November 30 th 2012, San Francisco. 7:45 -8:15 amRegistration and Breakfast 8:15 -8:20 amWelcome and...

SF IIA Fall Seminar Internal Audit's Role

in the Changing Business Landscape

November 30th 2012, San Francisco

7:45 -8:15 am Registration and Breakfast

8:15 -8:20 am Welcome and Introductions

Ed Byers, (Deloitte),

Farhan Zahid, (Deloitte)

8:20 -9:00 am Emerging Hot Issues Security and Privacy – Husam Brohi, Michael Corey (PWC) Vendor Compliance – Byron Tatsumi, (KPMG)

09:00 -09:50 am Leveraging Data Analytics to Enhance Your Internal Audit Function Dawei Qu, (BlueShield of California), Dale Livezey (Deloitte)

9:50 -10:10 am BREAK

10:10 -11:30 am Enterprise Risk Management and Impact to Your Audit Plan

CAE Panel Discussion led by Shawn Kirshner (Accretive Solutions)

Agenda

11:30 -12:20 pm Risks in Social Media

Anna Tchernina, Willis Kao (Deloitte)

12:20 -1:20 pm GOURMET LUNCH (provided)

1:20 -2:10 pm Fraud Risk Management – The Things You Need To Know

Paul Ritchie, (Deloitte)

2:10 – 3:00 pm Top 10 IT Internal Audit Risks

Michael Juergens (Deloitte)

3:00 – 3:20 pm BREAK

3:20 – 4:40 pm Understanding Your Auditee – How to Communicate More Effectively

Group Setting

Howie Cumme (URS)

Ed Byers, (Deloitte)

Farhan Zahid (Deloitte)

Agenda

WelcomeSF IIA Fall Seminar

ChairEd Byers, (Deloitte)

Farhan Zahid, (Deloitte)

Logistics – Fire Exits and Restrooms

Breaks and Lunch

Phone calls

Questions and Answers

Rules of the Road

Emerging Hot Issues08:20 – 09:00

Various Presenters

08:20 – 08:40 Security and PrivacyHusam Brohi, PWCMichael Corey, PWC

08:40 – 09:00 Vendor ComplianceByron Tatsumi, KPMG

Emerging Hot Issues

Fortifying your defenses The role of internal audit in assuring data security and privacy

PwC

CEOs/Boards are no longer ignoring Information and Technology (I&T) Risks

I&T Risk is an enterprise-wide issue. Specific types of risks organizations are facing include:

• Connected IT infrastructure exists in an environment that is increasingly under threat against unauthorized access or disclosure of sensitive data and attacks originating from cyber-criminal groups and hackers.

• Increase in Privacy and Security regulatory mandates in recent years, as well as expected changes in upcoming years.

• Boards are no longer willing to accept the risk that technology can pose to the business.

• Growing demand by business leaders to understand how security integrates with privacy (“what” data is sensitive to the business) and security (“how” they protect the data deemed sensitive).

• Increase in threats and vulnerabilities to sensitive data and corporate assets.

• Businesses continue to struggle to maintain accountability to their stakeholders and establish effective strategies and standards for security risk management and privacy control activities.

9

PwC

Change and Complexity is Right Around the CornerSecurity and Privacy Hot Topics: Balancing Business Enablers vs Business Risks

10

Organizations looking to improve privacy management in the event of a breach have to continually plan and prepare.

Organizations in all industries are under increased scrutiny by regulatory governance bodies.

While risks associated with third parties and cloud computing continue to increase, many companies are less prepared to defend their data.

Privacy and Data Loss Prevention

Regulatory Compliance

Third Parties and Cloud Computing

Companies need to stay informed about the constantly changing threat environment, processes to identify potential vulnerabilities, and processes to resolve potential exposures.

Mobile platforms, social media, and accelerated product life cycles are just the latest contributors to risk of an enterprise.

The cyber threat landscape continues to yield an increasingly sophisticated underworld of criminals. Companies need to remain prepared for such cyber crises.

Mobility and Social Media

Technical threats and vulnerabilities

Cyber Crime

PwC

Stakeholders want focus in all critical risk areasRisk areas in which stakeholders and CAEs want/plan to add IA capabilities

11

Government spending and taxation

Energy and commodity costs

Commercial market shifts

Competition

Mergers, acquisitions and JVs

New product introductions

Economic uncertainty

Large program risk

Financal markets

Regulations and government policies

Reputation and brand

Talent and labor

Business continuity

Fraud and ethics

Data privacy and security

11%

14%

10%

10%

26%

29%

23%

29%

22%

32%

21%

27%

22%

31%

46%

7%

12%

10%

12%

27%

23%

21%

33%

24%

34%

22%

24%

32%

47%

52%

CAEs

Stakeholders

PwC

Acting today to protect data: The critical role ofinternal audit

12

What the audit committee should expect of internal audit

In the risk assessment report that it presents to the audit committee, internal audit should highlight the organization’s significant data security and privacy risks, including any new risks. Further, it should identify weaknesses in policies and controls.

Because the nature of information security risks is evolving continuously, internal audit functions need to stay ahead of the threat curve. stay plugged in to emerging security threats, and practices for protecting against them.

Internal audit’s role in ensuring that information security threats are properly considered becomes especially important when a company is ready to roll out a new business process, product or information system.

Internal Audit must also keep its ear to the ground and move quickly to conduct special audits for new information security threats, which some executives consider as important as regularly scheduled audits

1

2

3

Strengthen the Annual Risk Assessment to be relevant

Having the right people

Stay vigilant on key or triggering events

PwC

Overcoming the barriers to internal audit playing an effective roleEffective data privacy and security measures are not easy to effect. In fact, we commonly find four barriers in organizations that try to adopt them.

