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Scouting For Fraud - Parag Deodhar

Parag Deodhar
Parag Deodhar

This document summarizes a seminar on fraud risk for businesses. The seminar covered that fraud is now common, with the typical organization losing an estimated 5% of annual revenues to fraud. The speaker discussed the most common types of occupational fraud, including asset misappropriation schemes like skimming, billing, and payroll fraud. Detection methods included tipoffs, internal audits, and accounting anomalies. The speaker suggested proactive measures like whistleblower mechanisms, employee background checks, and controls to help businesses detect and prevent fraud.

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SCOUTINGFORFRAUD SCOUTING FOR FRAUD IN YOUR BUSINESS INYOURBUSINESS SeminaronFraudasaStrategicRisk g WhatCFOsandCEOsdontnotice,butshould ParagDeodhar Parag Deodhar BANGALORE 27July2012
FRAUD RISK FRAUDRISK Fraud is now so common that its occurrence is Fraudisnowsocommonthatitsoccurrenceis nolongerremarkable,onlyitsscale. If f d Iffraudwereadisease,almostallcompanies di l t ll i wouldhaveaslighttemperature Whats@Risk? Thetypicalorganizationlosesanestimated5%of yp g itsannualrevenuestofraud Regulatorysanctions g y Reputation/Brandimage Company closure! Companyclosure! 27July2012 ParagDeodhar 2
TYPES OF OCCUPATIONAL FRAUD TYPESOFOCCUPATIONALFRAUD SOURCE:ACFE2012GLOBALFRAUDSTUDY 87% 33% 8% 27July2012 ParagDeodhar 3
ASSET MISAPPROPRIATION SCHEMES ASSETMISAPPROPRIATIONSCHEMES Category Description Examples SCHEMES INVOLVING THEFT OF CASH RECEIPTS Skimming Cash is stolen from an organization before it is recorded on Employee accepts payment from a customer but does not the organizations books and records record the sale and instead pockets the money Cash Larceny Cash is stolen from an organization after it has been Employee steals cash and checks from daily receipts before recorded on the organizations books and records they can be deposited in the bank SCHEMES INVOLVING FRAUDULENT DISBURSEMENTS OF CASH Billing Person causes his or her employer to issue a payment by Employee creates a shell company and bills employer for submitting invoices for fictitious goods or services, inflated services not actually rendered invoices or invoices for personal purchases Employee purchases personal items and submits an invoice to employer for payment Expense An employee makes a claim for reimbursement of fictitious Employee files fraudulent expense report, claiming personal Reimbursements or inflated business expenses travel, nonexistent meals, etc. Check Tampering A person steals his or her employers funds by intercepting, Employee steals blank company checks and makes them out to forging or altering a check drawn on one of the g g g himself or an accomplice p organizations bank accounts Employee steals an outgoing check to a vendor and deposits it into his or her own bank account Payroll An employee causes his or her employer to issue a Employee claims overtime for hours not worked payment by making false claims for compensation Employee adds ghost employees to the payroll Cash Register C hR i t An A employee makes f l entries on a cash register t l k false t i h i t to Employee f d l tl voids a sale on hi or h cash register E l fraudulently id l his her h i t Disbursements conceal the fraudulent removal of cash and steals the cash OTHER ASSET MISAPPROPRIATION SCHEMES Misappropriation of The perpetrator misappropriates cash kept on hand at the Employee steals cash from a company vault Cash on Hand victim organizations premises organization s Non-Cash An employee steals or misuses non-cash assets of the Employee steals inventory from a warehouse or storeroom Misappropriations victim organization Employee steals or misuses confidential customer financial information 27July2012 ParagDeodhar 4
PROFILE OF A FRAUDSTER PROFILEOFAFRAUDSTER SOURCE:ACFE2012GLOBALFRAUDSTUDY 27July2012 ParagDeodhar 5
