The Fraud Examiner’s Role in Responding to   Whistleblowing TUESDAY, FEBRUARY 12, 2013 AT 11:09AM

INTERVIEW WITH IAN FOXLEYChairman of Whistleblowers UK and keynote speaker at the 2013 ACFE European

Fraud Conference, 17-19 March in Prague

According to the ACFE’s Report to the Nations, more frauds are detected by tips than by any other method. What role do anti-fraud professionals play in ensuring tips are welcomed, encouraged and not punished?

Tips are only worthwhile if they are valid, verifiable and justified. Sources of tips should be aware that they may remain anonymous, but if they are to believed then the tip off cannot stand in isolation but must be provable – one way or another. Anti-fraud professionals have a role in ensuring that tips are valid and verifiable and sort out those that are worthy of note from those that aren’t. That way when a true tip is offered, the recipient, be it a company, organization, manager, director or compliance officer, knows that it is a worthwhile piece of information that is worth investigating.    

How have you seen the role of the whistleblower change over the past few years? Do you think this role will change in the future and become more accepted and praised?

The role of the whistleblower hasn’t changed – it still remains as a source of information that exposes wrongdoing in the face of resistance by those who should have dealt with the information properly.

There have been those who have tried to use whistleblowing to propagate personal aims or settle debts, and they do real whistleblowers a great disservice. But there remains a fundamental corporate distrust of whistleblowers that needs to be actively overcome. Whistleblowing needs to be recognized as a courageous and heroic act, not one born of disloyalty and self-interest. Whistleblowing is not the act of a “sneak.” It is the act of an honest broker who has tried to expose the wrongdoing and found only resistance, coercion and aggression.    

Reward is the wrong word to use – it offers the opportunity for detractors to profess that whistleblowers are merely “in it for the money.” But we do need to find a way to compensate whistleblowers for the stress, discomfort, family pain, financial loss, career stoppage and sheer hell of what we go through.

What do you most hope attendees will take away from your address?

An understanding of what makes a whistleblower tick and what they can do to help future whistlebowers.

Read more about Foxley and the other keynote speakers at this year’s ACFE European

Fraud Conference. And don't forget, the last day to register early and save EUR 125 is

this Friday, 15 February.

How to Start the Ethics   Conversation THURSDAY, FEBRUARY 21, 2013 AT 03:19PM

GUEST BLOGGERCatherine Lofland, CPAACFE Research Specialist

Someone once told me about a girl who was a cashier at a large grocery store chain. On her 15-minute break, she helped herself to a snack from the bulk bins. Although each item from the bulk bins is priced differently and therefore charged individually, she assembled a quick mix of almonds, cashews, dried cranberries and goji berries in one bag. When she paid for the bag, she checked herself out and used the code for almonds, the cheapest item in the mix. As she left the store after her shift, she was arrested and charged with theft.

The cashier probably thought mischarging a few goji berries (which can cost over $14/lb) was no big deal. Her employer clearly disagreed.

While some might argue involving the police was an unnecessarily harsh reaction to such a petty crime, it is critical for a company’s employees to exhibit an unwavering commitment to high ethical standards. After all, if this employee had gotten away with

mischarging these items, what might she steal in the future? Could you really describe this employee as “ethical?”

For many people, ethics is an esoteric concept. Philosopher Philip Wheelwright defines ethics as “that branch of philosophy which is the systematic study of reflective choice, of the standards of right and wrong by which it is to be guided, and of the goods toward which it may ultimately be directed.” While most people have a general idea of what ethics is, the concept does not receive enough discussion, analysis and attention. Many leaders avoid the topic because it is not cut-and-dry. It is difficult to teach and understand. However, I think everyone recognizes the importance of an ethical workplace culture.

If you’ve been looking for a way to start the conversation about ethics at your organization and implement a formal ethics program, or tweak an existing one, I encourage you to check out one of our newest online self-study courses, How to Build

an Effective Ethics Program. This course teaches you how to perform an ethics audit, it identifies the essential components of an ethics policy and it provides guidance on how to conduct engaging ethics training. Most importantly, however, it teaches you how to integrate an ethics policy into the operations and culture of your organization.

