program.

• Educate managers and employees about the

FCPA and create and maintain a culture of

compliance.


Compliance Programs

Benefits of a Proactive Anti-corruption Plan

• Supports compliance with laws, statutes and

regulations

• Reduces risk of criminal prosecution and/or

imposition of civil sanctions

• Assists directors and officers in meeting their

fiduciary duties

• Promotes integrity of business dealings

• Reduces exposure to financial losses and business

disruption


Compliance Programs

SEC, DOJ and Governmental Resources

• US Sentencing Commission (http://www.ussc.gov/Guidelines/index.cfm)

– Chapter 8 Part B – "REMEDYING HARM FROM CRIMINAL CONDUCT, AND

EFFECTIVE COMPLIANCE AND ETHICS PROGRAM"

• DOJ (http://www.justice.gov/criminal/fraud/fcpa/)

– Resource Guide

– Enforcement Actions

– Links to other Anti Corruption Sites

• SEC (http://www.sec.gov/spotlight/fcpa.shtml)

– Anti-bribery provisions

– Enforcement Actions

– Record Keeping and Internal Control Provisions

• UK Justice (http://www.justice.gov.uk/legislation/bribery)

– Guidance to help commercial organizations understand the sorts of procedures they

can put in place to prevent bribery

http://www.ussc.gov/Guidelines/index.cfm

http://www.justice.gov/criminal/fraud/fcpa/

http://www.sec.gov/spotlight/fcpa.shtml

http://www.justice.gov.uk/legislation/bribery


Ethical Tax Planning and StrategiesAdam Lehmann, TARAS


Judge Billings Learned Hand

US Judge and Judicial Philosopher

Any one may so arrange his affairs that his taxes shall

be as low as possible; he is not bound to choose that

pattern which will best pay the Treasury; there is not

even a patriotic duty to increase one's taxes.

Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934)

Over and over again courts have said that there is

nothing sinister in so arranging one's affairs as to keep

taxes as low as possible. Everybody does so, rich or

poor; and all do right, for nobody owes any public duty

to pay more than the law demands: taxes are enforced

exactions, not voluntary contributions. To demand more

in the name of morals is mere cant.

Commissioner v. Newman, 159 F.2d 848, 851 (2d Cir. 1947)


Formal Rules of Conduct

Model Rules of Professional Conduct

• Created by the American Bar Association

• Baseline standards of legal ethics and professional

responsibility

• Administered on a state by state basis




• Rule 1.2(d):A lawyer shall not counsel a client to engage,

or assist a client, in conduct that the lawyer

knows is criminal or fraudulent…

• Rule 8.4(a)-(d):It is professional misconduct for a lawyer to:

(a) violate or attempt to violate the Rules of

Professional Conduct, knowingly assist or

induce another to do so, or do so through

the acts of another;

(b) commit a criminal act that reflects

adversely on the lawyer's honesty,

trustworthiness or fitness as a lawyer in

other respects;

(c) engage in conduct involving dishonesty,

fraud, deceit or misrepresentation;

(d) engage in conduct that is prejudicial to

the administration of justice;




• Ethical obligations follow attorney's across

jurisdictions and govern every activity

• Emphasis on the ethical code is on its spirit rather

than on its letter

• Cross jurisdictional violations draw disciplinary

review/sanctions



Circular 230 – Regulations Governing Practice

Before the IRS

• First issued by the US Treasury Department in

1921

• Well known amendments made in 2005

• Provides:

– Rules relating to the authority to practice before the IRS

– Duties and restrictions to such practice

– Sanctions for violating the regulations

– Disciplinary proceedings




Before the IRS

§ 10.22 – Diligence as to

accuracy:A practitioner must exercise due diligence —

• In preparing or assisting in the

preparation of, approving, and filing tax

returns, documents, affidavits, and other

papers relating to Internal Revenue

Service matters;

• In determining the correctness of oral or

written representations…to the

department of the Treasury

• In determining the correctness of oral or

written representations made…with

reference to any matter administered by

the Internal Revenue Service.

