Essentials of a Highly Effective Employee Fraud Awareness Program

Essentials of a Highly
Effective Employee Fraud
Awareness Program
February 13, 2013
Special Guest Presenter:
Peter Goldmann, MSc., CFE

Copyright © 2013 FraudResourceNet™ LLC

About Peter Goldmann, MSc., CFE



President and Founder of White Collar Crime 101

Publisher of White-Collar Crime Fighter
Developer of FraudAware® Anti-Fraud Training
Monthly Columnist, The Fraud Examiner,
ACFE Newsletter

 Member of Editorial Advisory Board, ACFE
 Author of “Fraud in the Markets”
Explains how fraud fueled the financial crisis.


About Jim Kaplan, MSc, CIA, CFE
 President and Founder of
AuditNet®, the global resource
for auditors
 Auditor, Web Site Guru,
 Internet for Auditors Pioneer
 Recipient of the IIA’s 2007
Bradford Cadmus Memorial
Award.
 Author of “The Auditor’s
Guide to Internet Resources”
2nd Edition

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Today’s Agenda
 Introduction: Fraud Statistics: The Growing Fraud
Threat
 Why It is Important to Train
 Policy Problems and Tone at the Top
 Building Your Awareness Training Program
 Whistleblower Hotlines
 Your Questions
 Conclusion


Fraud: The Big Picture
According to major accounting firms, professional fraud
examiners and law enforcement:

 Fraud jumps significantly during tough economic times
 Business losses due to fraud increased 20% in last 12
months, from $1.4 million to $1.7 million per billion dollars of
sales. (Kroll 2010/2011 Global Fraud Report)
 Average cost to for each incident of fraud is $160,000
(ACFE) Of Financial Statement fraud: $2 million
 Approx. 60% of corporate fraud committed by insiders (PwC)
 Approx. 50% of employees who commit fraud have been
with their employers for over 5 years (ACFE)

Financial Statement Fraud: The
Big Picture
 Victims of financial fraud are stakeholders with claims against the
entity: shareholders, lenders, regulators.
 Financial fraud occurs less frequently than asset misappropriation
but the losses are substantially higher.

Source: ACFE 2012 Report to the Nation


Fraud Training: Statistical
Overview

Source: ACFE 2010 Report to the Nation


AWARENESS TRAINING:
EXPERTS SPEAK
 “Employee education is the foundation of preventing and
detecting occupational fraud. Employees must be trained in
what constitutes fraud, how it hurts everyone in the company
and how to report any questionable activity”. (2010 ACFE
“Report to the Nations”)
 “…education, such as frequent communication or even
formal classroom training, could be a remedy … and in fact
might accelerate the …adoption of a more ethical
corporate culture in an organization.” (Crowe Horwath LLP)


Policy Problems…And
Solutions
Ethics Policy, Compliance Policy and
FRAUD POLICY
Myth: Ethics, Compliance, Code of Conduct policies cover fraud
detection and prevention
Reality: Most cover only:
 Harassment
 Discrimination
 Regulatory compliance (banking rules, safety regulations,
employment regulations, etc
 Conflict of interest/gifts policy
 General dictate about complying with all laws and regulations

MOST POLICIES NEVER MENTION “FRAUD. For
example…

ETHICS/COMPLIANCE TRAINING
VS. FRAUD TRAINING

CODE OF CONDUCT:
“All Directors, Officers and
Associates should protect the
Company’s assets and ensure their
efficient use.
Theft, carelessness and waste have
a direct impact on the Company’s
profitability. All Company assets
should be used for legitimate
business purposes.”

But what about:
 Bribery?
 Kickbacks?
 Bid-rigging?
 Identity fraud
 Financial statement fraud?
 Cyber-sabotage?
 Etc., etc.


Policy Problems…And
Solutions
Formal anti-fraud policies
call for:
Formal training of all employees
in fraud schemes, red flags and
responsibility for reporting
wrongdoing


Step One: Tone at the Top
Top management must:
 Set standard of “zero tolerance” through actions (no bribepaying, no book-cooking, no embezzlement, no conflict of
interest, etc)
 Emphasize integrity in key communications….
 Annual reports
 Press releases
 Internal communications with employees
 Emphasize responsibility to detect and report fraud
 Implement regular anti-fraud training for all staff …


Polling Question 1

Most corporate codes of conduct do cover
anti-fraud matters
A. True
B. False
C.