According to the 2012 Kroll Advisory Solutions’ Global Fraud Report, more than 66 percent of corporate frauds are committed by insiders. Although conducting background checks and speaking with references are good practices for vetting job seekers, not all unethical people have an incriminating past. The ACFE reports in its 2012   Report to the Nations on Occupational Fraud and Abuse  that 87 percent of fraudsters had no criminal background prior to the offense and had never been punished or terminated by an employer.

For an ethics program to be successful, an organization must support an ethical culture. Individual character traits might predispose a person to ethical or unethical behavior, but the cultural context in the organization also has a powerful influence on the employees’ actions. Being immersed in an ethical culture might make someone think twice about stealing a few goji berries… or embezzling a few thousand dollars.

The Most Effective Controls in Limiting Fraud   Losses FRIDAY, AUGUST 10, 2012 AT 09:26AM

GUEST BLOGGERJohn Warren, J.D., CFEACFE Vice President and General Counsel

One of the most important things we try to accomplish with our global fraud study, the Report to the Nations, is to identify key characteristics about organizations that have been victimized by occupational fraud. Although every business is vulnerable to fraud, the more we can learn about organizations that suffered frauds in the past, the more information we will have to prevent occupational fraud or at least limit its impact in the future.

Perhaps the most important victim data contained in the Report to the Nations is the information we gather on anti-fraud controls. We ask each of our respondents to tell us which, if any, of 16 common anti-fraud measures were utilized by the victim organizations while the frauds were occurring. We then compare the losses based on whether a particular control was or was not present. For example, in 2012 we found organizations that used a hotline experienced a median loss of $100,000 per occupational fraud case, while organizations that did not use a hotline had a median loss of $180,000.  This analysis gives us a general indication of the impact various anti-fraud controls have in limiting fraud losses. We can say, for instance, that the presence of a hotline was associated with a 44.4 percent lower median fraud loss.  

In the table below, we’ve presented the results of this analysis for each edition of theReport to the Nations dating back to 2008. For each anti-fraud measure, you can see the reduction in fraud losses it was associated with, along with its ranking relative to other controls.[1]One interesting thing to note is that every one of these controls was associated with lower fraud losses in all three editions of the Report.  

The key information in this table is contained in the yellow shaded columns at the right, where we have combined the results from all three editions of the Report. This data comprises more than 4,100 total cases of occupational fraud. The two bold columns show the average loss reduction and overall ranking of each control for the three combined studies. We see here that hotlines have ranked No.1 among all anti-fraud measures in this analysis, typically being associated with a 54.5 percent reduction in fraud losses.  Hotlines were followed by employee support programs, surprise audits, fraud training for managers and executives, job rotation/mandatory vacation, and fraud training for employees.  Every one of those six anti-fraud controls was associated with at least a 45 percent reduction in fraud losses, and all six controls ranked in the top 8, respectively, in each edition of the Report. 

In the two far-right columns of the table above, we have presented the average rate of implementation for each control.  In other words, this shows what percentage of victim organizations were utilizing each control at the time the frauds occurred. We can clearly see that the six most effective anti-fraud measures all scored poorly in terms of implementation. With one exception, these controls all ranked 9th or lower in terms of implantation rate, and only two of them were used by more than half of the organizations in our studies.

What this data seems to indicate is that the anti-fraud measures which tend to have the greatest impact on fraud losses are being under-utilized. Every control in the table above is important and they all have an impact not only in limiting fraud losses but also in preventing them. But the six highest ranking anti-fraud controls, according to our study, are utilized by an unacceptably low number of companies and agencies. 

Every organization is, at some point, vulnerable to occupational fraud. Ideally we would prevent all such frauds from ever occurring, but sooner or later a fraud will occur, and when it does, the best thing we can do is catch it as quickly as possible and limit the financial impact of the crime. We hope organizations that are serious about reducing their exposure to occupational fraud will consider this data and in future studies we will see the implementation rates for hotlines, support programs, surprise audits, fraud training and job rotation increase substantially.