§ 10.51(a)(4) –

Incompetence and

disreputable conduct:A practitioner may be sanctioned for

(amount others):

• Giving false or misleading information –

including facts or other matters in

testimony, Federal tax returns, financial

statements, affidavits, declarations, and

any other document or written or oral

statement – to the IRS or to any court

handling a tax case, in connection with

any matter pending or likely to be

pending before them




Before the IRS

• Administered by the Office of Professional

Responsibility (OPR) within the IRS

• OPR is authorized to initiate administrative

proceedings

• Circular 230 was amended in 2014 to broaden

responsibilities and obligations of tax practitioners


Avoidance vs. Evasion

Tax Obligations

• The US system of taxation is based on a high

degree of voluntary compliance

• The General Accounting Office has reported that

US taxpayer compliance is the highest in the world

• Nevertheless, the IRS has acknowledged that the

problem of tax evasion is a serious one and has a

significant impact on revenue raising



Conceptual Differences

Tax Avoidance• Occurs when a taxpayer takes advantage

of all legal opportunities to minimize its

tax obligations through claiming

permissible deductions and credits

• Avoidance is considered legitimate, even

if sometimes involving aggressive

planning

e.g. Saving tax dollars through specific

actions to avoid the tax liability prior to the

time it would have occurred according to the

law.

Tax Evasion• Occurs if the planning structure involves

some form of deception, fraud, false

statements or sham in fact

• Includes concerted efforts to impair,

impede and obstruct IRS tax

enforcement

e.g. The taxpayer does not report income

even though the taxpayer already has a tax

liability and all actions are definitely

complete



Can You Tell the Difference?

• Difficulty in discerning avoidance from evasion is

driven by the endless development of clever,

complex, and technically legal tax structures

• Increased focus on tax practitioners engaging in

tax reduction strategies solely for that purpose

• Normative legal principles are used in the

assessment of whether strategies are ethically and

legally tolerable


Established Legal Doctrines

Avoidance vs. Evasion–Can You Tell the Difference?

Courts have used common law doctrines to address

unreasonable or unwarranted tax benefits, including:

• Substance-over-form

• Step transaction doctrine

• Business purpose

• Economic substance/sham-in-substance doctrine



Can You Tell the Difference?

Taxpayer intent frequently distinguishes avoidance

from evasion. Consider the "badges" of fraud:

• Understatement of income

• Claiming of fictitious or improper deductions

• Accounting irregularities

• Allocation of income

• Acts and conduct of the taxpayer



Evasion – Internal Revenue Code

Regarding Tax evasion, IRC §7201:

Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.



What is a Tax Shelter?

tax shel·ternoun

a financial arrangement made to avoid or minimize taxes

Tax shelters can range from investments or investment accounts that provide favorable tax treatment, to activities or transactions that lower taxable income. The most common type of tax shelter is an employer-sponsored 401(k) plan

Tax minimization (i.e. tax avoidance) is a perfectly legal way to minimize taxable income and lower taxes payable.



What is an Abusive Tax Shelter?

Inherently difficult to identify, but share common characteristics:

• Lack of Economic Substance

• Inconsistent financial accounting and tax treatments

• Tax-indifferent parties

• Marketing activity

• Confidentiality

• Contingent or refundable

• High transaction costs



The Search for Beneficial Owners

The IRS, Treasury Department, and other government authorities have been focused on reinforcing ethical and transparent tax planning.

Consider the following:• Offshore Voluntary Disclosure Initiatives (OVDI)

• Foreign Account Tax Compliance Act (FATCA)



Global Cooperation - OECD

Organization for Economic Co-operation and Development (OECD)• International economic organization

• 34 member countries

• Founded in 1961 to stimulate economic progress and world trade



Global Considerations – Then

• In 1998, in an effort to 'level the tax playing fields' and counter aggressive national tax regimes, the OECD released a report condemning 12 different harmful tax practices;

• This initiative led to a substantial reduction of some of the most aggressive tax regimes

• Opened dialogue amongst member and nonmember countries focused on transparency and exchange of information



Global Considerations – Now

• OECD Base Erosion and profit shifting (BEPS) project

• BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to make profits 'disappear' for tax purposes.

• Implementation of the recommendations coming out of the BEPS Project will reduce disputes, giving business greater certainty, and reinforcing the fairness and consistency of international tax system



Global Cooperation - Next

• Historical schemes and strategies need review as the OECD finalizes the BEPS project

• Constant evolution of jurisdictional tax regimes will certainly drive change as to what is considered abusive and non-abusive tax avoidance

• Preparedness for increased scrutiny and transparency amongst jurisdictions; e.g. country-by-country reporting


"Planning" for Ethical Tax Planning

Managing Global Complexity and Change

Four key priorities:1. Seeing the big picture

2. Clear strategy: Balancing tax risk and effective tax rate

3. Implementing and enforcing policies

4. Develop an effective tax communication strategy



Baseline Considerations

• How are you doing business?

• Where are you doing business?

• Who are you doing business with?

• What conflicts of interest exist?



