UT System Administration General Compliance Training
Fall 2014
This training will take approximately 20 minutes to complete
Fraud Awareness Training
Objectives
What is occupational fraud
Common myths about fraud
Conditions for fraud
Behavioral red flags/warning signs of fraud
How frauds are detected
What your responsibilities are
What to do if you suspect fraud
What is occupational fraud?
Occupational fraud is defined as the use of one’s occupation for personal enrichment through the
deliberate misuse or misapplication of the employing organization’s resources or assets.
The Association of Certified Fraud Examiners (ACFE) 2014 Report to the Nations on Occupational Fraud and Abuse
(Report), used as a resource for this training, was based on a study of 1,483 cases of occupational fraud.
According to the ACFE 2014 Report, organizations lose 5% of their annual revenues to fraud. When applied to the estimated 2013 Gross World Product, this would translate to an estimated
$3.7 trillion in fraud losses.
Cost of Fraud?
Types of Fraud
The ACFE has broken down the schemes for committing occupational fraud into three primary categories.
Asset Misappropriation – 85%
Corruption – 37%
Financial Statement Fraud – 9%
Asset Misappropriation
Asset Misappropriation schemes are frauds in which the perpetrator steals or misuses an organization’s resources. Examples include:
Theft
Employee steals or misuses cash or non-cash assets (e.g. supplies, equipment) of the organization
Payroll fraud
Employee claims overtime for hours not worked
False Expense Reimbursements
Employee files fraudulent travel expense report claiming nonexistent meals, etc.
False invoicing
Employee creates a fictitious company and bills the employer for nonexistent goods or services
Corruption refers to schemes in which fraudsters use their influence in business transactions to
obtain a benefit for themselves or someone else contrary to their duty to their employer.
Bribes
Accepting illegal gratuities
Engaging in conflicts of interest
Extorting illegal payments from third parties
Corruption
Financial Statement Fraud involves the intentional misstatement or omission of material information from the organization’s financial reports which may include
Financial statements
Grants
Applications submitted which include financial information
Financial Statement Fraud
We don’t handle cash–there is nothing to steal
Audits will detect all frauds
All of my employees are trustworthy
Most people won’t commit fraud
Prosecuting fraud deters others
Most fraud goes undetected
Fraud is not material to the business
Common Myths About Fraud
Poor or weak internal control system (i.e., duties not properly segregated, assets not properly safeguarded)
Lack of monitoring of internal controls
Independent reconciliations are not performed or unreconciled items are not investigated
Documentation is not produced or kept or the
documentation is not an original source document
Transactions are executed without proper authorization
Employee relationship with a particular vendor is close and long term
Conditions That Facilitate Fraud
One employee “does it all” or an employee won’t take a vacation
Management or others can override procedures without documentation
Poor management supervision/oversight
High management or employee turnover
Low employee morale
Write-off of inventory with no attempt to determine its whereabouts
Frequent use of exclusive acquisition procurement contracts
Non-enforcement of the organization’s ethics code
Conditions That Facilitate Fraud
(continued)
Fraudsters often display certain behaviors or characteristics, known as red flags, that may serve as warning signs to coworkers, superiors, and other daily contacts.
The presence of these symptoms does not in and of itself signify that a fraud is occurring or will
occur in the future.
Behavioral Red Flags
Some red flags present during fraud schemes listed in the order of frequency:
Living beyond means
Financial difficulties
Wheeler-dealer attitude
Control issues, unwillingness to share duties
Divorce/family problems
Unusually close association with vendor
Behavioral Red Flags
(continued)
Addiction problems
Past legal problems
Past employment–related problems
Complaining about inadequate pay
Refusal to take vacations
Excessive pressure from within the organization
Instability in life circumstances
Excessive family/peer pressure for success
Complaining about lack of authority
Behavioral Red Flags
(continued)
Joe Smith has authority to approve vendors and amounts paid to them on contracts for goods
and services. Joe was approached by a dishonest vendor about an arrangement
whereby the vendor would send him phony or inflated invoices for materials or labor and Joe would approve the payment and then split the loot with the vendor.
What type of fraud is this?
