Using Data Analytics to Detect Fraud - Fraud · PDF file2016–investigation concludes no...
Transcript of Using Data Analytics to Detect Fraud - Fraud · PDF file2016–investigation concludes no...
Welcome!The Return of the Tone at the Top
Gerard Zack, CFE, CPA, CIA, CCEPManaging Director, Global Forensics
BDO USA, LLP
© 2017 Gerard Zack and the Association of Certified Fraud Examiners, Inc.
Gerard M. Zack, CFE, CPA, CIAManaging Director, Global Forensics
BDO USA, LLP
Washington, DC
The Return of the Tone at the TopSessions 2B/5B
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Session Objectives
1. Understand how tone at the top affects:
• Financial statement fraud
• Nonfinancial reporting fraud
• Corruption schemes
• Asset misappropriation schemes
2. Identify different elements of corporate culture
in our organizations that can increase the risk
of fraud and corruption.
3. Determine practical action steps we can take
to improve tone at the top.
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Corporate Culture—2002
CEO Bernie Ebbers “created, and the [then] board
permitted, a corporate environment in which
pressure to meet numbers was high, the
departments that served as controls were weak,
and the word of senior management was final and
not to be challenged.”
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Corporate Culture-2015
Toshiba
“A corporate culture at Toshiba where it was
impossible to go against the boss’s will” and “a
systematic involvement including by top
management, with the goal of intentionally inflating
the appearance of net profits.”
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Poor Tone at the Top Identified
as an Internal Control Weakness
22.9% of financial statement frauds
16.9% of corruption cases
9.5% of asset misappropriation cases
Source:
2016 ACFE Report to the Nations on Occupational Fraud and Abuse
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CASE STUDIES
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Toshiba Profit Inflation Scheme
Pre-tax profit inflated by
$1.9 billion (USD)
Senior management
pressured employees to
meet targets
Employees interpreted as
implicit direction to cook
the books
CEO denies giving explicit
instruction
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Toshiba
CEO instructed executives to “use every
possible measure to achieve profitability.”
Culture in place made it impossible for
employees to go against the will of their
superiors.
Profit targets became more and more
aggressive.
Division heads were told their business might
be closed if results did not improve.
Accounting department intentionally misled
auditors to cover up the scheme.
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37 PERCENT OF MANAGEMENT
ACCOUNTANTS HAVE FELT
PRESSURE FROM MANAGERS OR
PEERS TO COMPROMISE
CORPORATE ETHICS
Source: Chartered Global Management Accountant (2015)
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Tesco Inflated Profits by £263m
Problem can be traced to expansion beyond
traditional grocery business in early 2000s– clothing,
garden centers, banking, etc.
2006–open U.S. chain, part supermarket, discount,
convenience store
Back in home market–competition heats up
Pressure to maintain profitability rises
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Tesco Profit Inflation
Improper accounting for supplier credits
Can be traced to overly aggressive tactics in
dealing with suppliers as a method of
meeting profit goals
In one email, direction was given to “maintain
[Tesco’s] margin at key financial reporting
periods” by “not paying back money owed” to
a supplier.
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Multiple Accounting
Errors
Fifteen separate areas of the company’s 2012
and 2013 financials required restatement.
Investigation identified weaknesses in four of
the five COSO components of internal controls:
• Control environment
• Risk assessment
• Control activities
• Information and communication
• Monitoring
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Hertz Control Environment
An “inconsistent and sometimes inappropriate tone at
the top.”
“Our former chief executive officer’s management
style and temperament created a pressurized
operating environment at the company, where
challenging targets were set and achieving those
targets was a key performance expectation.”
“There was in certain instances an inappropriate
emphasis on meeting internal budgets, business
plans, and current estimates.”
Also cited lack of expertise, training, and reporting
structure.
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Marvell Technology Group
2015–reports possible fraudulent financial
reporting
2016–investigation concludes no fraud, BUT
“Significant pressure” from management on its
sales teams to meet revenue targets
When audit firm resigned, it cited concerns:
• Management’s operating style and flow of
information and communication
• Lack of personnel with appropriate knowledge,
expertise, and training
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It’s Not All About Financial Reporting
This is the story of the president of Mount St. Mary’s
University.
One metric for the university involves the success
rate of students.
The denominator of this rate is “enrolled” students.
“Enrolled” is measured on September 25, after
students have been in classes for about three
weeks.
If the president could get the professors to weed out
the students most likely to fail by September 25, the
success rate would get a boost!
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The Plan Is Hatched
By email: “My short-term goal is to have 20–
25 people leave by the 25th.”
“This one thing will boost our retention 4–5%.”
“A larger committee or group needs to work
on the details…
But I think you get the idea.”
“There will be some collateral damage.”
But there was a problem:
• Professors tend to develop strong bonds with their
students.
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Mount St. Mary’s University
“This is hard for you,
because you think of
the students as
cuddly bunnies.”
“You just have to
drown the bunnies…”
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The Collateral Damage
The president resigned from Mount St.
Mary’s University, even though he had
widespread student support for many of the
changes he had brought to the university in
the sort time he was there.
But this one incident involving a single-
minded focus on achieving a performance
metric led to his demise.
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Other Frauds Linked to Corporate Culture
“Diesel Gate”–Volkswagen
Other automakers–emissions, etc.