HOW ARE FRAUDS DETECTED HOWAREFRAUDSDETECTED SOURCE:ACFE2012GLOBALFRAUDSTUDY 27July2012 ParagDeodhar 6
DETECTION METHODS DETECTIONMETHODS SOURCE:ACFE2012GLOBALFRAUDSTUDY 27July2012 ParagDeodhar 7
PROACTIVE MEASURES PROACTIVEMEASURES 27July2012 ParagDeodhar 8
WHISTLEBLOWER MECHANISM WHISTLE BLOWERMECHANISM KEY ELEMENTS FOR SUCCESS Who Who decides Wh d id receives the the actions? High complaints? Availability Anonymous & &Secure Accessibility Who Who takes investigates? i ti t ? actions? ti ? Independent Credible& & Impartial transparent Who reports? 27July2012 ParagDeodhar 9
RED FLAGS FLAGS SOURCE:ACFE2012GLOBALFRAUDSTUDY 87%Firsttimers 87% First timers 35%Casesneverreported topolice t li 27July2012 ParagDeodhar 49%Norecovery 10
BEHAVIORAL RED FLAGS BEHAVIORALREDFLAGS Excessive Family/Peer ExcessiveFamily/Peer Irritability, Suspiciousness Irritability,Suspiciousness PressureforSuccess orDefensiveness ComplainedAboutLack WheelerDealerAttitude ofAuthority f A th it Divorce/FamilyProblems PastLegalProblems ControlIssues, Excessive Pressure from ExcessivePressurefrom UnwillingnesstoShare Unwillingness to Share WithinOrganization Duties RefusaltoTakeVacations UnusuallyClose y ComplainedAbout Associationwith InadequatePay Vendor/Customer PastEmploymentRelated Financial Difficulties / FinancialDifficulties/ Problems HighDebt Addiction Problems AddictionProblems Living Beyond Means LivingBeyondMeans 27July2012 ParagDeodhar 11
FRAUD DETECTION FRAUDDETECTION Employee Background Checks EmployeeBackgroundChecks Notjustduringrecruitment Mystery Shopping MysteryShopping MandatoryLeave/JobRotation,Transfers Anti BriberyclauseinContracts AntiBribery clause in Contracts ReviewofProcessesandControls Dedicatedteamforfrauddetection/ Dedicated team for fraud detection / investigation Clear reporting lines & Segregation of duties Clearreportinglines&Segregationofduties Electronic/Digitalsurveillance Over riding Controls!!! OverridingControls!!! 27July2012 ParagDeodhar 12
VENDOR / PARTNER DUE DILIGENCE VENDOR/PARTNERDUEDILIGENCE Organizations often operate in unfamiliar territories or with little knowledge of the background, reputation or ability to conduct business of their business associates and service providers. Many a times the track record and reputation can be overlooked, while focusing only on the potential gains. While positive impact is often expected, the potential negative impact from these associates normally ignored at the time of selection which might have significant impact. Almost all organizations rely on It is, therefore, in the interest of the third parties/ vendors to help them organizations to discover as much conduct their business information as possible about their Each of these associates can have vendors a significant impact on y g p your The focus should be on validation of business details provided as well discovery of While the positive impact is often any undisclosed information expected, expected the potential negative It is also important that the right impact, normally ignored at the time of selection of a vendor can partners are brought on board to have greater significance h t i ifi assist on the collation and validation of this information 27July2012 ParagDeodhar 13
MIS & DATA ANALYTICS MIS&DATAANALYTICS BIG DATA- 80% unstructured emails / spreadsheets & other docs Red Flags can be visible in routine MIS as well: Increasedrevenueswithouta Unusualincreasesinincomeorincome correspondingincreaseincashflow, inexcessofindustrypeers especiallyovertime i ll i Significantunexplainedincreasesin Significant,unusualorhighlycomplex fixedassets transactions,particularlythosethatare Recurringnegativecashflowsfrom closedneartheendofafinancial operationswhilereportingearningsand operations while reporting earnings and reportingperiod earningsgrowth Unusualgrowthinthenumberofdays Allowancesforsalesreturns,warranty salesinreceivables claims,etc.,thatareshrinkingin Strongrevenuegrowthwhenpeer St th h percentagetermsorareotherwiseout t t th i t companiesareexperiencingweaksales oflinewiththoseofindustrypeers Recurringnegativecashflowsfrom Assets,liabilities,revenuesorexpenses p p g g operationswhilereportingearningsand g basedonsignificantestimatesthat earningsgrowth involvesubjectivejudgmentsor Significantdeclinesincustomerdemand uncertaintiesthataredifficultto andincreasingbusinessfailuresineither corroborate theindustryortheoveralleconomy the industry or the overall economy 27July2012 ParagDeodhar 14