Scenario 1
Answer: Corruption – Kickback Scheme
Kickbacks are undisclosed payments made by vendors to employees of purchasing companies.
The purpose of a kickback is usually to enlist the corrupt employee in an over-billing plot.
Analyzing trends in spending and understanding variances and irregularities can help detect
overpayments.
Corruption schemes are most often exposed through a tip.
Scenario 1
Sue Williams was approved to attend a two-day
conference in San Antonio. Fees for the conference, including the hotel accommodations, were paid in advance. Meals were included as part of the
conference fees.
Sue choose not to participate in the second day of the conference, but instead took a taxi to the outdoor
market for a day of shopping. When Sue submitted her expense report, she requested reimbursement for the related taxi fare and meals.
What type of fraud is this?
Scenario 2
Answer: Asset Misappropriation – Expense Reimbursement Scheme
All expense reports should be carefully reviewed and routine questions asked prior to authorizing reimbursement. In this case, inquiries about
the conference would be prudent. Expense reports should be accompanied by original receipts verifying that adequate evidence of travel and related expenses occurred.
Scenario 2
John Jones had been struggling to make his
mortgage and car payments since his wife lost her job. He had authority to approve invoices for
payment. He used his management authority to establish a shell vendor account, JJ Enterprises,
which never provided goods or services of any kind.
John used a mail drop address for the vendor
account where he could receive the checks for his own personal gain.
What type of fraud is this?
Scenario 3
Answer: Asset Misappropriation – Billing Scheme
Billing fraud is often perpetrated by deceitful
employees who have the ability to approve new vendor accounts. The fraudster then directs
falsified payments to that vendor account that he or she controls. Be alert to suspicious patterns of vendor payments, including those that are “just under the radar” in terms of required approvals, reporting, amounts, or other procedures. Strict controls over vendor account approvals might
Scenario 3
Confession IT Controls Notified by Law Enforcement Surveillance/Monitoring External Audit Document Examination Account Reconciliation By Accident Internal Audit Management Review Tip
0.8%
1.1%
2.2%
2.6%
3.0%
4.2%
6.6%
6.8%
14.1%
16.0%
42.2%
Detection Method
Initial Detection of Occupational Fraud
How Are Frauds Detected?
Management is responsible for establishing and maintaining an effective control system according to UTS118 – Statement of
Operating Policy Pertaining to Dishonest or Fraudulent Activities.
A well-designed internal control system should not be conducive to fraud.
The minimization of fraud, waste, and abuse is every employee’s responsibility.
What are your Responsibilities?
UTS131 – Protection from Retaliation for Reporting Suspected Wrongdoing (www.utsystem.edu/policy/policies/uts131.html) states that all UT System employees are required to report:
Illegal or fraudulent activity;
Financial misstatements, or accounting or auditing irregularities;
Conflicts of interests, or dishonest or unethical conduct;
Violations of the institution’s code of conduct; and
Violations of other laws, rules, or regulations.
Under UTS131, UT System will not tolerate any form of retaliation
against individuals providing information concerning fraud or suspected
Suspected Fraud
What are your Responsibilities?
Do not question or confront the person
Do not investigate the matter on your own
Work within your management chain of command
Follow the fraud policy
UTS118 – Statement of Operating Policy Pertaining to Dishonest or Fraudulent Activities
Suspected Fraud
What are your Responsibilities?
How to report fraud?
Talk with your supervisor
Contact the Chief Audit Executive at 512-499-4390
Contact the Director of Police at 512-499-4680
Contact the Systemwide Compliance Officer at 512- 499-4304
Call the Compliance Hotline at 1-877-217-2426, 24- hours a day, 365 days a year
Suspected Fraud
What are your Responsibilities?
UTS118 – Statement of Operating Policy Pertaining to Dishonest or Fraudulent Activities
www.utsystem.edu/policy/policies/uts118.html
UTS131 – Protection from Retaliation for Reporting Suspected Wrongdoing
www.utsystem.edu/policy/policies/uts131.html
Standards of Conduct Guide
www.utsystem.edu/systemcompliance/SOCcombined.pdf
Ask your supervisor
Ask the Chief Audit Executive
Where to Find out More
UT System Administration