[1] “Formal Fraud Risk Assessments” was not a category prior to the 2012 Report.

Dallas is Back, but J.R.-Style CEOs Never Went   Away WEDNESDAY, AUGUST 8, 2012 AT 01:29PM

SPECIAL TO THE WEBRobert Tie, CFE, CFPContributing Editor, Fraud Magazine

Is the recent re-appearance of a 1980s fictional swindler worthy of CFEs' professional attention? You bet, because it's a more-relevant-than-ever character study of a cunning, driven and egocentric fraudster.

Crooked oil baron J.R. Ewing is the antihero of famed soap opera Dallas, which has just returned to television after a 21-year hiatus. As senior partner and de facto chief executive of the family business, J.R. has always been up to no good. And now, in 10 new episodes, he plans more felonious deceptions.

J.R.'s business associates have every reason to be nervous. His past frauds spanned a broad range of targets and techniques: conspiring to "fix" oil prices, violating a U.S. State Department embargo by clandestinely selling oil to Cuba and setting up an illegitimate shell company to fraudulently hide his business interests from others entitled to full disclosure, including his honest junior partner, younger brother Bobby.

Whether or not J.R.'s crimes pay off, the show focuses mostly on what he plots against others and how they retaliate. But seldom do misfortunes befall J.R. or Ewing Oil because of something he has not done.

Of course, real-life executives cut from the same cloth as J.R. hurt their companies actively, by their deliberate frauds, and passively, by their negligent inattention to detecting and preventing others' illicit schemes.

A case in point: At the 23rd Annual ACFE Fraud Conference & Exhibition   in June, convicted felon Mark Whitacre told how he and other dishonest executives claimed $660,000 in phony-expense reimbursement from their employer, agribusiness giant Archer Daniels Midland, to cover personal losses they had suffered as victims of an advance fee scam (see Fraud Examiners Manual, section 1.838). Obsessed with their own enormous price-fixing conspiracy to cheat ADM customers, these J.R. clones were greedily blind to any and all fraud risks threatening them or their company.

In the oil business, as in other industries, that kind of myopia can lead to considerable and sometimes undetected fraud-related losses.

PROACTIVE LOSS PREVENTION

Tim J. Leech, CFE, FCA, CIA, CMA, is managing director of global services at Risk Oversight Inc., a Toronto- and Calgary-based consultancy that advises corporate boards and management on mitigating their organizations' vulnerability to fraud and numerous other perils. Early in his career, Leech worked in the energy sector in Calgary as Gulf Canada Resources' audit manager in charge of loss control.

"To do my job as well as possible, I went down to Houston and learned how to steal oil and gas," he recalled. There, an energy industry trade group schooled Leech in the various techniques thieves use to defraud oil producers.

"In one scam, the trucker who hauls crude from your well adds a secret compartment to the inside of his main tank," he said. "And every time he pulls up at your site, he surreptitiously puts some of your product in that hidden extra tank. Then, after he delivers the oil he legitimately took, he makes a second stop to off-load the oil he stole. You never know the difference, but it all comes off your bottom line. And he keeps on bleeding you until you wise up."

Another fraud was more sophisticated. Wells often discharge a mixture of oil and salt water. Producers separate the two, and truck the water away as waste. But scheming employees sometimes divert oil into the water tankers, which haul it off for

surreptitious refinement and theft of oil the producer's management never knows it has lost, Leech said.

Read the rest of the article on Fraud-Magazine.com.

Tone at the Top: It’s More Than ‘Don’t Steal From Your   Company’ THURSDAY, AUGUST 18, 2011 AT 10:01AM

GUEST BLOGGERCora BullockAssistant Editor, Fraud Magazine

At my time here at the ACFE, I’ve learned many methods that companies use to create an ethical culture, including tone at the top, which is the behavior exhibited by upper management that trickles down throughout the organization. I used to think this was only stuff like not embezzling millions from your company, telling the truth to your board of directors and taking responsibility for your sometimes delusional decisions. But I’ve learned there is a more subtle aspect to tone at the top: caring for your employees.

