Presentation at CII-KPMG seminar on Fraud as Strategic Risk at Bangalore - 27 July 2012

1. SCOUTING FOR FRAUD
SCOUTING FOR FRAUD
IN YOUR BUSINESS
IN YOUR BUSINESS
Seminar on Fraud as a Strategic Risk
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“What CFOs and CEOs don’t notice, but should”
Parag Deodhar
Parag Deodhar
BANGALORE – 27 July 2012

2. FRAUD RISK
FRAUD RISK
• Fraud is now so common that its occurrence is
Fraud is now so common that its occurrence is
no longer remarkable, only its scale.
• If f d
If fraud were a disease, almost all companies
di l t ll i
would have a slight temperature…
• What’s @ Risk?
– The typical organization loses an estimated 5% of
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its annual revenues to fraud
– Regulatory sanctions
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– Reputation / Brand image
– Company closure!
Company closure!
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3. TYPES OF OCCUPATIONAL FRAUD
TYPES OF OCCUPATIONAL FRAUD
SOURCE: ACFE 2012 GLOBAL FRAUD STUDY
87% 33% 8%
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4. ASSET MISAPPROPRIATION SCHEMES
ASSET MISAPPROPRIATION SCHEMES
Category Description Examples
SCHEMES INVOLVING THEFT OF CASH RECEIPTS
Skimming Cash is stolen from an organization before it is recorded on Employee accepts payment from a customer but does not
the organization’s books and records record the sale and instead pockets the money
Cash Larceny Cash is stolen from an organization after it has been Employee steals cash and checks from daily receipts before
recorded on the organization’s books and records they can be deposited in the bank
SCHEMES INVOLVING FRAUDULENT DISBURSEMENTS OF CASH
Billing Person causes his or her employer to issue a payment by Employee creates a shell company and bills employer for
submitting invoices for fictitious goods or services, inflated services not actually rendered
invoices or invoices for personal purchases Employee purchases personal items and submits an invoice to
employer for payment
Expense An employee makes a claim for reimbursement of fictitious Employee files fraudulent expense report, claiming personal
Reimbursements or inflated business expenses travel, nonexistent meals, etc.
Check Tampering A person steals his or her employer’s funds by intercepting, Employee steals blank company checks and makes them out to
forging or altering a check drawn on one of the
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organization’s bank accounts Employee steals an outgoing check to a vendor and deposits it
into his or her own bank account
Payroll An employee causes his or her employer to issue a Employee claims overtime for hours not worked
payment by making false claims for compensation Employee adds ghost employees to the payroll
Cash Register
C hR i t An
A employee makes f l entries on a cash register t
l k false t i h i t to Employee f d l tl voids a sale on hi or h cash register
E l fraudulently id l his her h i t
Disbursements conceal the fraudulent removal of cash and steals the cash
OTHER ASSET MISAPPROPRIATION SCHEMES
Misappropriation of The perpetrator misappropriates cash kept on hand at the Employee steals cash from a company vault
Cash on Hand victim organization’s premises
organization s
Non-Cash An employee steals or misuses non-cash assets of the Employee steals inventory from a warehouse or storeroom
Misappropriations victim organization Employee steals or misuses confidential customer financial
information
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5. PROFILE OF A FRAUDSTER
PROFILE OF A FRAUDSTER
SOURCE: ACFE 2012 GLOBAL FRAUD STUDY
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6. HOW ARE FRAUDS DETECTED…
HOW ARE FRAUDS DETECTED…
SOURCE: ACFE 2012 GLOBAL FRAUD STUDY
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7. DETECTION METHODS
DETECTION METHODS
SOURCE: ACFE 2012 GLOBAL FRAUD STUDY
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8. PROACTIVE MEASURES
PROACTIVE MEASURES
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9. WHISTLE‐BLOWER MECHANISM
WHISTLE BLOWER MECHANISM
KEY ELEMENTS FOR SUCCESS
Who
Who decides
Wh d id
receives the
the actions? High
complaints? Availability Anonymous
& & Secure
Accessibility
Who Who takes
investigates?
i ti t ? actions?
ti ?
Independent
Credible &
&
Impartial
transparent
Who reports?
27 July 2012 Parag Deodhar 9

10. RED FLAGS
FLAGS
SOURCE: ACFE 2012 GLOBAL FRAUD STUDY
87% First timers
87% First timers
35% Cases never reported
to police
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27 July 2012 Parag Deodhar
49% No recovery 10