13

Exposures are changing constantly,policies and controls need to changealongside them.

A mindset that believes adequatecontrols are already in place.

1

Implement cost/benefit analysis in risk assessment to assesses potential damage of various types of security breach.

Cost. Achieving and maintainingeffective information security cancost significant money and effort.

2

Hiring & training staff to be top of their game in this arena and/or outsourcing as needed to experts that have technical skills

Low expectations. Internal Audit not viewed as capable of assessing complex security and privacy topics.

3

Establish responsibility and accountability. Define and assign a single point of responsibility for information security.

Fragmented responsibilities. The job of maintaining effective information security controls is often split among many stakeholders

4

PwC

Thank you…

For more information, please contact:

Michael Corey 415-505-2482 [email protected]

Husam Brohi 415-205-8068 [email protected]

14

Adobe Acrobat Document

16

IIA ConferenceNovember 30, 2012

Continuous Audit with Data Analytics

17

Speakers

Dale LivezeySenior Manager, NorPac Regional Technology Leader

Deloitte & Touche LLPAudit and Enterprise Risk ServicesSan Francisco, CA [email protected]

Dawei QuInternal Audit Manager

Blue Shield of CaliforniaInternal Audit ServicesSan Francisco, CA [email protected]

18

• Benefits of Data Analysis• Type of Data Analysis

Ad hoc queryRepetitive AnalysisContinuous Auditing

• Case StudyClaims Denials AuditAccounts Payable Audit

Agenda

19

Benefits of Data Analytics

20

More efficient and effective manual testing

Assist in root cause analysis

Test Validity and accuracy of reports

Target and assess specific risk areas

Identify control weakness / effectiveness gaps

Data Analytics can help in many aspects of business process testing

Overall more effective control testing

services for our clients

Data analysis improves the quality, effectiveness and efficiency of audits• Performs 100% recalculations and verification of transactions in a timely and repeatable fashion• Compares data from multiple / disparate systems• Provides business insights and identifies process improvement opportunities• Presents quantifiable results from analysis based on complete population

Benefits of Analyzing Data

21

Benefits of Analyzing Data

Approach BenefitProfiling and trending • Focus on specific areas of risk or interest

• Provide insights into transactional history and behavior• Test internal controls effectiveness• Identify hidden relationships between people, organizations

and events

Customized transactional analysis

• Geared towards a clients specific business process• Reduction in manual testing procedures• Perform proactive instead of reactive audits• Identify potentially improper or fraudulent transactions

Statistical Sample selection and evaluation

• More efficient and accurate selection procedures• Reduces time spent on selections of little or no interest• Analyze the full population of transactions instead of a

traditional sampling approach• Focus on risk!

Report re-performance and metric recalculation

• Validate operational reporting systems and assist in the documentation of current reporting process

• Reduce manual testing procedures

22

Type of Data Analysis

23

Computer Aided Audit

1) Ad-Hoc Query: One time based specific analytic query or analysis at a point of time. No intention of repetitive testing Explorative and investigative

2) Repetitive: Periodic analysis of processes from multiple data resources

Periodical Seek to improve the efficiency , consistency, and quality of audits

24

Continuous Audit

1) Definition: The independent application of automated tools to provide assurance on financial, compliance, strategic and operational data within a company.

2) Nature: Automated Continuous basis – Specified intervals Constantly search for errors, fraud and inefficiencies Advanced analytic tool involved: SAS and ACL

3) Example: Automated A/P review Automated J/E review Operational process review

25

What are Companies Doing?

1) 25% have CA programs in 2009, compared to 11% in 2006 *

2) Benefits listed by survey participants : Auditors are aware of issues as they occur 100 percent of the population rather than a sample is evaluated Allow to create preventive controls for process owners

3) Challenges listed by survey participants: Implementation takes long Auditors need to have detailed knowledge of the underlying data

structures to use the tool correctly Auditors and business owners have to the determine parameters

used in the CA program

Note: Statistic is based on IIA survey

26

Case Study 1 – SAS Medical Claims Denials

Analytics

Note: Numbers or findings have no meaning beyond being placeholders for the given example

27

Steps

1) Audit Planning2) Data Readiness3) Data Analysis4) Risk based Sampling5) Substantive Testing6) Communication of Results

28

Audit Planning

1) Establish Testing Period: Jan to June of 20122) Determine Scope: all medical claims denied from Jan to June of 20123) Determine Frequency: quarterly4) Define Audit Objective: Ensure claims were appropriately denied

as per provider contract, member benefit and regulation5) Select Audit Methodology:

Perform data analysis to identify high risk denial areas Perform risk based sampling and substantive testing

6) Know your Deliverables: An excel based deck to present data analysis results An audit report to communicate findings of substantive testing

29

Data Readiness

1) Request Data: Pull data directly from corporate data marts Work with IT to extract relative data

2) Data Reconciliation Control total Key fields (numeric fields) tie-out

3) Data Quality Test Duplicate records Missing values of key fields Invalid value of key fields. For example, billed date of

01/32/2012; negative co-pay/deductable amount

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Data Analysis Steps

1)Research the relative areas of high risks by partnering with business owners

Measurement of compliance risk: system days per claimMeasurement of operational risk:

locations per claimdenial ratio at provider level

Measurement of financial risk: billed amount /claim2)Design the profiling tests in relation to specific risks

Determine the list of testsMap test to risk(s)

