Fraud, Waste, And Abuse Risks And CSA - Virginia

Fraud, Waste, and Abuse Risks and CSAApril/May 2019

Is your CSA program at risk?Are you aware of the potential impact fraud,waste, and abuse may have on an organization?This session is an overview of fraud, waste, andabuse risk concepts and its applicability toChildren’s Services Act (CSA) programs.OCS, April/May 20192

Discussion TopicsOCS, April/May 20193

OCS, April/May 20194

OCS, April/May 20195

OCS, April/May 20196

OCS, April/May 20197

FRAUDTERMINOLOGYOCS, April/May 20198

“FRAUD is any intentionalact or omission designed todeceive others resulting in thevictim suffering loss and/orthe perpetrator achievinggain.” - as defined by IIA, AICPA, and ACFEOCS, April/May 20199

EXAMPLESFalse representation of facts (whether by words or conduct)Making false or misleading statementsConcealment of something that should have been disclosedwhichDECEIVES AND INTENDS TO DECEIVEOCS, April/May 201910

“WASTE is defined asthoughtless or carelessexpenditure, consumption,mismanagement, use, orsquandering of resources.”Source: Office of the State Inspector General, Newsletter, January 2016OCS, April/May 201911

EXAMPLEFailure to submit poolfund reimbursementstimely LOCAL ONLYFUNDINGOCS, April/May 201912

“ABUSE is excessive orimproper use of a resource, orto use a resource in a mannercontrary to the natural or legalpurpose.”Source: Office of the State Inspector General, Newsletter, January 2016OCS, April/May 201913

EXAMPLESPersonal use ofgovernment-ownedresources, supplies orequipmentConducting personalbusiness during work hoursAccessing informationwithout a legitimatebusiness needOCS, April/May 201914

OCS, April/May 201915

OCS, April/May 201916

OCS, April /May 201917

OCS, April /May 201918

OCS, April/May 201919

OTHER COMMON TERMSBribery - The offering, giving, receiving, orsoliciting of any item of value to influencethe action of an official or other person incharge of a public or legal dutyCollusion - An agreement between two ormore people to participate in inappropriate/illegal activity for profit/gainOCS, April/May 201620

OTHER COMMON TERMSCorruption – Involves the abuse of aperson’s power or position to acquirepersonal benefit for themselves or someoneelseEmbezzlement – Steal or misappropriatefunds entrusted to one’s care.OCS, April 201621

CATEGORIESOFFRAUDOCS, April/May 201922

FINANCIAL ANDMANAGEMENT REPORTINGOccurs when anorganization’s reportsare intentionallyprepared with omissionsor misstatementsOCS, April/May 201923

MISAPPROPRIATION OFASSETSUnauthorized,inappropriate andintentional acquisition,use, or disposal of theorganization’s assetsOCS, April/May 201924

CORRUPTIONAbuse of power orposition to acquirepersonal benefit forthemselves orsomeone else.OCS, April/May 201925

ERYILLEGALGRATUITIESOCS, April/May 201926

MANAGEMENTOVERRIDEActions in whichinternal controls areintentionallyoverridden for anillegitimate purpose.OCS, April/May 201927

OCS, April/May 201928

OCS, April/May 201929

OCS, April /May 201930

OCS, April/May 201931

WHY DO PEOPLE COMMIT FRAUD?OCS, April/May 201932

“Regardless of culture, ethnicity, religion, or otherfactors, certain individuals will be motivated tocommit fraud and the primary reasons why fraudoccurs are “pressures to do ‘whatever it takes’ tomeet goals (81% of respondents) and to seekpersonal gain (72% of respondents).” Additionally,many respondents indicated that “they do notconsider their actions fraudulent (40%) as a reasonfor wrongful behavior.”Source: The 2007 Oversight Systems Report on Corporate Fraudwww.oversightsystems.comOCS, April/May 201933

COMMON CHARACTERISTICSOF FRAUDRED FLAGSOCS, April/May 201934

PRESSURE OR INCENTIVENeed the perpetrator is trying to satisfy bycommitting fraud: Severe pressure from boss to reach goalsor recover from high risk losses Financial pressure (at home or work) Illness/addictionOCS, April/May 201935

OPPORTUNITYThe ability to commit the fraud. May be due to weak internal controls, lackof segregation of duties, inappropriate ITaccess May start small or accidentally; when notcaught, expand the scheme (e.g. officesupplies, reimbursed expenses)OCS, April/May 201936

