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  

Karin  M.  Smith,  MBA,  SFO,  CFE  Heinfeld,  Meech  &  Co.,  P.C.  

602-­‐277-­‐9449  karins@heinfeldmeech.com  

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)

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Why Is Reliable Info Important to a Parent?

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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

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What is an Interview?

“A conversation with an agenda”

What’s the Agenda?

“to Gather Information”

Data is Raw Facts

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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.

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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?

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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?

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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

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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

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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

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Joey’s Tell

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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

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John Edwards says yes but shakes head no…

Verbal Behavior Symptoms 7%

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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

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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 karins@heinfeldmeech.com Daniel Porter, CFE Legislative Investigative Auditor Special Investigations Unit Comptroller of the Treasury State of Tennessee (615) 401-7905 daniel.porter.tn@gmail.com