3)Develop testing routines in SAS4)Review the data analysis results with business owners

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Data Analysis – Profiling Tests

1)Population overview

2)Trend analysis of denial rate

3)Trend analysis of system date

4)Dollar stratification

5)Location count stratification

6)Profiling of providers (hospitals)

7)Profiling of explanation of benefit (EOB) codes

32

Data Analysis - RPM

33

Population Overview

The average billed amount for denied claims is significant higher than paid claims Denied claims take longer to process compared to paid claim Denied claims go through more locations to complete

34

Trend Analysis – Denial Rate

Facility (hospital) denial rate is significantly higher compared to overall average Denial rate in May 2012 is high driven by the higher denial rate of facility claims

35

Trend Analysis – System Day

Manual claims take longer by the processing system to reject or pay. Correlation exists between denial rate and manual system days in May May population is worth to look into

36

Stratification

Yellow strata subjects to risk based sampling while purple might need drill down Auditors may design strata according to relative limit approval controls

Dollar Stratification

Stratification on location

37

Profiling on Hospitals

The denial rate for top providers is significantly high compared the average (20%) Provider #2 has a high denial rate in May Hospitals #1, #2 and #5 are trending up on denial rate

38

Profiling on Explanation of Benefit

19%

17%

11%

50%

3%

Break-out by EOB Category

MG/IPA ResponsibilityEligibility - MemberMissing EOBNon-Contract BenefitDuplicate

11% blank EOB is noted This break-out can be compared against the industry benchmark to analyze the space of improvement

39

Profiling and Sampling Process Flow

Denial Claims with

EOB Desc

Datamart

Logics to define denials

SAS Programming – Pull In Scope Denied Claims Data

25 Claim Selections

Risk Assessment - Assign Risk Score to Sub-Population of Each Analysis

EOB Desc File

Analysis 1

Population Overview

Analysis 2

Trend by Denial Rate

Analysis 3

Trend by System Date

Analysis 4


Analysis 5

System Day Stratification

Analysis 6

Location Stratification

Analysis 7

COB Profiling

Analysis 8

ER Visits Profiling

Analysis 9

Provider Profiling

Analysis 10

EOB Profiling

Analysis 11

IPA / MG Drill Down

SAS Programming - Analyze the Claims Data

Score: 1

Trend by Denial Rate

Score: 1

Trend by System Date

Score: 1


Score: 1-2

System Day Stratification

Score: 1-2

Location Stratification

Score: 1

ER Visits Profiling

100% Test

Provider Profiling

Score: 1-3

EOB Profiling

100% Test

DOFR Drill Down

Score: 0

Population Overview

Score: 0

COB Profiling

SAS Programming: Claims Scoring and Sampling

12 Provider Selections

Input:

Output: Subject to Detail Testing

40

Risk Based Sampling - Selections

1) Risk score is calculated for each claim

2) Total risk score is the sum of risk weight for each failed / hit profiling tests

3) Samples were selected from the claims with higher risk scores

4) Auditors professional judgment plays an important role on finalizing samples

5) Average number of risks tested per sample is 5.56

41

Communication of Findings

Finding 1:

During the data analysis, Internal Audit noted that 11% denied claims do nothave explanation of benefit (EOB) codes. This was a result of an incorrect fieldmapping between the claims processing system and Claims data mart.

Finding 2:

During the data analysis and the subsequent detail testing, Internal Audit notedthat the denial rate for hospital #2 in May is significant higher than other periodsand other hospitals. This was a result of an insufficient communication on thechanged provider contracts.

42

Case Study 2 – Accounts Payable

43

Agenda

Final Assessment

Project Snapshot

Roles and Responsibilities

Purpose and Scope

Internal Audit engaged Deloitte to help proof of concept

Account PayableFCPAExpenses

Purpose and Scope

Deloitte understands that the Company’s objectives for this engagement are:

Assist with developing ACL scripts, to serve as queries for use by limited members of various business units, as part of routine management oversight.

Obtain results of profiling analytics specifically on procurement and expense data provided by the Company.

Execute sample profiling scripts, as a test case, to assist with FCPA (Foreign Corrupt Privacy Act) related controls.

Assess the applicability of scripts executed, and determination of additional scripts to be considered for future development in the Procurement Cycle.

Project Snapshot

Accounts Payable– List of Analytics performed

Vendor Analyses: Vendor Master Check Valid Vendor Analysis Vendors with PO Box Addresses Duplicate Vendor Analysis One Time Vendor

Invoice Analyses:

Duplicate Invoices Payment Date vs. Invoice Date Analysis Benford Analysis

Disbursement Analyses:

Payments to Vendors not in Vendor Master or Unauthorized/Restricted Payee Name / Vendor Name Mismatch Duplicate Disbursements Benford Analysis

Project SnapshotAccounts Payable – Continued….

Analytics - VENDOR MASTER CHECK


Analytics – Duplicate Vendors


Analytics – PAYMENT DATE VS. INVOICE DATE


Analytics – DUPLICATE DISBURSEMENTS

Project Snapshot

Expense Report – List of Analytics performedLine items flagged as “Policy Violation”Expense booked in advance of the actual expense date.Flight within US above $500 Hotels above $1000Group Meals above $50Duplicate Analysis 1 – Combination of Expense date, Expense line amount, Expense type, Employee name and Expense report numberDuplicate Analysis 2 – Combination of Expense date, Expense line amount, Expense type and Employee nameMissing Expense ReceiptExpense over WeekendsExpense over Holidays

Project SnapshotExpense Report – Continued….

