Fraud Risk Management - IIA Singapore Conferenec 2013

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1 Fraud Risk Management By Tommy Seah ACFE Regent Emeritus tommyseah@gmail.com

Important Disclaimer :

Important Disclaimer A speaker’s opinions are just that – opinions Not offering legal advice – just discussing principles Any questions from audience welcome, but any replies are general comments only and should not be construed as legal advice 2

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3 What is FRAUD ? ICFE CONSULTANCY GROUP PTE LTD International Cybercrime & Forensics Examiners www-icfe-cg.com

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4 Principles of Fraud FIVE (5) ELEMENTS OF FRAUD Mens Rea - Criminal Intent Actus Reus - Criminal Action Carelessness or Innocence on the part of the victim An active participation by the victim as a result of the carelessness or innocence The transaction is concealed to prevent detection.

The Fraud Triangle:

The Fraud Triangle Perceived Pressure Rationalization Perceived Opportunity Auditor’s Domain Fraud Risk Management Fraud Risk Management 5

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14 Fraud Classification System 6

Internal Controls:

Internal Controls 7

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8               The Trinity of Controls Internal Audit CPA(CIA) CSI, CISA Compliance CPA,LLB, CSI Risk Management CPA,CFA CSI Financial Control The Fraud Examiner CFE The Certified System Investigator CSI The Existing model

Limitations of Internal Control:

Limitations of Internal Control Errors may arise from misunderstandings of instructions, mistakes of judgment, fatigue, etc. Controls that depend on the segregation of duties may be circumvented by collusion Management may override the structure Compliance may deteriorate over time 9

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10 What is Risk ? B E C D A Operational Risk Liquidity Risk Credit Risk Reputational Risk Market Risk F What happened to

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Fraud Control Principle (the correct way in understanding anything is to understand the principles involved) 11

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12 No organization is immune to fraud – the next step is to Acknowledge the need for fraud risk management. 12

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Copyright (c)2006 13 Regardless of these variables, any Fraud Risk Management model should aim to achieve one, or all, of the five primary objectives: 13

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Copyright (c)2006 14 The first primary objective: _ Prevention 14

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Copyright (c)2006 15 The second primary objective: _ Deterrence 15

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Copyright (c)2006 16 The third primary objectives: _ Disruption 16

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Copyright (c)2006 17 The fourth primary objective: _ Identification 17

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Copyright (c)2006 18 The fifth primary objective: _ Civil action/criminal prosecution 18

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Copyright (c)2006 19 How to achieve the FIVE Objectives ? We need direction………. 19

Use the Compass to get the right direction in detecting/preventing Fraud :

Use the Compass to get the right direction in detecting/preventing Fraud 20

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The eight points on the compass are: 1. The fraud environment 7 Compass for Fraud Detection 1 2 3 4 5 6 8 2. The types of fraud 3. The execution of the fraud 7. Accomplice identification 4. eDiscovery 5. Preliminary evidence evaluation 6. Evidence collection 8. Undiscovered fraud 21

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Determination by Area Determination by Scheme Determination by Person The approach……. 22

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23               Collusion between employees and third parties represents a growing number PROCUREMENT frauds in SINGAPORE .

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24               What type of individual commits FRAUD? It is not limited to any one type of person. Human element in all fraud ICFE CONSULTANCY GROUP PTE LTD International Cybercrime & Forensics Examiners www-icfe-cg.com

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25 Conclusion: Fraud Perpetrators Look Exactly Like Us! Optimistic High self-esteem Achieving Family harmony Socially conforming Self control Kind Sympathetic

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26 Given the right circumstances, almost everyone can rationalize that it is OK to commit fraud..   26 Profile of A Person Who Commits Fraud

“Red Flags” :

27 “ Red Flags ” Text Alcohol Gambling Drugs Sex Profile of A Person Who Commits Fraud Given the “right circumstances” , almost everyone can rationalize that it is OK to commit fraud..

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28 The key, in any effective anti-fraud program, is to strike the right balance between oversight and trust

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The 4 Investigative methods 29 Proving wrongdoing

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Covert Investigative Methods Surveillance and covert operations Invigilation Seizing and searching digital evidence on computers Physical evidence Concealment Investigative Methods Document examination Digital Audits Electronic searches Physical asset count Conversion investigative Methods Searching public records Online resources The net worth method Inquiry Investigative Methods Interviews/Profiling and interrogation Honesty testing 30

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31 The problem with proving intent is that it requires determining a person’s state of mind. As a result, intent usually is proven circumstantially .

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32 Some of the ways we can help prove intent by circumstantial evidence include: Motive : The motive for fraud is a strong circumstantial element. Opportunity : Management typically has the opportunity to circumvent or override controls over financial reporting.

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33 Some of the ways we can help prove intent by circumstantial evidence include: Repetitive acts : Should the financial statements contain a single false journal entry, a fraudster might be able to claim it was an error.

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34 Some of the ways we can help prove intent by circumstantial evidence include: Witness statements : Circumstantial evidence rarely can be sufficient without the statements of witnesses.

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For those new to evidence in general, inculpatory evidence is that which supports a charge or accusation of wrongdoing. Inculpatory Evidence 35

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exculpatory evidence is that which would cast doubt or prove innocence. Exculpatory Evidence 36

Evidence used in Fraud Conviction: :

Evidence used in Fraud Conviction: “Tools and techniques to recover, preserve, and examine digital evidence on or transmitted by digital devices.” PLUS data recovery

Sources of Digital Evidence:

Sources of Digital Evidence Computers Email Digital images Documents Spreadsheets Chat logs Illegally copied software or other copyrighted material 39

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40               Thank you Contact Information: Tommy Seah CFE, CSI, FCPA,ACIB,MSID Regent Emeritus ACFE Board of Regents, Texas, USA www.cfe-in-practice.com tommyseah@rocketmail.com Phone : + (65) 9106 9872

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