11. BEHAVIORAL RED FLAGS
BEHAVIORAL RED FLAGS
• Excessive Family/Peer
Excessive Family/Peer • Irritability, Suspiciousness
Irritability, Suspiciousness
Pressure for Success or Defensiveness
• Complained About Lack • Wheeler‐Dealer Attitude
of Authority
f A th it • Divorce/Family Problems
• Past Legal Problems • Control Issues,
• Excessive Pressure from
Excessive Pressure from Unwillingness to Share
Unwillingness to Share
Within Organization Duties
• Refusal to Take Vacations • Unusually Close
y
• Complained About Association with
Inadequate Pay Vendor/Customer
• Past Employment‐Related • Financial Difficulties /
Financial Difficulties /
Problems High Debt
• Addiction Problems
Addiction Problems • Living Beyond Means
Living Beyond Means
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12. FRAUD DETECTION
FRAUD DETECTION
• Employee Background Checks
Employee Background Checks
– Not just during recruitment
– Mystery Shopping
Mystery Shopping
• Mandatory Leave / Job Rotation, Transfers
• Anti Bribery clause in Contracts
Anti‐Bribery clause in Contracts
• Review of Processes and Controls
• Dedicated team for fraud detection /
Dedicated team for fraud detection /
investigation
• Clear reporting lines & Segregation of duties
Clear reporting lines & Segregation of duties
• Electronic / Digital surveillance
• Over riding Controls!!!
Over‐riding Controls!!!
27 July 2012 Parag Deodhar 12

13. VENDOR / PARTNER DUE DILIGENCE
VENDOR / PARTNER DUE DILIGENCE
Organizations often operate in unfamiliar territories or with little knowledge of the background, reputation or
ability to conduct business of their business associates and service providers. Many a times the track
record and reputation can be overlooked, while focusing only on the potential gains. While positive impact
is often expected, the potential negative impact from these associates normally ignored at the time of
selection which might have significant impact.
 Almost all organizations rely on  It is, therefore, in the interest of the
third parties/ vendors to help them organizations to discover as much
conduct their business information as possible about their
 Each of these associates can have vendors
a significant impact on y
g p your
 The focus should be on validation of
business
details provided as well discovery of
 While the positive impact is often any undisclosed information
expected,
expected the potential negative
 It is also important that the right
impact, normally ignored at the
time of selection of a vendor can partners are brought on board to
have greater significance
h t i ifi assist on the collation and validation
of this information
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14. MIS & DATA ANALYTICS
MIS & DATA ANALYTICS
“BIG DATA”- 80% unstructured – emails / spreadsheets & other docs
Red Flags can be visible in routine MIS as well:
• Increased revenues without a • Unusual increases in income or income
corresponding increase in cash flow, in excess of industry peers
especially over time
i ll i • Significant unexplained increases in
• Significant, unusual or highly complex fixed assets
transactions, particularly those that are • Recurring negative cash flows from
closed near the end of a financial operations while reporting earnings and
operations while reporting earnings and
reporting period earnings growth
• Unusual growth in the number of days’ • Allowances for sales returns, warranty
sales in receivables claims, etc., that are shrinking in
• Strong revenue growth when peer
St th h percentage terms or are otherwise out
t t th i t
companies are experiencing weak sales of line with those of industry peers
• Recurring negative cash flows from • Assets, liabilities, revenues or expenses
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operations while reporting earnings and g
based on significant estimates that
earnings growth involve subjective judgments or
• Significant declines in customer demand uncertainties that are difficult to
and increasing business failures in either corroborate
the industry or the overall economy
the industry or the overall economy
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15. PREDICTIVE MODELING
PREDICTIVE MODELING
Assimilate data from multiple Accepting, prioritizing Analysis and
sources and apply predictive and distributing alerts visualization tool for
uncovering previously
analytics to accurately assess & determine if it is unknown relationships
transactions, activities and actual fraud or among accounts or
customer state in real time suspicious transaction entities
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16. DIGITAL SURVEILLANCE
DIGITAL SURVEILLANCE
• Most frauds leave a trail on the system
Most frauds leave a trail on the system –
emails, internet access, access control logs etc
• Data Leakage is a major challenge
• Tools are available to:
Tools are available to:
– Log events
– Scan logs for suspicious events and alert
– Correlate suspicious events across systems and
p y
network
– Digital forensics
Digital forensics
27 July 2012 Parag Deodhar 16

17. ETHICAL DILEMMA
ETHICAL DILEMMA
Align the third party code of conduct to the employee code of conduct
• Discrimination and harassment Demonstrate
• Wages and benefits through actions
• Work h
W k hours and over ti
d time
• Health and safety • Any activity that you engage in with
• Labor – forced labor / child labor / customers will be fair and defensible –
abuse of employees NO EXCEPTIONS
• Compliance to environmental laws • Approach your big and small customers/
and adherence to sustainable suppliers the same way.
business • Let all your current and potential
customers/ suppliers k
t / li know th t everyone
that
• Anti-bribery and corruption policies gets a fair chance
• Transparency in process
• Take a stand against customer who
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behave in a less than ethical manner
• Be willing to miss revenue or earnings
Key issues to targets if things are not done the right
wayy
address
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18. THANK YOU
THANK YOU
27 July 2012 Parag Deodhar 18