Analytics - Flight within US above $500


Analytics – Duplicate Line Items


Analytics – Expenses booked in advance of the actual expense date

Project Snapshot

FCPA Analytics– List of Analytics performed

Keyword search – Invoice line description

Keyword search – Expense line description

Payment Date vs. Invoice Date Analysis – Run as part of the AP Analytics

Project SnapshotFCPA – Continued….

Analytics – Keyword search – Expense line just

Final Assessment

Final AssessmentContinued….

58

Questions?

BREAK09:50 – 10:10

Enterprise Risk Management and Impact

to Your Audit Plan 10:10 – 11:30

CAE Panel Discussion led by Shawn Kirshner (Accretive Solutions)

61

Panel Members

Janet ChapmanGeneral Auditor, Union Bank

Cindy OvermyerSVP, Internal Audit Services, Kaiser Permanente

Thierry DessangeDirector, IT Audit, Safeway

Pat SammonHead of Audit & Advisory Services, Autodesk

Kathy GuthormsenDirector of Risk Management, Autodesk

Risks in Social MediaSocial media usage and risks

11:30 – 12:20Willis Kao, (Deloitte)Anna Tchernina (Deloitte)

© 2012 Deloitte Global Services Limited

Speaking with you today

Willis Kao, Senior Manager

[email protected]

408 718 0566

San Jose

Anna Tchernina, Senior Manager

[email protected]

415 254 4722

San Francisco

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mailto:[email protected]



Agenda

64

Welcome to the world of social business

Social media risks deep dive

Social media governance and risk management

Lessons learned from audits

Questions


Social Media Revolution Videohttp://www.youtube.com/watch?v=dA5Fn_Q10Tk&feature=related

65

http://www.youtube.com/watch?v=dA5Fn_Q10Tk&feature=related


Welcome to the World of Social Business

66

Welcome to the world of social business!

• People matter most

• Transparent markets

• Real-time expectations

• Pervasive, mobile, cloud computing

• Big data and invaluable analytics

• Connected customers & ecosystem

• Cross-boundary collaboration

67

Are you smarter than a 5th Grader?

• Do you use (personally) Facebook? LinkedIn? Twitter?

• Does your Company use - Facebook? LinkedIn? Twitter?

• Does your Company have a Social Media Policy?

• Are your employees allowed to use Social Media?

68

Social Media IncludesWikis, Social Networks, Blogs, Presence & Microblogging, Online Sharing of Videos & Media, and Social

Bookmarking & Tagging.

Social media is an umbrella term for a host of sites and technology that facilitate social

interaction, sharing, and creation of user-generated content, and aggregation of users’

opinions and recommendations.

Common forms of social media

Social Media Defined

Social media Description Popular examples

Wikis A page or site designed to enable collaborative contribution and modification of content by users

BlogsShort for web log; frequent online publications with commentary on current events, subjects, or one’s personal thoughts

Social networking Site focused on building online communities, establishing connections, and providing avenues for social interaction

Presence and Microblogging

Brief real-time updates of personal commentary, news, or status (aka “Tweets”)

Online photo andvideo sharing

Media-centric online communities that facilitate the viewing, sharing, and “tagging,” or classification, of media content

Online forums and/review sites

Websites/Tools that allow users to search for peer reviews or advice on a product or service, as well as to contribute their own ratings and comments

70

http://www.linkedin.com/

Copyright © 2012 Deloitte Development LLC. All rights reserved.71

Social media benefits Social media challenges

Decrease Costs

2

Generate

Prospects and Leads

(Sales)

1

Increase Loyalty

3

• Decrease time to market for new products• Increase marketing effectiveness• Develop new revenue opportunities• Leverage “interest” based marketing &

advertising

• Decrease R&D costs for new products by listening to your customers (and prospects)

• Focus on inexpensive social media tools instead of using the traditional expensive marketing channels

• Decrease customer support costs

• Increase customer insights and intelligence (“Voice of Customer”)

• Improve customer experience responsiveness• Improve customer education, expertise and

service• Direct contact with the customer instead of

indirect through the retail channels

Manage

Brand Reputation

4• Increase brand awareness through social

media• Protect brand and manage reputation• Benefit from spontaneous reactions from

the community by connecting like-minded peers

Inconsistent message

2

Loss of Control

1

Confidential Information

3

• The voice of the customer is amplified• Companies no longer control the message

or topic• Messages might include negative publicity

• When engaging several employees in the social media world, their messages and responses may not always be consistent and aligned with the strategy of the company

• The use of social media sites enables users to circumvent company controls, opening up the potential to violate communication policies

• Education and training for employees is a key component to managing loss of information

Productivity loss

4

• Social media drives collaboration among co-workers but can also be a major distraction in the work place

• Advertising departments

• Sales and Marketing staff

• Compliance professionals

• Internal Audit

• Risk Management

• Legal departments

• Operations and IT staff

• Recruiting/HR

• Customer service

• Senior Management

Key departments affected

72


Social media risks – deep dive

73


Social Media usage presents behavioral, application and technology related risks. The risklandscape is vast and continuously evolving

Anticipated Risks

Legal & regulatory compliance

• Disclosure of confidential information• Violation of copyright laws• Protection of intellectual property rights• Legal and financial ramifications for non-

compliance with industry regulations

Security & Privacy

• Identity theft, Social engineering • Ability to retain and log social media

communication; data retention• Technical exploits: Malware, Viruses/Worms,

Flash Vulnerabilities, XML injection

Brand and reputation damage

• Posting unfavorable or confidential information on a public site

• Unclear behavioral expectation of end users to use social media

• Defamation, Copyright infringement

Productivity loss

• Use of social media can be a distraction i.e. employees accessing non-work related social media sites

• Acceptable use of social media

Social Media Risk Landscape

74

Malware and viruses• Data leakage/theft• “Owned” systems (zombies)• System downtime• Resources required to clean systems

Brand hijacking• Customer backlash/adverse legal actions• Exposure of customer information• Reputational damage• Targeted phishing attacks on customers or employees

Lack of control over content• Enterprise’s loss of control/legal rights of information posted to the social media sites

Customer service dissatisfaction• Customer dissatisfaction with the responsiveness received in this arena, leading to

potential reputational damage for the enterprise and customer retention issues.

