Demystifying Procurement Fraud May 2014

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1 DEMYSTIFYING PROCUREMENT FRAUD By Tommy Seah CSI World Headquarters Chairperson ACFE Regent Emeritus

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2 DAY ONE     INTRODUCTION TO PURCHASING FRAUD • Are Procurement Officers the main perpetrators of fraud? • Popular misconceptions regarding Procurement Fraud • What really is Procurement Fraud? • How is Procurement Fraud different from Employee Misdemeanour • Circumstantial Evidence • Limitations of Internal Controls • Can strengthening Internal Controls actually prevent Procurement Fraud?

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3 DAY ONE AFTERNOON UNDERSTANDING AND SHAPING YOUR ORGANISATION • Understanding your organisation’s policies, codes and practices • Internal audit, Risk Management and Compliance role in Procurement • What the New Paradigm in dealing with fraud risk is and how it affects procurement CASE DISCUSSION ON KICKBACKS • Collusion between employees and third parties • The direction to go in handling allegation of corruption

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4 DAY ONE AFTERNOON UNDERSTANDING AND SHAPING YOUR ORGANISATION Conflict of Interest : • In what order would you perform the suggested investigative tasks? • What would each of you recommend to be done to investigate the rumours of “someone senior” receiving kickbacks from vendors?

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5 The procurement cycle The Six Stages

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6

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7 What is FRAUD ?

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8 Top Singapore Police Officer (CNB) & IT Vendor in Procurement Fraud case He was charged in June last year (2012) with four counts of obtaining sexual favours from Ms Cecilia Sue, who was a sales manager for two IT vendors.

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9 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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Despite acknowledging that there was indeed a conflict of interest , Shanmugam stated that the presence of conflict does not automatically imply that there was corruption . He said he was satisfied that there was neither corrupt element or guilty knowledge on Ng's part in relation to his charges, adding that in his view, throughout the time where the two IT contracts were approved and processed, Ng possessed "no ulterior motive, let alone a corrupt intent ". 10

The Fraud Triangle.:

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

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14 What REALLY is Procurement FRAUD Corruption Asset Misappropriation Fraudulent Statements

Common Procurement Fraud Fraud in the bidding process :

13 Common Procurement Fraud Fraud in the bidding process

Common Procurement Fraud Unjustified sole source :

14 Common Procurement Fraud Unjustified sole source

Common Procurement Fraud Split Purchase :

15 Common Procurement Fraud Split Purchase

Common Procurement Fraud Change Purchase Order Abuse :

16 Common Procurement Fraud Change Purchase Order Abuse

Common Procurement Fraud Cost Mischarging and Defective Pricing :

17 Common Procurement Fraud Cost Mischarging and Defective Pricing

Common Procurement Fraud False Invoices and Phantom Vendors :

18 Common Procurement Fraud False Invoices and Phantom Vendors

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19               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

Internal Controls:

Internal Controls Internal controls are a system consisting of specific policies and procedures designed to provide management with reasonable assurance that the goals and objectives it believes important to the entity will be met.

Can strengthening Internal Controls actually prevent Procurement Fraud?:

Can strengthening Internal Controls actually prevent Procurement Fraud? S.E.A.T.A. (Systems Evaluation Approach Towards Audit) 21

Why have Internal Controls?:

Why have Internal Controls? Promote operational efficiency and effectiveness Provide reliable financial information Safeguard assets and records Encourage adherence to prescribed policies Comply with regulatory agencies

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The material on this presentation is Copyright 23 SLA fraud case: Koh Seah Wee slapped with additional 70 charges Koh Seah Wee was slapped with an additional 70 charges over his role in the Singapore Land Authority fraud case. FORMER senior government executive Koh Seah Wee , facing multiple charges of defrauding the Singapore Land Authority (SLA) of more than of $12 million, was slapped with 70 more cheating charges in the Subordinate Courts this morning. ………… Koh, 40, now faces a total of 372 charges altogether and currently in remand. …..

