9/3/2019 Your input matters… We will be soliciting your input during our presentation. Please log on to the website below and use code 41 12 63 to participate in audience polls. www.menti.com 1
9/3/2019 Learning Objectives • What is fraud? • Why fraud happens • Ways to reduce fraud risk • How to report possible fraud 2
9/3/2019 You Are HCC’s MOST IMPORTANT Control! 3
9/3/2019 Fraud defined… "Any intentional act or omission designed to deceive others, resulting in the victim suffering a loss and/or the perpetrator achieving a gain." * *Source: The Institute of Internal Auditors (IIA), The American Institute of Certified Public Accountants (AICPA), & Association of Certified Fraud Examiners (ACFE), Managing the Business Risk of Fraud: A Practical Guide (pp. 5). What does a “TYPICAL” Fraudster look like? Female Male Owner/Executive 19% Manager 34% Employees 44% Others 3% > 1 year 9% 1-5 years: 44% Level of Authority 6-10 years: 23% > 10 years: 24% 31% 69% < 30: 15% 31 – 35: 15% 36 – 40: 19% 41 – 45: 19% 46 – 50: 14% High school graduate or less: 24% > 50: 18% Some University: 15% University Degree: 47% Perpetrator’s Age Postgraduate Degree: 14% 4
9/3/2019 Fraud News Headlines Former Washington University administrator pleads guilty to embezzlement… Most Common Categories of Fraud (Occupational‐committed by employees against employers) Financial Statement Corruption Asset Misappropriation Fraud • The deliberate • Dishonest or fraudulent • Involves the actual misrepresentation of conduct by those in theft of an the financial condition of an power, typically involving entity's assets enterprise accomplished bribery through the intentional • Most common misstatement or omission of • Next most common • 89% of cases amounts or disclosures in • 38% of cases the financial statements • $114,000 median loss • Least common • $250,000 median loss • Most costly • $800,000 median loss Association of Certified Fraud Examiners (ACFE) 2018 Report to the Nations 5
9/3/2019 Common Types of Fraud in Higher Education • Fake vendor payments • Fraudulent employee expense reports • P‐card abuse • Financial aid kickbacks • Theft of donations <<Fraud can cost our students, donors, and key stakeholders>> https://www.claconnect.com/resources/articles/2018/tips‐for‐preventing‐and‐detecting‐internal‐fraud‐at‐colleges‐and‐universiti How Fraud Can Affect HCC… Financial loss is the generally the main effect of FRAUD in Higher Education, but… Reputational Damage is another significant risk of Fraud in Higher Education. The Institution receiving… • negative publicity (i.e. news broadcasts, newspapers, rating agencies, etc.) • Potential drop in future enrollment • Potential drop in future advancement/development contributions 6
9/3/2019 Why good people do bad things? "Integrity is doing the right thing, even when no one is watching." ‐C. S. Lewis The use of nicknames and Sometimes people, having In large euphemisms for questionable Small thefts are ignored. Then been moral and forthright organizations, employees practices can free them of slightly larger ones like over in their dealings for a long can begin to feel more like claiming expenses or accepting their moral connotations, time, feel as if they have numbers or cogs in a making them seem more unauthorized business gifts. banked up some kind of acceptable. (“ greasing the machine than individuals. ( stationery, sugar packets, paper "ethical credit”. wheel”, “financial engineering”) cups, toilet paper ) https://www.businessinsider.com/reasons‐why‐good‐people‐do‐bad‐things‐2016‐12#the‐compensation‐effect‐5 Why Does Fraud Happen? Fraud Case Example Payroll Scam 7
9/3/2019 RED FLAGS OF FRAUD Understanding and recognizing the behavioral red flags displayed by fraud perpetrators can help organizations detect fraud and mitigate losses. These 6 BEHAVIORAL RED FLAGS have been the most common in studies dating back to 2008.* • Living beyond means • Financial difficulties • Unusually close association with vendor/customer • Control issues, unwillingness to share duties • Divorce/family problems • “Wheeler‐dealer” attitude *Association of Certified Fraud Examiners (ACFE) 2018 Report to the Nations 8