Environmental claims
Product safety claims
Wells Fargo new account fraud
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The Importance of Controls Over
Nonfinancial Reporting & Compliance
COSO 1992 COSO 2013
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Corruption Cases
The link to the highest levels of an
organization is clearest in financial and
nonfinancial reporting frauds.
Next clearest link is with corruption schemes.
Least obvious link is with asset
misappropriations.
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Avon China
In December 2014, Avon agrees to $135m
SEC/DOJ settlement over FCPA charges.
From 2004–2008, Avon China provided $8
million in value to government officials.
Initially identified by internal audit in 2005
Avon self-reported, but not until 2008.
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Avon China (AC) AC executives directed IA to delete FCPA references
from the audit report, saying it “fell within purview of
Legal, and not Internal Audit.”
IA team was told to retrieve and destroy draft reports.
Avon HQ failed to instruct AC to cease the conduct
identified in the draft report.
No remedial measures were ever taken, even though
the decision was made to remediate.
In March 2006, AC adopted a “zero penalty policy,”
but it’s not what you might think!
Pay bribes to reduce or eliminate fines and to prevent
any negative media.
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Asset Misappropriation Schemes
The least obvious link to a branch of the Fraud
Tree
Poor tone at the top often linked to
rationalization for employees who commit asset
misappropriations:
• Perceived greed of executives
• Perceived transgressions/violations perpetrated by
executives
• Perceived lack of enforcement against coworkers
• Perceived poor treatment by executives
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COMMON THEMES IN POOR
TONES AT THE TOP
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Is It Merely Lip Service?
91% of FTSE annual reports reference ethics and
integrity
• Only 8% provided any metrics on ethics
82% of companies surveyed have a code of ethics,
and 80% indicate that bribery was an ethical issue for
their organizations
• Only 57% have specific anti-corruption guidelines
59% have hotlines
• 26% say management views users as “trouble makers”
Sources:
• U.K.’s Chartered Institute of Internal Auditors (CICA)
• CGMA’s Managing Responsible Business – 2015 Edition
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Signs of Toxic Corporate Culture(Tone at the Top, February 2016)
1. Favoritism
2. Walking on eggshells (constant fear of
discipline from supervisors)
3. Bad workplace behavior (competitiveness,
cliques, etc.)
4. Lack of development (no training)
5. Information hoarding by managers
6. Lack of accountability (no consequences for
ethics violations)
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Additional Red Flags
Overly aggressive goal-setting
Pressure cooker environment for achieving
goals
One-way communication from executives
Decision-making driven by attempts to hide
problems rather than address them
The “Enron culture”
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What Is the Enron Culture?
A focus on finding the loophole in a rule or
contract
Strategizing ways to comply with the letter
of the rule, while violating its spirit
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Corrupt Individual or Corrupt Organization?
“Bad apple” versus “rotten barrel”
“Personal corruption” cannot be meaningfully
separated from “organizational corruption”
Davide Torsello, anthropologist and associate professor of
organizational behavior at the CEU Business School of the Central
European University in Budapest, Hungary
From an article by Torsello and Alison Taylor “Don’t buy the ‘rogue
employee’ myth. There’s more to it.” 4.27.16 at www.fcpablog.com
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Why Not? Five Reasons
1. Leadership–Management is responsible for
integrating employees by communicating
rules, norms, processes, etc.
2. Motivation–What cultural condition allows
unethical motivations (achieve goals no
matter how) to take precedence over
integrity?
3. Socialization–Workers spend a third of their
lives at work; work environment affects
personal vision, individual choices.
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Why Not? Five Reasons
4. Rules and norms–Cognitive mechanisms
enable workers to accept and justify
differences between workplace and personal
norms; cognitive dissonance; rationalization.
5. Reciprocity–Is the sense of reciprocity built
towards individuals? Or is it built more
towards the organization?
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WHAT CAN BE DONE TO
IMPROVE THINGS?
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It Starts at the Top!
Is ethics a regular item on the board’s agenda?
• Make it an active, on-going discussion at the board
level.
Are ethics metrics tracked?
• People participating in training programs
• Surveys of employee opinions
Exec compensation linked to ethics
Consider external measures
• Dow Jones Sustainability Index
• FTSE4Good
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Understanding Culture
Rarely is there a single culture.
Understand micro-cultures that exist due to:
• Geographic differences
• Mergers and acquisitions
• Job categories
Senior execs need to be proactive to ensure
their tone at the top is transferred to each
layer of micro-culture.
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Enhance the “Speak Up” Line
Well communicated through the organization
Availability
Multiple languages
Provide guidance, not only a tool for reporting
Clear protocol for handling information
Confidentiality
Consistency in enforcement
Protection for providers of information
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Managing Pressure
Pressure is a fact of doing business, but it
can be better managed.
There is no one single step to this, but rather
a series of incremental steps:
• Good two-way communication between managers
and employees
• Manager awareness of pressures on employees
• Managers not imposing their own schedules and
pressures on employees
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Other Characteristics of Strong Culture
Managers demonstrate interest in staff well-being• Including investment in training and development of individuals
Lots of social interaction among coworkers and
between levels
Leaders provide clear guidance • Workers have a strong understanding of their roles and where the
organization is going
Workers are focused on customer needs (rather than
their own needs or those of the boss)• Focus on mission of the organization
Departments are interdependent and have high group
identification
Group participation in goal-setting
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Questions??
My contact information
Gerry Zack, CFE, CIA, CPA
Managing Director – Global Forensics
BDO USA, LLP
Washington, DC
https://www.linkedin.com/in/gerryzack