Social Media Risk Deep Dive

75

Record retention non-compliance• Regulatory sanctions and fines

• Adverse legal actions

Other threats and vulnerabilities….• Use of personal accounts to communicate work-related information

• Employee posting of pictures or information that link them to the enterprise

• Excessive employee use of social media in the workplace

• Employee access to social media via enterprise-supplied mobile

devices

Social Media Risk Deep Dive – Continued

76


Social media governance and risk management

77


Social Media Governance and Risk Management

Strategy: • Review the social media strategy, program goals, and organization model and assess

whether these have been formalized and communicated to all relevant teams.

• Evaluate the alignment of the strategy with company goals.

Policy:• Review the social media policy and confirm that elements related to disclosure, ethics,

community and privacy are included. • Identify gaps and test awareness of the policy.

Roadmap:• Assess the adequacy of the social media roadmap, including whether it is global, or

localized and whether short-term and long-term program milestones have been defined.

Team Structure: • Assess whether the roles of key owners and stakeholders in the social media program

have been defined and clearly communicated (e.g. executive sponsorship, communications / PR, employees, Legal, IT, etc).

78


Preparedness and Response

Customer Profiles and Market Analyses: • Review customer profile and market analyses and evaluate whether all products are

covered, the appropriate target customers have been identified, including the desired relationship and engagement model.

Tools and Analytics:• Understand how customer interactions via social media are integrated with existing

systems and databases.• Assess whether formal alerting tools have been implemented to identify key topics,

comments, commentators, and sentiment from website activity.• Evaluate KPIs and metrics against best practices and alignment of metrics with the

social media strategy.

Processes:• Test the policies and procedures that have been implemented to ensure that messaging

is consistent with the social media strategy / plan• Review and test policies, processes and procedures used for triage, crisis response,

intake and response to customer insights. • Understand how customer insights are monitored, tracked, and shared with relevant

teams (product marketing, R&D, Support, etc) for resolution.

79


Training and Education / Compliance

Training and Education• Evaluate the types of training programs implemented to share best practices and rules of

the road within the social media team• Understand how social media best practices are shared cross functionally with other

functions in the organization, such as recruiting, sales, product, etc.

Monitoring and Compliance:• Understand whether compliance with the social media policy is monitored both internally

and externally• Perform procedures to test compliance with the social media policy internally and

externally

80


Lessons Learned from Recent Audits

• Crisis Management Plan

• Monitoring processes

• Bloggers disclosers

• Data leakage protection

81

• It is here and it’s not going away

• There may be substantial business benefits with using social media to achieve business objectives

• As with any opportunity there is risk

Bottom line

82


Questions?

83

GOURMET LUNCH12:20 – 13:20

Fraud Risk Management:The Things You Need To Know

1:20 – 2:10Paul Ritchie, Deloitte

Agenda

What is Fraud and Why is it an Important Concern? The Profile of a Fraudster Fraud Risk Assessment, Schemes and Red Flags Responding to Indicators of Fraud

What is Fraud and Why is it an Important Concern?

What is Fraud?

As defined by the Institute of Internal Auditors:

“Any illegal acts characterized by deceit, concealment or violation of trust. These acts are not dependent upon the application of threat of violence or of physical force. Frauds are perpetrated by parties and organizations to obtain money, property or services; to avoid payment or loss of services; or to secure personal or business advantage.”

Types of Fraud

Internal: illegal acts of employees, managers and executives against the company

External: illegal acts of outsiders (non-employees) against a company

The activity:◦ Is clandestine◦ Violates the perpetrator’s fiduciary duties to the victim

organization◦ Is committed for the purpose of direct or indirect financial

benefit to the perpetrator◦ Costs the employing organization assets, revenue or

reserves

Occupational Frauds by Category - Frequency

Source: ACFE 2012 Report to the Nation on Occupational Fraud and Abuse.

Occupational Frauds by Category – Median Loss


Fraud Across Industries


Corruption Across Industries


Initial Detection of Occupational Frauds


Why Do Companies Need to Manage Fraud Risk?

Legal duty of care to shareholders Statutory/regulatory requirements (SOX, SEC, FCPA,

and Federal Sentencing Guidelines) Direct financial impact to the organization Indirect costs to the organization

Economics of Fraud

A $250,000 fraud loss . . .

XYZ Company Profit margin = 10%

0500,000

1,000,0001,500,0002,000,0002,500,000

Fraud Loss

Revenue

Fraud Loss Revenue

. . . will require an additional $2.5 million in revenue to maintain net income levels

The Profile of a Fraudster

The Fraudster – Which Department?

Statistics from the 2012 ACFE Report to the Nation on Fraud

The Fraudster – How Old?