RATIONALIZATIONThe “story” the fraudster tells to justify thefraud in their mind. The more that they feel detached, the morelikely they are to rationalize Overlooked for promotion or raise (I deserve it) Feeling unappreciated They wont notice, it’s not hurting anyone Use of nicknames (“greasing the wheels” ratherthan bribery) helps with rationalizationOCS, April/May 201937

OCS, April /May 201938

FRAUD RISKMANAGEMENTACTIVITIESOCS, April/May 201939

Every organization is susceptibleto fraud, but not all fraud can beprevented, nor is it cost effectiveto try.OCS, April /May 201940

OCS, April /May 201941

TECHNIQUES FOR ASSESSING FRAUD RISK Interviews and brainstorming with people from all areaswithin organization (i.e. CSA Program) Consider whistleblower and stakeholder complaints(i.e. CSA due process complaints / Feedback surveys) Include assessment of incentives, pressures, andopportunities to commit fraud (i.e. reduce CSA costs) Consider the potential override of controls bymanagement (i.e. lack of segregation of duties).OCS, April/May 201942

FRAUD RISK MANAGEMENT RESPONSE – CPMT Responsible for developing and executing mitigatingcontrols to address fraud risks Consider both the fraud scheme and the individualswithin and outside the organization (i.e. CSA Program)who could be the perpetrators of each scheme Decide what the response should be and perform acost/benefit analysis of implementing controls orspecific fraud detection proceduresOCS, April/May 201943

Website: fOCS, April/May 201944

OCS, April/May 201945

Good Practices Guide – Deterring Fraud Assess the organization’s vulnerability to fraud, identifyand earmark those areas that are most vulnerable to riskof fraud Create an anti‐fraud culture through publicitycampaigns; Create awareness about fraud risk amongemployees Issue a Fraud Risk Control Policy; Assign ownership andresponsibility for overall management of anti‐fraudactivities Develop a Fraud Response PlanOCS, April/May 201946

Good Practices Guide – Fraud Prevention Prevent fraud through effective internal controls Prevent staff (insider) fraud by proper vetting andsecurity screening of employees Prevent fraud in relation to identity information,data, and documents Assess the inherent risks of the new schemes/programs and fraud proof the schemes/programsOCS, April/May 201947

Good Practices Guide – Fraud Detection Set up and encourage the use of hotlines to detectfraud Identify and act upon Red Flags (Fraud Indicators) Use statistical and IT tools in the detection of fraud Institute an effective internal audit systemOCS, April/May 201948

Good Practices Guide: Investigating and Dealing with Fraud Equip the organization with the right skills to undertakeprofessional Investigation of the fraud that has beendetected Respond effectively to fraud when it occurs Enforce effective sanctions, including appropriate legalaction against people committing fraud Monitor and evaluate the effectiveness of sanctionscontinuously Adopt effective methods for seeking redress in respect ofmoney defraudedOCS, April/May 201949

Fraud RiskManagementActivitiesSources:- Committee on SponsoringOrganizations (COSO)Framework, Principal 8- Fraud Risk Assessment, Fowler &Company, LTDOCS, April /May 201950

GROUPEXERCISEOCS, April/May 201951

GROUP EXERCISE – CASE STUDY The case described is an example of . Select all that may apply. Explain youranswer. Fraud Waste AbuseWhat category of fraud, waste or abuse applies in this scenario? Explain your answer. Financial and Management Reporting Misappropriation of Assets Corruption Management overrideWhat are the red flags, if any? Pressure/IncentiveOpportunityRationalizationWhat are some fraud prevention techniques that could be implemented to reduce thefraud risks in the CSA program?OCS, April/May 201952

WHAT WE COVERED TODAY FRAUD DEFINITION AND TERMINOLOGY CATEGORIES OF FRAUD FRAUD INDICATORS/RED FLAGS FRAUD RISK MANAGEMENT ACTIVITIESOCS, April /May 201953

OCS, April/May 201954

Stephanie S. Bacote, CIGAProgram Audit ManagerPhone: (804) 662-7441Email: stephanie.bacote@csa.virginia.govorAnnette E. Larkin, MBAProgram AuditorPhone: (804) 662-9816Email: annette.larkin@csa.virginia.govOffice of Children’s Services, 1604 Santa Rosa Rd, Suite 137, Richmond, VA 23229WWW.CSA.VIRGINIA.GOVOCS, April/May 201955

Good Practices Guide -Fraud Prevention Prevent fraud through effective internal controls Prevent staff (insider) fraud by proper vetting and . (COSO) Framework, Principal 8 - Fraud Risk Assessment, Fowler & Company, LTD. . FRAUD RISK MANAGEMENT ACTIVITIES OCS, April /May 2019 53. OCS, April/May 2019 54 .