Fraud and Ethics: We must Fraud and Ethics: We must complycomply

Presented by:Presented by:

Elizabeth G. Henry, Internal Elizabeth G. Henry, Internal AuditorAuditor

Laredo Independent School Laredo Independent School DistrictDistrict

August 6, 2009August 6, 2009

Discussion:Discussion:

Fraud and ethics Fraud and ethics policiespolicies

Some forms of fraud Some forms of fraud in generalin general

Indicators of fraud – Indicators of fraud – “Red Flags”“Red Flags”

Cases of fraudCases of fraud

LISD

IntroductionIntroduction

What is fraud?What is fraud? How is it found?How is it found? Who is normally involved?Who is normally involved?

OverviewOverview

Fraud is a crimeFraud is a crime– Unlike an error, is intentional and usually involves a deliberate Unlike an error, is intentional and usually involves a deliberate

concealment of facts.concealment of facts.

Law address different types of fraudLaw address different types of fraud– InsuranceInsurance– ContractsContracts– ComputersComputers– CorruptionCorruption– OthersOthers

Association of Certified Fraud ExaminersAssociation of Certified Fraud Examiners

Occupational fraud – Occupational fraud – The use of one’s occupation forThe use of one’s occupation for

personal enrichment through thepersonal enrichment through the

deliberate misuse or misapplicationdeliberate misuse or misapplication

of the employing organization’sof the employing organization’s

resources or assets*resources or assets*

*2008 Report to the Nation on Occupational Fraud and Abuse. Copyright 2008 by the*2008 Report to the Nation on Occupational Fraud and Abuse. Copyright 2008 by the

association of Certified Fraud Examiner’s Inc.association of Certified Fraud Examiner’s Inc.

Fraud TriangleFraud Triangle

Incentive/ Pressure

Opportunity

Rationalization

OpportunityOpportunity

Knowledge of weak Knowledge of weak controlscontrols

Lack of supervisionLack of supervision

Belief the employee Belief the employee won’t get caughtwon’t get caught

Unethical tone at the Unethical tone at the toptop

Ineffective controlsIneffective controls

Incentive/PressureIncentive/Pressure

Pressure placed on administration / Pressure placed on administration / managers to performmanagers to performExcessive gambling habitExcessive gambling habitDesire for status symbols – house, car, Desire for status symbols – house, car, etc.etc.Unusually high personal debtUnusually high personal debtAlcohol or drug problemsAlcohol or drug problemsUndue family or peer pressure to Undue family or peer pressure to succeedsucceed

RationalizationRationalization

Feeling of insufficient recognition for job performanceFeeling of insufficient recognition for job performanceMany employees who commit fraud fully intend to Many employees who commit fraud fully intend to return the money – however never doreturn the money – however never doPersonal need for more moneyPersonal need for more moneyEmployee feels the district owes them; therefore they Employee feels the district owes them; therefore they compensate themselvescompensate themselves

Board PoliciesBoard Policies

Follow up and familiarize yourself with the following:Follow up and familiarize yourself with the following:

CAA (Local) Fiscal Management Goals and CAA (Local) Fiscal Management Goals and Objectives Financial EthicsObjectives Financial Ethics

CFC (Local ) Account Audits CFC (Local ) Account Audits

DH (Local) Employee Standards of ConductDH (Local) Employee Standards of Conduct

DH ( Regulation) Code of Ethics and Standards DH ( Regulation) Code of Ethics and Standards of Conductof Conduct

Board Policies

How can we reduce risk of fraud?How can we reduce risk of fraud?

Removing any of the three components normally Removing any of the three components normally prevents fraudprevents fraud

Easiest one to remove is Easiest one to remove is OPPORTUNITYOPPORTUNITY, by , by having a strong system of internal controlshaving a strong system of internal controls

What makes us vulnerable?What makes us vulnerable?

Lack of segregation of Lack of segregation of dutiesduties

Untrained personnelUntrained personnel

Insufficient funds for Insufficient funds for program implementationprogram implementation

Lack of school Lack of school management supervisionmanagement supervision

Lack of internal controlsLack of internal controls

Management’s thinking Management’s thinking “he/she wouldn’t do that”“he/she wouldn’t do that”

Examples of FraudExamples of Fraud

٭ Failure to make timely bank depositsFailure to make timely bank deposits٭ Stealing equipmentStealing equipment٭ Manipulation of collections of accountsManipulation of collections of accounts٭ Taking copy paper homeTaking copy paper home٭ Unauthorized use of credit cards/fundsUnauthorized use of credit cards/funds٭ Alteration/falsification/destruction of Alteration/falsification/destruction of

documentationdocumentation٭ Pilfering postage stampsPilfering postage stamps

““Red Flags”Red Flags” in School Accounts in School Accounts

Fictitious vendorsFictitious vendors

Diverting receiptsDiverting receipts

Altered/missing documentationAltered/missing documentation

Insufficient segregation of dutiesInsufficient segregation of duties

Untimely depositsUntimely deposits

Non-compliance with established rules Non-compliance with established rules and regulationsand regulations

Observations:Observations:

Campus held fundraisers, however deposited Campus held fundraisers, however deposited monies in faculty accounts.monies in faculty accounts.