9/3/2019 Primary internal control weaknesses that contribute to occupational fraud. Lack of Overriding Poor Lack of Lack of Competent of Tone Other Internal Management Personnel Existing at the Controls Review in Oversight 6% Controls Top Roles 18% 30% 19% 10% 8% *Association of Certified Fraud Examiners (ACFE) 2018 Report to the Nations Easy Ways to Reduce Fraud Risk 1. Management Controls 2. Fraud Risk Assessments 9
9/3/2019 Key Management Controls Segregation of duties Change Physical and IT management access Management oversight – Update required policies and reviews, procedures approvals, and reconciliations 10
9/3/2019 THE SECOND LINE OF DEFENSE: THE FIRST LINE OF DEFENSE: THE THIRD LINE OF DEFENSE: RISK MANAGEMENT AND OPERATIONAL MANAGEMENT INTERNAL AUDIT COMPLIANCE FUNCTIONS • Responsible for maintaining • A risk management function • Provide the governing body and effective internal controls. (and/or committee) that senior management with facilitates and monitors the comprehensive assurance implementation of effective risk based on the highest level of • Responsible for executing risk management practices. independence and objectivity and control procedures on day‐ within the organization. to‐day basis. • A compliance function to monitor various specific risks. • Provides assurance on the • Identifies risks and assesses effectiveness of governance, controls to mitigate risks. risk management, and internal • A controllership function that controls, including the manner monitors financial risks and • Guides the development and in which the 1 st and 2 nd lines of financial reporting issues. implementation of internal defense achieve risk policies and procedures. management and control objectives. Fraud Risk Assessments Process to identify where fraud may occur and who may be committing it Determine Add practical Document the whether the procedures to Ask how would I controls in place control bring the control commit the to prevent this environment is environment to fraud? fraud from adequate to an acceptable happening. prevent the fraud. level if needed. 11
9/3/2019 Active Fraud Risk Brainstorming How could Begin with the someone How could How could PRESUMPTION exploit someone someone Assume you that a fraud weaknesses in override or conceal their are committing event has our controls circumvent our wrongful the fraud. already and daily controls? actions? occurred. behaviors? Fraud News Headlines 12
9/3/2019 Tips are the #1 source… Tips are the #1 source… Who Reports Occupational How is Occupational Fraud Initially Fraud? Detected? Confession 1% Shareholder/owner 2% IT Controls 1% Notified by Law Enforcement 2% Competitor 3% Surveillance/Monitoring 3% Other 5% External Audit 4% Document Examination 4% Vendor 8% Account Reconciliation 5% Other 6% Anonymous 14% By Accident 7% Customer 21% Management Review 13% Internal Audit 15% Employee 53% Tip 41% 0% 10% 20% 30% 40% 50% 60% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% *Association of Certified Fraud Examiners (ACFE) 2018 Report to the Nations HCC is pleased to provide a third‐party Ethics and Compliance Hotline for employees, students, and members of the public to encourage the reporting of any fraud, waste, and abuse and violations of College District policy and law. http://www.hccs.ethicspoint.com/ 1.855.811.6284 13
9/3/2019 Access to Ethics and Compliance Hotline via HCC Homepage Search “hotline” https://www.hccs.edu/ Select “The Ethics and Compliance Hotline” link https://www.hccs.edu/media/AboutEthicsComplianceHotline.pdf Prevention and Deterrence Active ongoing Visible and vocal Policies on Fraud fraud risk leadership Responsibilities brainstorming 14
9/3/2019 HCC Policies on Fraud Responsibilities • Policies BBFB (LEGAL) CAK (LEGAL) CDC (LOCAL) CDE (LOCAL) DGBA (LOCAL) DH (LOCAL) FEA (LOCAL) FLB (LOCAL) FLD (LOCAL) • Employee Standards of Conduct annual training 15
9/3/2019 • Terry Corrigan, Internal Audit Director • 713‐718‐7278 • hcc.internalaudit@hccs.edu • https://www.hccs.edu/departments/internal‐auditing/ Questions/Comments 16
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