Making a case for Fraud Risk Management- ISACA 2014 - TOMMY SEAH

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Fraud Risk assessment is an integral part of Fraud Risk Management. The need for effective fraud risk management strategies in any organisation. All organizations are subject to fraud risks. Large frauds have led to the downfall of entire organizations, massive investment losses, significant legal costs, incarceration of key individuals, and erosion of confidence in capital markets. Publicized fraudulent behaviour by key executives has negatively impacted the reputations, brands, and images of many organizations around the globe. Fraud can be defined as ‘dishonestly obtaining a benefit by deception or other means’. Fraud risk management refers to the integrated set of activities to prevent, detect, investigate and respond to fraud and to the supporting processes such as staff training and the prosecution and penalization of offenders.

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

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

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If you cannot prove it, it did not happen The problem in dealing with FRAUD ? The material on this presentation is Copyright 3

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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.

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By Channel NewsAsia , Updated: 09/01/2012 3 MHA senior officers issued warning letters for clerk’s fraud “Someone” forged over 90 documents to cheat the Ministry of Home Affairs over a four—year period (2007—2011). NOTE : Deputy Prime Minister and Home Affairs Minister Teo Chee Hean said MHA views the case extremely seriously, and has since tightened its procurement processes and strengthened internal controls and supervision. 5

The Fraud Triangle:

The Fraud Triangle Perceived Pressure Rationalization Perceived Opportunity Auditor’s Domain Fraud Risk Management Fraud Risk Management 6

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14 Fraud Classification System 7

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8               The Trinity of Controls Internal Audit Compliance Risk Management Financial Control Functional Roles for Good Corporate Governance FRM Preventive FRM Remedial

Internal Controls:

Internal Controls 9

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 10

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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

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Determination by Area Determination by Scheme Determination by Person The approach……. 20

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

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22               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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23 Conclusion: Fraud Perpetrators Look Exactly Like Us! Optimistic High self-esteem Achieving Family harmony Socially conforming Self control Kind Sympathetic

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24 Given the right circumstances, almost everyone can rationalize that it is OK to commit fraud..   24 Profile of A Person Who Commits Fraud

“Red Flags” :

25 “ 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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26 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 27 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 28

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29 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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30 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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31 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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32 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 33

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exculpatory evidence is that which would cast doubt or prove innocence. Exculpatory Evidence 34

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 37

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38               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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