Campus held fundraisers, however deposited Campus held fundraisers, however deposited monies in PTO accountmonies in PTO account

School bookkeeper took close to $19,000 in School bookkeeper took close to $19,000 in collection from studentscollection from students

What can we do for prevention?What can we do for prevention?

Provide:Provide:

Segregation of dutiesSegregation of duties

Guidance for operations – policies and proceduresGuidance for operations – policies and procedures

Training for personnel handling fundsTraining for personnel handling funds

SUPERVISE! MONITOR!SUPERVISE! MONITOR!

ADMINISTRATIVE ADMINISTRATIVE

OPERATIONSOPERATIONS

SummarySummary

Know theKnow the “Red Flags”“Red Flags” of fraud in your area ofof fraud in your area of responsibilityresponsibilityBe familiar with the types of fraudBe familiar with the types of fraudTAKE CHARGE – put controls in place for TAKE CHARGE – put controls in place for preventionprevention

District Administration / District Administration / OperationsOperations

Human Resources – Teachers & other & benefitsHuman Resources – Teachers & other & benefitsInformation & Technology ServicesInformation & Technology ServicesTransportationTransportationPurchasing/procurementPurchasing/procurementFood & Nutrition Services – Cafeterias Food & Nutrition Services – Cafeterias Specialists – speech therapist, para’s - pro’s, etc.Specialists – speech therapist, para’s - pro’s, etc.Curriculum – Testing, Grades, TeachingCurriculum – Testing, Grades, TeachingNurses – health servicesNurses – health servicesSafety and securitySafety and securityMaintenance – custodial and others Maintenance – custodial and others Risk Management – insuranceRisk Management – insuranceFinance – A/P, A/R, Investments, PayrollFinance – A/P, A/R, Investments, Payroll

LISD

ObservationsObservations

Secretary altered daughter’s Secretary altered daughter’s time cards - reflecting at times time cards - reflecting at times as though she was working, as though she was working, when in reality she was notwhen in reality she was not

Fraud consequences in Fraud consequences in Administrative functionsAdministrative functions

Personal issues that created pressuresPersonal issues that created pressures

Lack of segregation of dutiesLack of segregation of duties

Untrained personnel – unfamiliar with Untrained personnel – unfamiliar with requirementsrequirements

Opportunity to utilize system weaknesses Opportunity to utilize system weaknesses – system overrides– system overrides

Results of Fraudulent ActivityResults of Fraudulent Activity

Legal FeesLegal Fees

Increased debtIncreased debt

Loss of Loss of reputation/credibilityreputation/credibility

Media coverageMedia coverage

RestitutionRestitution

ArrestArrest

Loss of jobLoss of job

FRAUD ADDS UP!FRAUD ADDS UP!

Time costs money; consider the Time costs money; consider the time taken:time taken:

◊ Spent devising the fraud schemeSpent devising the fraud scheme◊ Actively concealing Actively concealing

information/documentsinformation/documents◊ Spent to investigate occurrencesSpent to investigate occurrences◊ Prove case and discharge Prove case and discharge

perpetratorsperpetrators◊ Locate and train replacement Locate and train replacement

personnelpersonnel

Steps for PreventionSteps for Prevention

Management sets the tone -Management sets the tone -Establishes ground rulesEstablishes ground rules

Conduct a Review of:Conduct a Review of:

Overall Campus/Department Overall Campus/Department internal controls – ask yourself – internal controls – ask yourself – how strong are they?how strong are they?

Is there a segregation of duties?Is there a segregation of duties?

Is there adequate Is there adequate supervision/monitoring?supervision/monitoring?

AcknowledgementAcknowledgement

I acknowledge that I as an employee of theI acknowledge that I as an employee of the

Laredo Independent School District haveLaredo Independent School District have

read and understood this presentation asread and understood this presentation as

well as all related Fraud and Ethics relatedwell as all related Fraud and Ethics related

policies addressed.policies addressed.

To confirm the completion of the Fraud and Ethics on-line session click on the link below:To confirm the completion of the Fraud and Ethics on-line session click on the link below:

http://http://www.laredoisd.org/departments/internalauditor/confirm.aspwww.laredoisd.org/departments/internalauditor/confirm.asp

Thank YouThank YouIf you have any questions, feel free to contact our If you have any questions, feel free to contact our

department-- Internal Audit Departmentdepartment-- Internal Audit Department

Elizabeth G. Henry – Elizabeth G. Henry – ehenry@laredoisd.orgehenry@laredoisd.org– Internal AuditorInternal Auditor

Angelica R. Salinas – Angelica R. Salinas – asalinas@laredoisd.orgasalinas@laredoisd.org– Staff AuditorStaff Auditor

Roxanna R. Pedraza – Roxanna R. Pedraza – rrpedraza@laredoisd.orgrrpedraza@laredoisd.org– Staff AuditorStaff Auditor

1520 Victoria St. 1520 Victoria St. 956-795-3402956-795-3402