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The material on this presentation is Copyright 24 Meanwhile the Supreme Court announced an Independent Review Panel chaired by Justice Quentin Loh and comprising officers from two government departments has been set up to review the Supreme Court's procurement processes. It will also review internal controls and make recommendations

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The material on this presentation is Copyright 25 SI A Scandal: How $35 million was stolen over 13 years The SIA case had all the hallmarks of a typical corporate fraud: a trusted, long-serving employee; superiors who failed to carry out proper checks; loop-holes in the system; and accidental discovery. In all, Teo Cheng Kiat, or Henry as he was also known, siphoned almost $35 million, a staggering amount . 'No matter how much you trust your employees, it is always important that internal control systems are implemented in the company to prevent and detect such fraudulent activities ,' said James Teo, who led the Commercial Affairs Department (CAD) probe into the case.

Former Citigroup Accountant Accused of Embezzling $19.2 Million :

Former Citigroup Accountant Accused of Embezzling $19.2 Million The material on this presentation is Copyright 26 …….It also raises new questions about Citi’s internal controls, nearly two years after regulators forced it to strengthen its risk management and compliance practices upon losing tens of billions of dollars during the financial crisis.

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Financial Reporting Promotes integrity of data used in making business decisions Assists in fraud prevention and detection through the creation of an auditable trail of evidence Laws and Regulations Helps maintain compliance with laws and regulations through periodic monitoring Operations Promotes efficiency and effectiveness of operations through standardized processes Ensures the safeguarding of assets through control activities Internal Controls

Inherent Limitations of Internal Control:

Inherent 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

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There should be a system of adequate internal controls Many of the well-known corporate fraud cases have involved lapses in or failures to adhere to internal audit controls (e.g. in the cases of Asia Pacific Breweries and Gaelic Inns). The material on this presentation is Copyright 29 In every instances of fraud, the same old sentiments is regurgitated by the Board………………

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In the instance of the NKF, it was said that they had a three-member internal audit team which reported to the CEO directly, and an audit committee that at one time did not meet for three years because the CEO would not support its recommendations. (An extract from an SID article) So, who is the REAL Boss? The material on this presentation is Copyright 30

Limitations of Internal Control:

31 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

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32 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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33               The Trinity of Controls Internal Audit Compliance Risk Management Financial Control The NEW model FRM Preventive FRM Remedial

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Fraud Control Principle (the correct way in understanding anything is to understand the principles involved) 34

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35 If an organization accepts that it is exposed to fraud – and no organization is immune to fraud – the next step is to implement fraud risk management (FRM). 35

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36 Regardless of these variables, any Fraud Risk Management model should aim to achieve one, or all, of the five primary objectives: 36

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37 The first primary objective: _ Prevention 37

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Copyright (c)2006 38 The second primary objective: _ Deterrence 38

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Copyright (c)2006 39 The third primary objectives: _ Disruption 39

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Copyright (c)2006 40 The fourth primary objective: _ Identification 40

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Copyright (c)2006 41 The fifth primary objective: _ Civil action/criminal prosecution 41

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Copyright (c)2006 42 The five primary objectives: _ Prevention _ Deterrence _ Disruption – _ Identification _ Civil action/criminal prosecution 42

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Copyright (c)2006 43 How to achieve the FIVE Objectives ? We need direction………. 43

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

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

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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 45 8. Undiscovered Fraud

1 - CREATE AN APPROVED VENDOR LIST. Companies have to have a system to verify each vendor to make sure the company exists. Once that is done, that vendor is put into the 'approved vendor list’. :

1 - CREATE AN APPROVED VENDOR LIST. Companies have to have a system to verify each vendor to make sure the company exists. Once that is done, that vendor is put into the 'approved vendor list’. 46

2 - SEPARATE JOB RESPONSIBILITIES. One of the underlying enablers of procurement fraud is a lack of separation of job responsibilities :

2 - SEPARATE JOB RESPONSIBILITIES. One of the underlying enablers of procurement fraud is a lack of separation of job responsibilities 47

3 - LOOK OUT FOR CLIQUES.:

3 - LOOK OUT FOR CLIQUES. 48

4 - ESTABLISH A HOT LINE FOR WHISTLE-BLOWERS. Sarbanes-Oxley dictates that companies establish confidential reporting mechanisms for employees.:

4 - ESTABLISH A HOT LINE FOR WHISTLE-BLOWERS. Sarbanes-Oxley dictates that companies establish confidential reporting mechanisms for employees. 49

5 - DO THE “PARKING-LOT” TEST:

5 - DO THE “PARKING-LOT” TEST 50

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51 The Five-Step Approach to Combat Fraud: Know Your Exposure Risks Know the Symptoms Be Alert For Symptoms Build Audit Programs To Look For Symptoms Follow Through On All Symptoms Observed

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52 DAY TWO MORNING GREASE MONEY AND KICKBACKS CASE STUDY Where to find help in investigating Procurement Fraud Understanding the Psychology of Fraud How to tell if someone is being dishonest Some interviewing strategy How to ask question in an interview How to overcome resistance How to secure a confession

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53 DAY TWO AFTERNOON THE 5 CRITICAL ELEMENTS IN FRAUD RISK MANAGEMENT POLICY Preventing – Is strengthening internal controls the only option to prevent fraud Detection – What can be done to detect fraud without causing any disruption to business. Disruption – What initial action must be taken before disruption of a fraud in progress Identification – Why is it important to identify the perpetrators even after the fraud has occurred Civil Action / Criminal Prosecution Inculpatory and Exculpatory evidence to be used in Court Q&A Session Personalised photo taking  

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Determination by Area Determination by Scheme Determination by Person The approach……. 54

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55               What type of individual commits FRAUD?   Understanding the Psychology of Fraud Human element in all fraud

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

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57               Profile of A Person Who Commits Fraud Given the right circumstances, almost everyone can rationalize that it is OK to commit fraud..   57

“Red Flags” :

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

The “Red Flags” of fraud :

The “Red Flags” of fraud The Gift Bearer Corrupt Players Totally In-Charge Operator

The “Red Flags” :

The “ Red Flags ” Types of People Who Take Payoffs or Embezzles Individual who takes a payoff or embezzles possesses certain personality traits or displays the results of ill-gotten gains in different ways. Big Spender Gift Taker Odd Couple Rule Breaker Unappreciated Middle Aged Crazy

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61 Gifts and entertainment practices

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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 62 Proving wrongdoing in purchasing

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Preparation Characteristics of Good Interview {No quickee} Characteristics of Good Interviewer {people person} {no bias} {no threat}

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Question Typology Introductory Questions Informational Questions Closing Questions Assessment Questions Admission-Seeking Questions

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Legal Considerations Legal Authority to Conduct Interviews False Imprisonment Use of Deception { sometimes can be employed legally} Recording Interviews { consent }

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Elements of Conversations Expression Persuasion Therapy ( a release, Catharsis ) Ritual Information Exchange

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Inhibitors of Communication Competing Demands for Time Ego Threat (Threat to self-esteem) Repression Disapproval Loss of Status Etiquette Trauma Forgetting

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Inhibitors of Communication Chronological Confusion Inferential Confusion (Induction & Deduction) Unconscious behavior (custom/habit – circular reaction – acute emotional crisis)

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Facilitators of Communication Fulfilling Expectations Recognition Altruistic Appeals Sympathetic Understanding New Experience Catharsis Need for Meaning Extrinsic Rewards

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Interview Mechanics Note-Taking Maintain Eye Contact Opinions Do Not Telegraph Emotions Writing Down Questions (Do NOT) Documenting Results (immediately after interview) Privacy

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TYPES OF QUESTIONS Introductory questions (to draw baseline) Clue : PROXEMICS CHRONEMICS KINETICS PARALINGUISTICS (volume, pitch, voice quality)

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TYPES OF QUESTIONS Informational questions (informational gathering) Clue : always asked from General to Specifics

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TYPES OF QUESTIONS Informational questions (informational gathering) QUESTIONING TECHNIQUES Open Question : Please tell me about the operation of your department?

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TYPES OF QUESTIONS Informational questions (informational gathering) QUESTIONING TECHNIQUES Closed Question : Do you work here?

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TYPES OF QUESTIONS Informational questions (informational gathering) QUESTIONING TECHNIQUES Leading Question : {questions that contain suggested answer} So there has been no changes in the operation of your department since last year?