PREDICTIVE MODELING PREDICTIVEMODELING Assimilate data from multiple Accepting, prioritizing Analysis and sources and apply predictive and distributing alerts visualization tool for uncovering previously analytics to accurately assess & determine if it is unknown relationships transactions, activities and actual fraud or among accounts or customer state in real time suspicious transaction entities 27July2012 ParagDeodhar 15
DIGITAL SURVEILLANCE DIGITALSURVEILLANCE Most frauds leave a trail on the system Mostfraudsleaveatrailonthesystem emails,internetaccess,accesscontrollogsetc DataLeakageisamajorchallenge Tools are available to: Toolsareavailableto: Logevents Scanlogsforsuspiciouseventsandalert Correlatesuspiciouseventsacrosssystemsand p y network Digital forensics Digitalforensics 27July2012 ParagDeodhar 16
ETHICAL DILEMMA ETHICALDILEMMA Align the third party code of conduct to the employee code of conduct Discrimination and harassment Demonstrate Wages and benefits through actions Work h W k hours and over ti d time Health and safety Any activity that you engage in with Labor forced labor / child labor / customers will be fair and defensible abuse of employees NO EXCEPTIONS Compliance to environmental laws Approach your big and small customers/ and adherence to sustainable suppliers the same way. business Let all your current and potential customers/ suppliers k t / li know th t everyone that Anti-bribery and corruption policies gets a fair chance Transparency in process Take a stand against customer who g behave in a less than ethical manner Be willing to miss revenue or earnings Key issues to targets if things are not done the right wayy address 27July2012 ParagDeodhar 17
THANK YOU THANKYOU 27July2012 ParagDeodhar 18

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Scouting For Fraud - Parag Deodhar

  • 1. SCOUTINGFORFRAUD SCOUTING FOR FRAUD IN YOUR BUSINESS INYOURBUSINESS SeminaronFraudasaStrategicRisk g WhatCFOsandCEOsdontnotice,butshould ParagDeodhar Parag Deodhar BANGALORE 27July2012
  • 2. FRAUD RISK FRAUDRISK Fraud is now so common that its occurrence is Fraudisnowsocommonthatitsoccurrenceis nolongerremarkable,onlyitsscale. If f d Iffraudwereadisease,almostallcompanies di l t ll i wouldhaveaslighttemperature Whats@Risk? Thetypicalorganizationlosesanestimated5%of yp g itsannualrevenuestofraud Regulatorysanctions g y Reputation/Brandimage Company closure! Companyclosure! 27July2012 ParagDeodhar 2
  • 3. TYPES OF OCCUPATIONAL FRAUD TYPESOFOCCUPATIONALFRAUD SOURCE:ACFE2012GLOBALFRAUDSTUDY 87% 33% 8% 27July2012 ParagDeodhar 3
  • 4. ASSET MISAPPROPRIATION SCHEMES ASSETMISAPPROPRIATIONSCHEMES Category Description Examples SCHEMES INVOLVING THEFT OF CASH RECEIPTS Skimming Cash is stolen from an organization before it is recorded on Employee accepts payment from a customer but does not the organizations books and records record the sale and instead pockets the money Cash Larceny Cash is stolen from an organization after it has been Employee steals cash and checks from daily receipts before recorded on the organizations books and records they can be deposited in the bank SCHEMES INVOLVING FRAUDULENT DISBURSEMENTS OF CASH Billing Person causes his or her employer to issue a payment by Employee creates a shell company and bills employer for submitting invoices for fictitious goods or services, inflated services not actually rendered invoices or invoices for personal purchases Employee purchases personal items