Typical Fraudster – On the Surface

Long-time employee Position of trust Appears to be extremely

dedicated Unexplained cash or other

wealth Always willing to help out

and put in extra hours

Typical Fraudster – Beneath the Surface

Gambler Drug or alcohol problem Behavioral changes Extramarital affairs Hostility to management General disenchantment with compensation

The Fraudster – Educational Background


The Fraudster – Effects of Tenure

Direct correlation between length of time employed and size of fraud losses

Employees with 10 or more years of tenure caused median fraud losses of $229,000

Employees with less than one year of tenure caused median fraud losses of $25,000


The Fraudster – Effects Of Gender

Male perpetrators accounted for 65% of cases with median fraud losses of $200,000

Female perpetrators accounted for 35% of cases with median fraud losses of $91,000


The “10-80-10” Rule

10% of the Population:

Would never engage in illegal conduct.

80% of the Population:Might engage in illegal conduct.

10% of the Population: Deviants

and always on the lookout to cheat, steal,

etc. (regardless of profession).

The Fraudster – How do they Attempt to Fool, Distract and Undermine an Auditor?

Overloading. Attaching false time

frames. Taking advantage of

perceived fears. Killing time with trivia. Exploiting expected

scopes. Exploiting historically

low-risk areas.


• Exploiting complex areas.• Predicting cycle audits.• Stalling.• Making staff unavailable.• Filtering of information.• Not updating procedures.• Discrediting the auditor.

How to Address

Maintain an attitude of professional skepticism Investigate what does not make sense If it seems to good to be true, it usually is – trust your

instincts Beware of trust over reason Avoid placing faith in other people’s faith

◦ Verify and corroborate Good interviewing and observation skills are key Look for signs of deceptive behavior Do not ignore information or data

Fraud Risk Assessment, Schemes and Red Flags

Internal Audit Plan

The plan should be:◦ Dynamic/Flexible.◦ Comprehensive/Complete.

It integrates fraud risk assessment, appropriate cycle rotations, and management insight.

It directs resources to areas with highest risk.

Fraud Risk Assessment Approach

1. Evaluate

Fraud Risk Factors

3. Analyze Fraud Risks and Schemes

and Evaluate Mitigating Controls

4. Evaluate Fraud Risk Assessment

Results and Prioritize Residual

Fraud Risks

2. Identify Possible Fraud Schemes and

Scenarios

Design Tests to Identify Fraud

Color By Numbers Approach Creativity and Thought Approach

What Are The Hallmarks Of An Effective FRA?

• Is systematic and recurring.• Is dynamic and is updated when new or unique circumstances

arise (e.g., changed operating environments, restructurings, acquisitions), at least annually.

• Is performed with the involvement of appropriate personnel.• Considers possible internal and external fraud schemes and

scenarios.• Considers management override (e.g., journal entries, bias of

estimates, non-routine transactions).• Assesses risk at organization-wide, significant business unit,

and significant account levels.• Consider historical fraud or industry fraud risks.• Results are monitored by the Audit Committee/Board.

Indicators in Practical Use

Where is the potential for fraud (according to interview results and survey responses)

Areas where fraud has been detected Manual and complex processes. Timing to register transactions Process involving cash management Unclear – who reviews and who approves Lack of controls – or knowledge of procedures

Valuable Soft Skills for an Internal Auditor

Think like a fraudster. Facilitate a control self assessment. Use information gathering techniques. Communicate and build rapport. All segments of an audit are connected. Use an unpredictable and flexible audit approach. Perform and understand data analytics. Don’t lead the interviewee. Pay attention to the details.

Attention to Details

Interviewing Techniques – Detecting Deceptive Behavior

Deceptive behaviors◦ Verbal or Non-Verbal

Remember:◦ Disregard isolated and/or individual behaviors

Deceptive Behaviors – Non-verbal

Adjusting AttireFleeing PositionWiping Sweat Hand Wringing

Scratching Covering Eyesand Face

Biting Lip Crossingthe Arms

Deceptive Behaviors – Verbal

Character Testimony

Making Excuses

Repetition of Oaths

Answering with a Question

Repeating Questions

Overuse of Respect

Selective Memory

Changing Speech Patterns

Responding to Indicators of Fraud

Internal Auditor Proficiency Standard

Internal auditors must have sufficient knowledge to evaluate the risk of fraud and the manner in which it is managed by the organization, but are not expected to have the expertise of a person whose primary responsibility is detecting and investigating fraud.

Source: The Institute of Internal Auditors International Standards for the Professional Practice of Internal Auditing (www.theiia.org)

When Does an Internal Audit Become a Fraud Investigation?

Expand sample, expand scope, or perform additional procedures. Look for additional instances or patterns.

Ask additional questions framed in the context of the internal audit (e.g., how could a situation like this occur?).

Maintain copies of documents and data files that support the red flags and symptoms of fraud.

When possible, maintain originals of documents. Any indication of potential perpetrators? Cease audit work if there appears to be a predication

for suspecting fraud.

Forensic Accounting vs. Financial Audit

Forensic Investigation Audit

Mindset • All cases may end in litigation

• Professional Skepticism

Frequency • Non-recurring; random • Recurring; scheduled

Approach • No management planning session

• Limited notification

• Meet with management to plan and scope the audit

Relationship • Potentially adversarial • Professional skepticism

Scope • Document examination of particular issue;

• Review of outside data, interviews of potential persons of interest.

• Analysis of financial statements and/or other financial data;

• Interviews with management.