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TYPES OF QUESTIONS Questions to AVOID Double-Negative Questions Didn’t you suspect that something wasn’t right ?

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TYPES OF QUESTIONS Questions to AVOID Complex Questions What are your duties here and how long have you been employed ?

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TYPES OF QUESTIONS Questions to establish mood Attitude Questions How are you doing this morning, Ms. Wong?

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TYPES OF QUESTIONS Controlled Answer Techniques Stimulate Desired Answer I understand you were present when internal controls were developed; would you please describe how they were constructed?

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TYPES OF QUESTIONS Free Narratives Objective is to get a quick resume of what is know about a matter {While it is useful, digression must be limited}

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TYPES OF QUESTIONS Closing Questions Always close on POSITIVE NOTE {to reaffirm FACTS, gather additional FACTS, CONCLUDE the interview}

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TYPES OF QUESTIONS Assessment Questions When the interviewer believes that the respondent’s answer is deceptive, he should begin asking ASSESSMENT questions

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TYPES OF QUESTIONS Assessment Questions are designed to get a VERBAL or Non-Verbal reaction from the respondent.

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TYPES OF QUESTIONS Assessing Reaction Norming or Calibrating Physiology of Deception

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TYPES OF QUESTIONS Assessing Reaction Norming or Calibrating Physiology of Deception {Everyone lies – to Receive Rewards or Avoid Punishment}

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VERBAL Clues Changes in Speech Patterns Repetition of the question Comments regarding interview Selective Memory Making excuses Emphasis on certain words Oaths Character testimony Answering with a question Overuse of respect

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VERBAL Clues Increasing weaker denials Failure to deny Avoidance of emotive words Refusal to implicate other suspects Tolerant attitudes Reluctance to terminate interview Feigned unconcern

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NON-VERBAL Clues FULL-BODY motions (lean back) ANATOMICAL physical responses (heart rate) ILLUSTRATORS (hand) INTERRUPT THE FLOW OF SPEECH (mouth close tightly) HANDS OVER MOUTH MANIPULATORS FLEEING POSITION CROSSING THE ARM REACTION TO EVIDENCE

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Methodology of ASSESSMENT QUESTIONS -should proceed logically from the least to the most sensitive

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Admission-Seeking Questions s hould be used only Reasonable probability of guilt/commission All other reasonable investigative steps have been completed Interviewer can control the place, time and subject of the interview

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Admission-Seeking Questions 3 purpose Distinguish innocent from guilty Obtain a valid confession Convince the confessor to sign a written statement acknowledging the facts

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OVERCOMING RESISTANCE RATIONALISATION

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RATIONALISATION Unfair Treatment Inadequate recognition Financial problems Aberration of conduct Family problems Stress, Drugs, Alcohol Revenge Depersonalize the victim Minor moral infraction Genuine Diffuse alibis

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Written Confession Once the verbal confession is obtained, it should be reduced to short and concise written statement.

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Written Confession Criteria-based statement analysis Parts of Speech Pronouns Possessive pronouns Verbs Balance of statement (one third)

Computer Forensics vs Electronic Discovery:

Computer Forensics vs Electronic Discovery Computer Forensics Investigate & detailed analysis Typically targets selected hard drives or PCs Searching for “deleted” information Determine who, what, & when Re-creation of time critical events Reporting & expert testimony Breaking of passwords/encryption May include backup tapes Includes Meta-data Electronic Discovery Gathering, searching, filtering, and producing large amounts information for review Data is accessed, but not analyzed Active and archived data Normally does not include deleted, discarded, or hidden data Backup tapes, email servers, network servers May or may not include Meta-data

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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

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exculpatory evidence is that which would cast doubt or prove innocence. In the computer forensic world, perhaps the best known example of exculpatory evidence is a virus which downloads content, or rootkit allowing surreptitious access by a third party to a computer. Exculpatory evidence

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99               Thank you Contact Information: Tommy Seah CFE, CSI, FCPA, NSID,ACIB, FAIA Regent Emeritus ACFE Board of Regents, Texas, USA www.cfe-in-practice.com tommy@cfe-in-practice.com Emergency email : tommyseah@rocketmail.com Singapore Phone : + (65) 91069872

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