I was taking a recent basic safety course offered by ACFE President and CEO Jim Ratley, who covered such topics as vehicle maintenance, the best locks for your home and how to handle yourself in a physical attack. At one point, Jim looked into our eyes and said intently, “If any one of you ever finds yourself in trouble at 3 a.m., and you have no one to call, you call me.” And I believed him.

Our senior management genuinely cares for us. They have programs in place to reward money-saving suggestions and have offered classes on everything from good nutrition to public speaking to writing. Employees have taken fitness boot camps, and coming up is a class on proper posture and positioning at your desk so your body isn’t a wreck by 5 p.m.

It’s not all be the best you can be. We’ve had happy hours with great door prizes (goodbye dry cleaning bills for a month!) and a summer party with free food, drinks, games and even a dip in a pool. Dr. Wells and Jim regularly come by to chat with everyone, just to see how we’re doing. My husband Clayton and Jim are on a pool team (as in billiards) named “Bad Shape” and play games every Wednesday night. And almost every Thursday morning, Jim comes by to reassure me that Clayton didn’t play as poorly as Clayton lamented he did. I genuinely look forward to our chats – how many other employees can say that about their CEO and president?

All of this, I realize, makes me care that much more about my fellow employees and my organization. I’m proud to work here, not just because of its stellar reputation, but also because people care about me here.

So, what has your company done to show its tone at the top?

Can You Teach   Ethics? FRIDAY, JUNE 3, 2011 AT 10:13AM

GUEST BLOGGERBruce Dorris, J.D., CFE, CPAACFE Program Director

Recently, I was camping with my family and our scout troop at a state park here in Texas. Late on a Saturday afternoon, we noticed a truck drive by with the windows down. I could hear the loud 80s hair-band music blaring before even seeing the truck. Of course, as luck would have it, they pulled into the campsite right next to ours.

So instead of a peaceful, calm evening under the stars making s‘mores, I expected a night of bass-thumping stereos and wild parties. But I was wrong – dead wrong. Much to my surprise, by 10 p.m. all music stopped and all lanterns turned off. In fact, it was my kids who were the loudest at that point.

It made me think: though I was unaware of any specific rule on a lights out-noise off policy in the Texas state park system, there is an unwritten rule or code of conduct that most campers follow:  Enjoy the parks, but respect others in the process.

I thought of this recent episode when I looked at the topic of the panel I will moderate at the ACFE Annual Fraud Conference: Can You “Teach” Ethics? I started to wonder, do we actually teach ethics when we conduct ethics training? Does a corporate code of ethics actually teach someone ethical behavior?

Just as treating your neighbors as you would like to be treated is an unwritten, learned behavior; so is ethical behavior. Ethics is about character. Written rules and codes go only so far. We can have all the internal controls in the world, but management may still have the opportunity to override them. What used to be a handshake on principal is now a team of lawyers and contracts – a very rules-oriented approach.

So, can we teach ethics? It is a very interesting question that will no doubt give way to plenty of debate. Our panel consists of folk from industry, public accounting and academia — a broad mix of experts to give their opinions on this important issue. It will be interesting to see what experiences the participants have had regarding ethics training and education.

If you are at the conference and free on Wednesday morning, stop by and throw in

your opinion too. I would love to hear what you think. See you there.

View a full list of session topics at the upcoming ACFE Annual Fraud Conference here.

Found: Proof the Good Guys Finish   First WEDNESDAY, MAY 25, 2011 AT 09:32AM

GUEST BLOGGERSheila Keefe, CFE, CPAPrincipal, BDR Advisors LLC

Growing evidence makes it clear that doing the wrong thing will cost companies dearly both in the marketplace and with law enforcement. Recent news shows that fraudulent business practices are bad for business. To wit,

The 2010 COSO Report—Fraudulent Financial Reporting: 1998–2007, An Analysis of

U.S. Public Companies reported that companies experienced a 16.7 percent drop in stock price within two days of reporting fraud. 