WHO, WHAT, HOW AND WHEN TO
TRAIN

BUILDING YOUR
FRAUD AWARENESS TRAINING
PROGRAM:
WHY, WHOM, WHAT, HOW AND WHEN


WHY TRAIN: SPECIFIC AWARENESS
TRAINING OBJECTIVES
Main objectives of fraud awareness training:
1) Teach employees about the responsibility to fight fraud
2) Educate employees at all levels to recognize red flags
of main types of fraud.
3) Provide employees with the knowledge needed to
report fraud and suspicious behavior via your hotline or
other reporting channel.
4) Serve as management’s “eyes and ears”.
5) Support management’s “Tone at the Top”.
6) Cut losses (together w/ hotline)
7) Deter by creating perception of risk of getting caught
8) Support morale by making employees “part of the
solution”
(continued)

WHY TRAIN: FRAUD AWARENESS
TRAINING OBJECTIVES
WHY TRAIN (continued)…
Latest incentive to train:
Dodd-Frank will force companies to take a hard look at
internal whistleblower systems and implement more robust
reward programs and protection programs if they want to
keep their problems in-house and out of the regulators hands.


OPTIONS, FREQUENCY & FORMAT
WHOM TO TRAIN …
IDEALLY: Everyone in the
organization
1) Managers to build sense of
importance of the training
2) All others
Note: Content for each group may
vary: Example: Financial Statement
Fraud for Managers Only


REGARDLESS OF WHO YOUR TRAINEES ARE, IT
SHOULD BE MANDATORY. OTHERWISE NO ONE WILL
TAKE IT SERIOUSLY AND FRAUD WON’T BE
REPORTED.


Polling Question 2
One of the main objectives of fraud awareness
training is to…
A.
B.
C.
D.

Screen for potential fraudsters among your employees
Compliance with state and local employment laws
Help employees to serve as management’s “eyes and ears”
Reduce employee turnover
E.


WHAT TO TRAIN: FIVE KEY CATEGORIES…
 Why it is essential to be aware of fraud risks (stats)
 Why people commit fraud (Fraud Triangle)
 Fraud risks affecting your organization
 Red flags of most common frauds
 How to report actual or suspected fraud (hotline)


OPTIONS, FREQUENCY, FORMAT
WHAT TO TRAIN: Create Detailed Outline. Example…

Sample Fraud Awareness Training for ABC Bank
MODULE I: INTRODUCTION
Objectives:
 Present a foundation of awareness for Detecting, Preventing
and Reporting fraud.
 Educate ABC Bank employees that fraud is more than
dollars stolen from the Bank: Fraud damages ABC Bank’s
reputation which results in lost customers which directly impacts
everyone directly. It can also draw unfavorable and potentially
costly regulatory scrutiny/enforcement action.
Continued….

WHAT TO TRAIN… Continued….
Fraud affects YOU: When fraud occurs it can result in:
 Reduced pay increases
 Reduced benefits
 Limited promotion opportunities
 Layoffs
Lesson 1: Statistics: Why we all must be aware of fraud
 ACFE: 5%
 24 months to detect
 Most frauds detected by employee tip
 Fraud losses reduced by 50% by fraud awareness training
Continued….

Lesson 2: Why People Commit Fraud

Continued….

Lesson 3: Fraud in the Financial Services Industry
 Check fraud stats
 Credit card fraud stats
 Insider trading (if applicable)]
 Loan fraud
Lesson 4: Fraud at ABC Bank
 ABC Bank fraud loss stats
MODULE 2: Learning to Detect, Prevent and Report Fraud
 Introduction: Two main types of fraud: External and
Internal. Majority of all frauds are internal.
Continued….


 Lesson 1: Common types of External Fraud to be aware of
 Credit card fraud
Lesson 2: Common types of Internal Fraud to be aware of
 Embezzlement (At all levels within the bank)
 Cash and check theft/forgery
 Loan fraud
 T&E fraud/Misuse of company credit card
Lesson 3: Red flags of Internal Fraud
 Embezzlement red flags (Behavioral changes, accounting
anomalies
 Cash and check fraud red flags
 T&E fraud red flags (Unusually high expense claims;
photocopies of receipts, etc)
Continued…

Lesson 4: How to Report Fraud
or Suspicious Activity (Hotline)
Lesson 5: Summary and
Review
Lesson 6: Course Quiz
(Optional)
CONCLUSION and ABC Bank
Certificate of Fraud Awareness


Polling Question 3
When creating a fraud awareness training program,
you should explain the reason for the training before
teaching the fraud risks
a. True
b. False


HOW TO TRAIN?
 In-house classroom instructor
(from I/A, Legal or Compliance)
 Outside classroom instructor
(Fraud investigator, fraud expert, forensic
accountant, university professor)