Work Programs • Programs developed and amended as needed

• Audit programs

“Employer” • Client’s Attorney, In-House Counsel, Special Committee

• Audit Committee/Client Management

Objective • Identify responsible parties;

• Quantify damages

• Issue an opinion on the client’s financial statements and related disclosures

Report Audience • Report is presented to counsel

• Opinions used by Board of Directors/Audit Committee/Shareholders/Public

Benefits of a Fraud Response Plan

Standardized response. Consistent approach. Clarified roles and responsibilities. Internal and external reporting responsibilities. Process for consensus and agreement.

Contact Details

Paul RitchieSenior Manager, Deloitte ForensicDeloitte Financial Advisory Services LLPTel. [email protected]


Top Ten Emerging IT Audit Issues

2:10 – 3:00pm

Michael JuergensDeloitte & Touche LLP

Overview IT controls continue to increase in

importance to organizations◦ Corporate reliance on technology increases◦ Compliance requirements increase

Deficiencies in IT controls can have a significant impact on the organization

IT Audits

Where We Have Been

Where We Need To Be

Top 10 IT audit issues By no means a comprehensive list Will vary by environment

◦ May be greater/lesser risk depending on industry, technology, business processes etc.

This list is based on what we see in the marketplace

Designed to get you thinking about your environments and if currently scheduled IT audit procedures will evaluate these risks

List is in no particular order

1. Omnichannel CommerceIssueTraditional “bricks and mortar” channels are merging with e-commerce channels to create a single integrated approach to sales.

Risk Failure to evolve could impact long term enterprise viability Will change sales approach and systems Large integration and master data concerns

RecommendationUnderstand current and planned changes to sales channels. Determine impact on systems, specific transactions processed, accounts impacted, and master data. Evaluate risk and then plan and execute audit procedures accordingly.

2. Cyber Security Reporting

IssueAs of October 2011, the SEC now requires public companies to disclose the risk of cyber incidents as part of Management’s Discussion and Analysis if "these issues are among the most significant factors that make an investment in the company speculative or risky."

Risk Failure to comply with SEC reporting requirements Exposure to potential shareholder litigation if requirement not met Audit Committee exposureRecommendationChallenge is that the reporting requirement lacks specificity. Organizations must determine what to report, if anything. Therefore, organizations must have a process for identifying exposures, evaluating impact, and then reporting and disclosing appropriately. IT audit should perform an assessment of this process to determine if it exists, and how comprehensive it is. Additional steps should be taken to evaluate how effective the process is.

3. Software Asset Management

IssueSoftware licensing contracts are complicated, and software lifecycles are complex. Economic downturn has caused software vendors to aggressively pursue licensing audits.

Risk Potential significant financial liabilities in case of an audit Loss of potential savings Failure to “sunset” unused applications

RecommendationPerform a software asset management (SAM) audit. Consider use of International Organization for Standardization (ISO) and Information Technology Information Library (ITIL) SAM standards. Audit should include evaluating the process for SAM, review of contracts and software license baselines, and analysis of non-essential software and patch deployment.

4. Payment ProcessingIssueEmerging methods of payment processing (ISIS, GoogleWallet, PayPal).

Risk Failure to adopt impacts potential revenue Impact on revenue cycle processes, systems and controls

RecommendationDetermine what changes are planned or underway to adopting new payment processing technologies. Determine impact on financial systems and processes (e.g. sales audit). Evaluate integration management. Identify new security and controls considerations and execute audit steps accordingly.

5. Hyper-Hybrid CloudIssueAdoption of heterogeneous cloud solutions creates significant issues with management and integration of processes and data, as well as leads to the need for deployment of additional management solutions.

Risk Master data proliferation and management Disparate cloud solutions impact business processes Security management becomes much more complex e.g. Security Assertion

Markup Language (SAML), OpenID Need for effective service lifecycle management increases

RecommendationUnderstand current and planned cloud services grid, and specific business control points, integration and workflow. Understand security management strategy, and deployment of new technologies/standards. Determine process and data risk and identify/test controls. Evaluate Service Organization Control (SOC) reports for vendors.

6. Data Lifecycle Management (DLM)

Issue2011 saw the emergence of new regulations and legislation for records management and data retention. Regulators have significantly increased their scrutiny of the data lifecycle space.

Risk Large potential financial penalties for non-compliance Impact on brand Impact on customers and vendors

RecommendationGain an understanding of how DLM is operationalized throughout the organization, DLM awareness levels and how DLM compliance is achieved. Evaluate the organization’s DLM capability maturity and identify compliance gaps related to the DLM governance structure, policies, processes and procedures

7. End User Computing (EUC)

IssueSignificant increase in evaluation of spreadsheets and other end user computing solutions by auditors and regulators. Additional regulations promulgated (e.g. Solvency II). Uncontrolled EUCs still impacting financial statements and business operations.

Risk Loss of critical data Potentially inaccurate financial or management reporting Exposure to regulatory sanctions or fines

RecommendationPerform an extensive EUC audit. Evaluate criteria such as criticality determination, governance model, and use of technical accelerators. Audits should also evaluate programming structure. A policy-based audit and/or access based audit is likely insufficient.

8. IT GovernanceIssueIT Governance continues to play a large role in aligning the proliferation and use of technology with organizational objectives. Also, Institute of Internal Auditors (IIA) Standard 2210.A2 states: “The internal audit activity must assess whether the information technology governance of the organization sustains and supports the organization’s strategies and objectives.

Risk Noncompliance with IIA standards Potential misalignment of IT resources with organization strategy

RecommendationAssess capabilities across IT governance capabilities: Strategic Alignment, Risk Management, Value Delivery, Performance Management and Resource Management. Establish a baseline of understanding regarding current capabilities and maturity level of IT governance processes.