The SEC’s 2010 Performance and Accountability Report announced that the SEC brought 681 enforcement cases covering a broad spectrum of financial wrongdoing in FY 2010. Those enforcement cases resulted in $2.8 billion in penalties and disgorgement.

At the same time, evidence is mounting that companies that do the right thing enjoy considerably higher returns. As reported by the Ethisphere Insitute, companies that qualified for the ‘ethics index’ outperformed the S&P 500 before, during and after the economic crisis of 2008.    

Such data provides the necessary ammunition in the fight against fraud, starting with cultivating an ethical work environment. Techniques and strategies may vary among ethical companies; there are a handful of tenets, however, common to all ethical companies. Those tenets include:

Free information flow to board: organizations should strive to have their top compliance officer designated as a C-suite position. Board directors should ensure that direct lines of communication exist for the top compliance officer.

Anonymous reporting mechanisms:  Anonymous tips are the leading detection tool for fraud, with the 2010 Report to the Nations on Occupational Fraud and

Abuse reporting that 40 percent of frauds are initially detected through tips.  Leadership by example: Employees watch top management very closely. When top

management does not exemplify the highest ethical standards such conduct plants the seeds of rationalization for committing fraud.

Enforce superb ethics policies: Non-enforcement of known violations or inconsistent, seemingly surreptitious enforcement of company policies breeds confusion and possibly discontent strong enough to fuel rationalization for committing fraud.

Inspired training programs: Orientation and ongoing training programs educate, empower and motivate the workforce to report fraud.

Alignment of incentives with organizations values and goals: ‘buy-in’ mechanisms such as stock options and bonus pools can benefit organizations by reducing conflicts between personal gains and corporate success. However, incentives can illicit dysfunctional business processes and financial statement fraud. Organizations should look for ways to use incentives to reward acts of integrity as well as revenue-generating business activity.

As shown by the Ethisphere’s report that shows higher returns for ethical companies, creating a culture of shared success can help organizations reach both their economic and ethical goals. Add to that the penalties for fraudulent behavior dispensed by both law enforcement and the marketplace, it is clear that good guys do indeed finish first.

Read more of Sheila's insights on her blog, Business Done Right.

Fraud Examiners Not Immune from Ethical   Dilemmas TUESDAY, MAY 17, 2011 AT 12:05PM

GUEST BLOGGERDawn Taylor, CFEACFE Research Specialist

One of the toughest decisions I've ever faced was whether I should disclose to a children's welfare organization certain morally questionable activities in a friend's household or feign ignorance. Telling all that I knew came with the possibility of my friend’s children

being taken from her — perhaps permanently. Yet, holding back information meant that the children might be put in harm’s way.    Would it be ethical for me to withhold information from the investigator? Did the situation justify the mother’s children being taken from her? Were the children actually in harm’s way, and would lying keep them there? How might the children suffer if they were taken from their mother? How might the mother suffer as a result of having her children taken from her custody?

As you can see, I had a lot to think about.

We all face ethical dilemmas at some point or another, including in our professional lives. As CFEs, we owe it to ourselves, the profession and society to do the right thing. But when ethical values collide, the right course of action isn’t always clear. Where can we turn for guidance?

One valuable resource is the ACFE's new online self-study, Ethical Issues for Fraud

Examiners. The course helps us to understand what constitutes an ethical dilemma and assists us in developing a greater awareness of ethical issues faced by fraud examiners. Included in the course are several interesting and thought-provoking fictional scenarios involving potential ethical dilemmas that pertain to fraud examinations.

Although there is no approach that will provide us with an automatic solution to our ethical dilemmas, Ethical Issues for Fraud Examiners can guide us as we deliberate on the issues for ourselves, explore important considerations and finally come to our own resolutions.

And, as an added bonus, the two CPE available allow CFEs to meet the new 2011 ethics-related CPE requirement.

Have you ever faced an ethical dilemma as a fraud examiner? How did you resolve it?