Financial Statement Considerations

• Uncertain tax positions

• Financial statement disclosure

• Management Discussion and Analysis (MD&A)

• Internal Control Environment


Ethical Tax Planning and Strategies

Final Reminders

• Remember the professional codes of conduct

• Tax avoidance schemes are facts and

circumstances specific; changes in either can drive

evasion schemes

• Plan for and have controls in place to consider:

– Changes/evolution in applicable tax law

– Economic substance review

– Professional tax advisors


Internal Audit Update – Fraud Corey Bazylinski – Business Advisory Services

Kaila Kennedy – Business Advisory Services


Agenda

• Role of Internal Audit in Fraud Programs

• Prevention

• Internal & External Fraud

• Detection

• Investigation

• Strengthening Your Defense


Role of Internal AuditIn Fraud Programs


What Do We Know?

Fraud Is Becoming Even More Difficult To Identify

• Looks normal until they attack

• Normal behavior vs. insider threat

behavior

• Over reliance on technology

• Social behaviors must be considered

• Low and slow approach – more damage

and longer

• Low technology vs. sophisticated

attacks– insiders not sophisticated

• Collusion


Role of Internal Audit in Fraud Programs

Addressing Fraud

Historically many organizations considered fraud prevention as a

component within their organizations internal controls rather than a

directed focus on potential fraud within an organization and the

identification of controls in place to address them.

• Adjustments to COSO framework to specifically address Fraud Risk

within an organization:

– General is no longer sufficient

– Targeted focus on identifying and implanting prevention tactics against risk


Role of Internal Audit in Fraud Programs

What is Internal Audit's Role?

Your internal audit function has a role in all aspects

of Fraud Management

• Prevention

• Detection

• Investigation


Prevention


Prevention

Where Do We Start Our Prevention Efforts?

• Oversight and management direction

• Board of Directors

• Audit Committee

• Internal Audit

• Identification of your organizations fraud risk

• Internal vs External Fraud Risk

• Fraud Risk Assessments

• Awareness programs

• Entity level programs and outlets for fraud identification


Insider & External

Fraud


Insider & External Fraud

What Forms of Fraud Can Occur?

• Employee/Identification

• Wire/check

• Online Fraud

• Corporate/Tax Fraud

• Credit Card



Insider Fraud

Companies often underestimate the insider threat

• 3 out of 4 companies polled in 2015 experienced a fraud

incident in the past year

– 81% of companies affected by fraud reported insider perpetrators

• Real world example



External Fraud

External Fraud remains the most prevalent method

• Makes up about 60% of all fraud conducted

• Example: Online banking fraud through use of malware

– Virus

– Adware

– Spyware

– Browser hijacking software



External Fraud

Malware Methods of Deployment• Malware writers are very experienced in using tricks to get users to

download their malware.

• Software that comes bundled with "other software" is often called a

Trojan Horse.

• Software that promises to speed up the Internet connection or assist

with downloads (e.g., My Web Search) will often contain adware.

• Another common way to infect a computer through email containing a

seemingly benign link or email attachment.

Live Demo

https://www.facebook.com/PandaSecurity/videos/vb.95000441700/1206703721124/?type=2&theater



External Fraud



External Fraud

• Employee Security Awareness Training

• Ensure Anti-Virus controls are adequate (regular updates, real-time

scanning enabled, etc.)

• Remove local administrator privileges from all user accounts that do not

specifically need it and enable User Account Control (UAC)

• Implement web content filtering

• Ensure patches are up-to-date (Microsoft, Adobe, etc.)

• Implement an IDS/IPS solution

• Implement egress filtering

• If a machine is suspected or found to have a virus, rebuild the system


Detection


Detection

How Can We Detect Fraud?

• Implementation of controls to address Fraud Risk

• Reduce end to end transaction capability by one individual

• Employing ongoing monitoring activities across critical processes and

roles

• Robust yet flexible audit plans and programs

• Sufficient coverage of risk, processes and functional areas

• Evaluation of competencies

• Staff execution the day to day transactions as well as Internal Audit skill

set in evaluating for potential fraud

• Advisory relationship in correcting control breakdowns or gaps in fraud

risk management


Investigation


Investigation

Investigating Potential Fraud

• Appropriate response plans in place

• Upward communication

• Deployment of forensic/investigative experts

• Coordination of activities being conducted and

consulting on actions to implement

• Validation and review of outcomes of investigation

and corrective action plans


Strengthening Your

Defense


Strengthening Your Defense

How Can We Enhance Our Defenses?

• Make fraud management an organization wide

initiative NOT just an internal audit initiative

• Implementing the Three Lines of Defense

– Use of Analytics

– Continuous auditing

– Trend identification

where law defines ethics – the fcps marc mercier, fraud ... · bias in financial statements •...

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