Ethics for Auditors: Understanding Current Issues in Financial Integrity

Ethics for Auditors:
Understanding Current
Issues in Financial Integrity"
June 26, 2013
Special Guest Presenter:
Michael Palmer, JD

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


About Michael Palmer
About Mike Palmer

 Founder, Ethics By Design
 Lawyer since 1980
 Consultant to large and small
companies
 Author
 Educator


About Michael Palmer
About Mike Palmer


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

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6

Today’s Agenda
 Introduction: Fraud Statistics: The Growing
Fraud Threat
 Auditing for Fraud: Standards & Essentials
 Ethics vs. Fraud
 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)

The Auditor’s Role
 1200: Proficiency and Due
Professional Care
 1220: Due Professional Care
 2060: Reporting to Senior
Management and the Board
 2120: Risk Management
 2210: Engagement
Objectives


Paul, Marta, & Paul’s Mother


Paul’s Deception


Paul’s Mother Chases Marta


Paul Eats the Tuber


Moral:
The Talent to Deceive is in Our DNA


The Hebrew Myth of Adam, Eve, and
the Serpent


Lead Us Not Into Temptation


Keeping us Honest

“If men were angels, no
government would be necessary. “
Federalist # 51.


The Cheating Culture


Lying


Government Procurement

“There is no kind of dishonesty
into which otherwise good
people more easily and
frequently fall than that of
defrauding the government.”
Benjamin Franklin


Our Challenge


Our Challenge


Internal Auditors
Watch the
Watching System

Internal Auditors Watch
the Watching System


Three Lines of Defense


Can We Make it Better?


Can We Make it Better?



What We’ve Learned


What We’ll Go Over Next

 We Are Group
 The Importance
Creatures: Lessons
of Reminders
from Social
 Implications for
Psychology
Governance,
 The role of Internal
Risk
Auditors is to
Management,
Watch the Watch
and Control
System
 Discussion

Polling Question 1
According to the IIA the 3rd Line of Defense in
defending against fraud, theft and other
ethical misconduct is
A. Internal controls
B. Risk management
C. Internal audit
D.


We Are
Group
Creatures

Obedience to Perceived
Authority


Authority


Authority


Few Thought Others Would Do It


Milgram Experiment Results


Lessons for GRC Design


Diffusion of Responsibility:
The Bystander Effect




Seeing What Others See




Me or Your Lying Eyes?


The Fraud Triangle

Opportunity

‐$
Motivation

Rationalization



Average of 4 Correct Answers


But They Reported
Six (6) Correct Answers


The Fudge Factory




Willpower is Finite


Willpower Depletion


Self-Control is a Like
Neurological Muscle


Polling Question 2
Another term for Rationalization in the context
of ethics and fraud is:
A.
B.
C.
D.

Absence of willpower
Illegal behavior
The fudge factory
None of the above
E.


Self-Control is a Like
Neurological Muscle


Meet With Your Parole Board in
the Morning or Just After Lunch


Willpower Depletion
Also Reduces Honesty


Willpower Depletion
Also Reduces Honesty




We Are Group
Creatures Part B

Was the Challenger
Launch Decision a
Failure of Governance,
Risk Management, and
Control Systems?


NASA
Headquarters
Washington,
D.C.

Morton-Thiokol
Utah

Marshall Space Flight
Center
Alabama
Johnson Space Center
Texas


The Decision to Launch


Icicles on the Launch Pad



Huntsville Alabama

Ogden Utah



Roger Boisjoly



“My God, Thiokol,'' Mulloy says.
''When do you want me to launch,
next April?''


A Management Decision?



As Feared, The O-rings Failed



Polling Question 3

The Challenger disaster is a dangerous
example of groupthink
A. True
B. False



Managers
NASA

Morton-Thiokol

Engineers


Disorganized Decision Making
 No hierarchy of values
 No explicit mention of pressures that
could distort judgment
 Engineering expertise subordinated to
“management” concerns
 No one objected to Mason’s direction to
put on management hat.
 The question was poorly framed
 Intuitive expertise was disregarded


Organizational Integrity Failure

Safety
Criticality 1

Diffusion
of

Task Force

Responsibility


Corporate
Integrity




VISION
MISSION

VALUES

EFFECTIVE
ETHICS
PROGRAM


Hierarchy of Values


Summary
 Obedience to Perceived Authority
 Diffusion of Responsibility
 Conformity to what we think
others are doing
 Focus theory of normative
conduct
 Normalization of deviance
(Challenger)

Polling Question 4
As the Challenger episode showed, a failure
of organizational integrity can lead to a risky
incident of….
A.
B.
C.
D.

Dishonesty
Negligence
Incompetence
Rationalization
E.


Other Ways to
Improve GRC
Systems

Two Areas to Start With

Institute Smart Habit-building Programs

Build Reminders Into the System


Smart Habit-building
Programs


Make them Operational
By Creating Checklists


Nurture Relationship of Trust With The
Checklist of Trustworthy Behavior™

1.
2.
3.
4.
5.
6.
7.

Is it our best?
Is it the truth?
Is it fair?
Is it polite?
Is it what we promised?
Is it legal?
Have we exercised
due care?


Create Your Own Checklists

Will this violate our
integrity?
How does this put the customer
first?


Checklists Assist Thinking


Auditors Know Checklists


The Role of
Reminders


The Role of Reminders


Build Moral Reminders
Into the System


The following report
contains only my actual
expenses.


Financial and Sales Reports

I will report only the truth in
this financial statement.


Performance Evaluations

This evaluation is accurate to
the best of my information
and belief...


Pressure Cooker Safety Valve


Defective Pressure
Cookers Can Explode


A Safe Place to Talk


A Safe Place to Talk


Effective Ethics & Compliance
Programs Have Many Parts


Code of Conduct

The Pieces Need to Come Together
WORKFORCE
Ombuds Office

TRAINING


Into A Comprehensive Program

CORE VIRTUES

TRAINING

RECRUITING

CODE OF

Ombuds Office

CONDUCT

FCPA
FAR

FSG

Internal Control
System

SOX

Polling Question 5

Reminding people to conduct themselves with
integrity and honesty is pointless
A. True
B. False
C.


Other Possibilities


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


Thank You!

mp@ethicsbydesign.com
www.ethicsbydesign.com

802 870 3450

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


Coming Up….

Fraud Auditing versus Fraud
Investigation: Important Distinctions
July 10
Bribery, Corruption and the FCPA: What
Auditors Need to Know July 24
Essentials of Effective Fraud Risk
Assessments, July 26


Ethics for Auditors: Understanding Current Issues in Financial Integrity

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