and submits an invoice to employer for payment Expense An employee makes a claim for reimbursement of fictitious Employee files fraudulent expense report, claiming personal Reimbursements or inflated business expenses travel, nonexistent meals, etc. Check Tampering A person steals his or her employers funds by intercepting, Employee steals blank company checks and makes them out to forging or altering a check drawn on one of the g g g himself or an accomplice p organizations bank accounts Employee steals an outgoing check to a vendor and deposits it into his or her own bank account Payroll An employee causes his or her employer to issue a Employee claims overtime for hours not worked payment by making false claims for compensation Employee adds ghost employees to the payroll Cash Register C hR i t An A employee makes f l entries on a cash register t l k false t i h i t to Employee f d l tl voids a sale on hi or h cash register E l fraudulently id l his her h i t Disbursements conceal the fraudulent removal of cash and steals the cash OTHER ASSET MISAPPROPRIATION SCHEMES Misappropriation of The perpetrator misappropriates cash kept on hand at the Employee steals cash from a company vault Cash on Hand victim organizations premises organization s Non-Cash An employee steals or misuses non-cash assets of the Employee steals inventory from a warehouse or storeroom Misappropriations victim organization Employee steals or misuses confidential customer financial information 27July2012 ParagDeodhar 4
  • 5. PROFILE OF A FRAUDSTER PROFILEOFAFRAUDSTER SOURCE:ACFE2012GLOBALFRAUDSTUDY 27July2012 ParagDeodhar 5
  • 6. HOW ARE FRAUDS DETECTED HOWAREFRAUDSDETECTED SOURCE:ACFE2012GLOBALFRAUDSTUDY 27July2012 ParagDeodhar 6
  • 7. DETECTION METHODS DETECTIONMETHODS SOURCE:ACFE2012GLOBALFRAUDSTUDY 27July2012 ParagDeodhar 7
  • 8. PROACTIVE MEASURES PROACTIVEMEASURES 27July2012 ParagDeodhar 8
  • 9. WHISTLEBLOWER MECHANISM WHISTLE BLOWERMECHANISM KEY ELEMENTS FOR SUCCESS Who Who decides Wh d id receives the the actions? High complaints? Availability Anonymous & &Secure Accessibility Who Who takes investigates? i ti t ? actions? ti ? Independent Credible& & Impartial transparent Who reports? 27July2012 ParagDeodhar 9
  • 10. RED FLAGS FLAGS SOURCE:ACFE2012GLOBALFRAUDSTUDY 87%Firsttimers 87% First timers 35%Casesneverreported topolice t li 27July2012 ParagDeodhar 49%Norecovery 10
  • 11. BEHAVIORAL RED FLAGS BEHAVIORALREDFLAGS Excessive Family/Peer ExcessiveFamily/Peer Irritability, Suspiciousness Irritability,Suspiciousness PressureforSuccess orDefensiveness ComplainedAboutLack WheelerDealerAttitude ofAuthority f A th it Divorce/FamilyProblems PastLegalProblems ControlIssues, Excessive Pressure from ExcessivePressurefrom UnwillingnesstoShare Unwillingness to Share WithinOrganization Duties RefusaltoTakeVacations UnusuallyClose y ComplainedAbout Associationwith InadequatePay Vendor/Customer PastEmploymentRelated Financial Difficulties / FinancialDifficulties/ Problems HighDebt Addiction Problems AddictionProblems Living Beyond Means LivingBeyondMeans 27July2012 ParagDeodhar 11
  • 12. FRAUD DETECTION FRAUDDETECTION Employee Background Checks EmployeeBackgroundChecks Notjustduringrecruitment Mystery Shopping MysteryShopping MandatoryLeave/JobRotation,Transfers Anti BriberyclauseinContracts AntiBribery clause in Contracts ReviewofProcessesandControls Dedicatedteamforfrauddetection/ Dedicated team for fraud detection / investigation Clear reporting lines & Segregation of duties Clearreportinglines&Segregationofduties Electronic/Digitalsurveillance Over riding Controls!!! OverridingControls!!! 27July2012 ParagDeodhar 12