9. Digital IdentityIssueDeployment of emerging technologies and unification of internal/external systems creates significant identity sprawl, and difficulties managing across platforms, applications and networks. To be efficient and compliant, federated identities are emerging. Our IT access audits and analysis are becoming more reliant on review-based controls.

Risk Unauthorized access to data or transactions Regulatory fines or litigation Brand impact

RecommendationUnderstand corporate security perspective on identity management. Inventory systems, devices and technologies currently deployed or planned (consider external sources as well). Evaluate strategy and technical solutions for managing digital identity. Perform a detailed audit of critical technologies and controls.

10. Product DuplicationIssueProliferation of cheap 3D printing technology makes it possible to easily duplicate certain consumer products

Risk Loss of sales, market share Impact on brand

RecommendationUnderstand current product mix; identify products susceptible to duplication (small, higher value items are typical). Understand security and controls around schematics. Peruse pirate sites to identify proliferation of schematics. Consult with loss prevention teams to understand approach to managing remote duplication.

Summary Need to understand which items may be

relevant in your business and technical environment

Ensure that risk assessment and audit universe address relevant items

Don’t walk the plank alone – communicate with management and the audit committee

Plan resource requirements◦ Be careful not to underestimate

Questions

Contact information

Michael JuergensPrincipal, Deloitte & Touche LLP213-688-5338

[email protected]/pub/michael-juergens/2/221/988


http://www.linkedin.com/pub/michael-juergens/2/221/988

http://www.linkedin.com/pub/michael-juergens/2/221/988

This presentation contains general information only and Deloitte & Touche LLP is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

BREAK2:40 – 3:00

Soft Skills TrainingUnderstanding your Auditee – Key

Lessons on Effective Communication 3:20 – 4:40

Group Setting

Howie Cumme, URSEd Byers, Deloitte

Farhan Zahid, Deloitte

Agenda and Introduction First Impressions Building Trust Personality Analysis – DISC Profiles Getting The Truth Navigating Politics Wrapping Up

Agenda for Session

Interactive Session Better understanding of yourself and human interactions

Building attraction and trust Adapting to the situation Challenging situations – tips and tricks

Intro and Background

Ultimate Auditing Technique

How many seconds to form a first impression?

1/10th of second, 7 seconds, 12 seconds All the correlations between judgments

made after a 1/10-second glimpse and judgments made without time constraints were high, but of all the traits, trustworthiness was the one with the highest correlation.

First Impressions

LogicalComplex,Certain

EmotionalAttachment,Uncertainty

PrimalHealth/Status

How the Mind Works

Reptilian

Paleomammalian

Neomammalian

You need to cater to the brain in the order it evolved Primal, Emotional and then Logical

Health and Appearance - Primal Behavior and Body Language - Primal Warmth and Introductions – Emotional Personality, Professionalism and

Preparation - Logical

First Impressions

Key to effective communication is to understand the style or method of communication desired by the auditee

The auditee’s behavior style is key! Ineffective communication typically results

when an auditor communicates in THEIR style vs. the AUDITEES desired style

Personality Analysis – Intro to DISC

The DISC profile is a simple tool to understand your behavior style and how to best work with others (e.g. SPOUSE!)

No behavior style is right/wrong – the key is to understand how to communicate effectively with others

DISC Profile

Select a word that MOST describes you and a word that LEAST describes you

Put an M/L next to the word – DO NOT put a big “X” for example in the MOST/LEAST column

Use a coin to gently rub the rectangle after the word in the MOST/LEAST columns

Tally up the results in the tally box on page 5

Fill out graphs I, II, and III

Steps to filling out the DISC Profile

Each style has its strengths, weaknesses, and needs – a weakness is an “overextension” of a style’s strength

There are typically key success factors in communicating to different styles

Understanding how to “match styles” is important – “evolve” if necessary

Good questions to ask different styles

Note: refer to handouts which overviews these four areas

Understanding the DISC Profile

How do you communicate if you are presenting to two different styles (e.g. D & C)

Do not assume that all executives are “D’s” and all auditors are “C’s”

How can you assess a person’s behavior style by looking at their office (or other factors)

What have you learnt about yourself? Key potential next steps

DISC Discussion Points

Friendliness/Rapport◦Warmth◦Connection◦Assertiveness

Flow of Conversation – Comfort Professionalism and preparedness Reassurance/Implications

Building Trust

Fear of the consequences Focus on what you need to know Professional reassurance – rationalism,

unbiased How to know if you are always getting the

truth?Sweaty palms?Hesitation?Avoidance of eye contact?

Getting The Truth

• Tough to tell the difference between lies and an honest person under stress

• Indicators of lying:◦ Level of detail being provided◦ Tone of voice, unusual body language◦ Inconsistency when changing viewpoints◦ Concealment of anger, distress or fear◦ Lifting just the inner part of the eyebrow

(Distress>85%)◦ Eyebrows raised and pulled together (Fear)◦ Narrowed, tightened lips or lopsided smile (Anger)

• No absolute clues to lying, only indicators.

Lies

Is it always possible? Internal and external politics affecting the meeting

Pressures in the room. Possibility of one on one time?

Ask questions again when necessary to each individual

Navigating Politics

“Leave the door open” Follow up within 24 hours Be genuine and smile Finish with something memorable and relaxed

Wrapping Up

Wrapping Up

Seminar Wrap Up and Thanks

SF IIA Fall Seminar Internal Audit's Role

in the Changing Business Landscape

November 30th 2012, San Francisco

November 30 th 2012, San Francisco. 7:45 -8:15 amRegistration and Breakfast 8:15 -8:20 amWelcome and...

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