 On-line (E-Learning)
 On-line—Webinar
 Intranet (Internal E-alerts)
 In-house newsletter
ALL TRAINING SHOULD BE CUSTOMIZED TO YOUR
ORGANIZATION’S CULTURE, BUSINESS PROCESSES, ETC


WHEN TO TRAIN?
 Full training once per year
 Quarterly or bi-monthly
seminars or refresher
Webinars
 Monthly E-alerts
 Full training for all new
hires


FRAUD HOTLINES

HOTLINE HOW-TO’s


Tips: Statistical Overview

Source: 2010 Report to the Nations on Occupational Fraud and Abuse, Association of Certified Fraud Examiners


Internal or External?

IMPORTANT:
In-House or Third Party?


How to Establish and Manage a Hotline

Regardless of Internal or External:
Step #1 Establish an easily
accessible channel.
 Should be toll-free number as well
as E-mail option, Web page,
Intranet
 Make sure it works…literally!
 Make sure the line is functioning
 Make sure callers aren’t getting busy
signals
 Ensure that the number actually goes
to the intended recipient (Should be an
actual person!)

Step # 2: Publicize the hotline.
 Employees don’t use hotlines they don’t know
about.
 Remember: Enron had an anonymous tips
hotline!
 Posters; intranet notices; employee fraud
awareness training; E-mails from management
 Use efforts to publicize hotline to demonstrate
“culture of compliance.”
 Particularly important for in-house hotlines.
 Encourage tips on fraud, ethics and compliance
(The distinction isn’t always crystal clear).


Step # 3: Provide Choice of Reporting Options
 Hotlines are essential, but not sufficient for gathering all
employee tips.
 Include anonymous E-mail addresses, Web sites, dropboxes or anonymous P.O. boxes.
 Encourage face-to-face tips to supervisors.



Step # 4: Staff hotline with independent personnel
“Independent” does not necessarily mean third-party.
May be in-house if this is a dedicated professional able to
preserve anonymity.


How to Establish and Manage a
Hotline
Step # 5: Properly Train Hotline Staff
 Must be provided with detailed scripts to
follow—including assurance that will be
no retaliation.
 Depending on size of organization and
role of hotline personnel, additional
training may be necessary.
 Hotline personnel who are responsible
for initial investigations/escalation
decisions will require additional training.
 May require hiring outside expert



Step # 6: Establish and Maintain a Claim Log
 Upon receiving complaint, hotline personnel should
immediately initiate an entry into claim log.
 Claim logs are essential to preserving anonymity;
each claim must receive unique claim number or
other anonymous identifier.
 Claim logs should also include other basic information
about the claim/reported incident.
Key: Claim logs serve as “hard copy” record for
compliance purposes. Your third-party provider
should maintain this log for you.



Step # 7: Make hotline available to all
stakeholders
 Don’t limit hotline access to

employees -- encourage vendors
and customers to report wrongdoing
too.
 Include them and any other
potential sources of tips in hotline
communications.
 Same principles apply to outsiders:
Companies must publicize hotlines
and preserve anonymity.

Claims Handling Essentials

Step # 8: Establish Escalation Policies
and Procedures
 If complaint requires escalation, I/A,
Legal or a Claims Screening
Committee should prepare a report to
audit committee.
 At this stage, an additional interview
with the whistleblower should be
conducted by trained, independent
interviewer and incorporated into the
report.

Polling Question 4
Full-staff fraud awareness training should be
conducted:
a.
b.
c.
d.

Quarterly
Twice per year
Once per year
Every two years


Polling Question 5
Hotlines are essential but not adequate for
capturing all employee tips. You should also have
(choose all that apply)
A.
B.
C.
D.

E-mail channel
Web-based reporting option
Employee questionnaire
P.O. Box


SUMMARIZING THE PROCESS
Bottom line: Have clear protocol in place in advance
. . . and enforce it!
 This is a good outline for setting up and maintaining a
whistleblower hotline.
 Whatever plan you follow, you need some advance
plan. Do not wait until crisis occurs.
 Adherence to a pre-set plan is a strong defense
against a retribution claim.
 Without it your awareness training will be meaningless


Questions?
 Any Questions?
Don’t be Shy!


Thank You!

Website: http://www.fraudresourcenet.com
Jim Kaplan
FraudResourceNet™
800-385-1625
jkaplan@fraudresourcenet.com
Peter Goldmann
FraudResourceNet™
800-440-2261
pgoldmann@fraudresourcenet.com


Essentials of a Highly Effective Employee Fraud Awareness Program

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