  • 13. VENDOR / PARTNER DUE DILIGENCE VENDOR/PARTNERDUEDILIGENCE Organizations often operate in unfamiliar territories or with little knowledge of the background, reputation or ability to conduct business of their business associates and service providers. Many a times the track record and reputation can be overlooked, while focusing only on the potential gains. While positive impact is often expected, the potential negative impact from these associates normally ignored at the time of selection which might have significant impact. Almost all organizations rely on It is, therefore, in the interest of the third parties/ vendors to help them organizations to discover as much conduct their business information as possible about their Each of these associates can have vendors a significant impact on y g p your The focus should be on validation of business details provided as well discovery of While the positive impact is often any undisclosed information expected, expected the potential negative It is also important that the right impact, normally ignored at the time of selection of a vendor can partners are brought on board to have greater significance h t i ifi assist on the collation and validation of this information 27July2012 ParagDeodhar 13
  • 14. MIS & DATA ANALYTICS MIS&DATAANALYTICS BIG DATA- 80% unstructured emails / spreadsheets & other docs Red Flags can be visible in routine MIS as well: Increasedrevenueswithouta Unusualincreasesinincomeorincome correspondingincreaseincashflow, inexcessofindustrypeers especiallyovertime i ll i Significantunexplainedincreasesin Significant,unusualorhighlycomplex fixedassets transactions,particularlythosethatare Recurringnegativecashflowsfrom closedneartheendofafinancial operationswhilereportingearningsand operations while reporting earnings and reportingperiod earningsgrowth Unusualgrowthinthenumberofdays Allowancesforsalesreturns,warranty salesinreceivables claims,etc.,thatareshrinkingin Strongrevenuegrowthwhenpeer St th h percentagetermsorareotherwiseout t t th i t companiesareexperiencingweaksales oflinewiththoseofindustrypeers Recurringnegativecashflowsfrom Assets,liabilities,revenuesorexpenses p p g g operationswhilereportingearningsand g basedonsignificantestimatesthat earningsgrowth involvesubjectivejudgmentsor Significantdeclinesincustomerdemand uncertaintiesthataredifficultto andincreasingbusinessfailuresineither corroborate theindustryortheoveralleconomy the industry or the overall economy 27July2012 ParagDeodhar 14
  • 15. PREDICTIVE MODELING PREDICTIVEMODELING Assimilate data from multiple Accepting, prioritizing Analysis and sources and apply predictive and distributing alerts visualization tool for uncovering previously analytics to accurately assess & determine if it is unknown relationships transactions, activities and actual fraud or among accounts or customer state in real time suspicious transaction entities 27July2012 ParagDeodhar 15
  • 16. DIGITAL SURVEILLANCE DIGITALSURVEILLANCE Most frauds leave a trail on the system Mostfraudsleaveatrailonthesystem emails,internetaccess,accesscontrollogsetc DataLeakageisamajorchallenge Tools are available to: Toolsareavailableto: Logevents Scanlogsforsuspiciouseventsandalert Correlatesuspiciouseventsacrosssystemsand p y network Digital forensics Digitalforensics 27July2012 ParagDeodhar 16
  • 17. ETHICAL DILEMMA ETHICALDILEMMA Align the third party code of conduct to the employee code of conduct Discrimination and harassment Demonstrate Wages and benefits through actions Work h W k hours and over ti d time Health and safety Any activity that you engage in with Labor forced labor / child labor / customers will be fair and defensible abuse of employees NO EXCEPTIONS Compliance to environmental laws Approach your big and small customers/ and adherence to sustainable suppliers the same way. business Let all your current and potential customers/ suppliers k t / li know th t everyone that Anti-bribery and corruption policies gets a fair chance Transparency in process Take a stand against customer who g behave in a less than ethical manner Be willing to miss revenue or earnings Key issues to targets if things are not done the right wayy address 27July2012 ParagDeodhar 17
  • 18. THANK YOU THANKYOU 27July2012 ParagDeodhar 18