Fraudulent substance over legitimate formover legitimate formproxy.siteo.com.s3.amazonaws.com/...Fraudulent substance over legitimate formover legitimate form September 19th 2009September

Fraudulent substance over legitimate formover legitimate form

September 19th 2009September 19th, 2009

Introduction

Page 1© 2009 Property of Ernst & Young – Confidential, in compliance with the principles stated in the “Disclaimers”. This presentation, reserved for your internal use, is indissociable from the contextual elements used as a basis for its elaboration and from the spoken comments accompanying it.

Six fraud myths

“Our people would not commit fraud.”Fact o cannot o ch for all of o r emplo ees► Fact: you cannot vouch for all of your employees

“Fraud could not happen to us – we are a stable organisation.”► Fact: fraud risks are everywherey

“We would know if fraud occurred – we watch vulnerable areas.”► Fact: fraud prevention activities often are not aligned with risks that matter

“If fraud occurred, it would be discovered quickly.”► Fact: individual fraud detection mechanisms have limitations

“Damage would not be significant – we can deal with it ”Damage would not be significant we can deal with it.► Fact: the impact of fraud cascades

“We are covered on fraud through SOX compliance.”► Fact: Sarbanes-Oxley projects address financial reporting risks


The current environment

The Stanford case• The SEC accused Mr. Stanford of

executing a “massive Ponzi scheme”

India’s Biggest Fraud• Satyam Computer’s founder B. Ramalinga Raju admitted to inflating the cash

balance by nearly $1 billion, incurred a liability of $253 million on funds arranged by him personally, and overstated quarterly revenues by 76% and profits b 97%

gover the last decade, in which he misappropriated funds and made more than $1.6 billion in “bogus” loans.

• He is also accused of falsifying financial statements to investors who bought

profits by 97%.

The Justice Department accused Siemens of making bribes and trying to falsify its corporate books from 2001 to 2007.• Siemens AG, settled allegations of corruption of public officials with total g

$8 billion worth of certificates of deposit whose large returns turned out too good to be true.

, g p pfines and penalties of approximately € 1 billion.

Sociéte Générale loses $7 billion in trading fraudParmalat, one of the world's largest dairy

manufacturers defaults on a €150 million bond

Money Manager ran $370 Million Ponzi Scheme• Nicholas Cosmo, the owner of

a New York investment firm

• One of the largest banks in Europe, revealed that a rogue employee had executed a series of elaborate, fictitious transactions that cost the

manufacturers, defaults on a €150 million bond• Before investigators could announce that

Parmalat overstated its 2003 Earnings by 530%, and understated its liabilities by €1.8 billion, the company declared that €7 billion in liquid assets, believed to exist in a Bank of America accounta New York investment firm,

Agape World Inc, ran a 370 Million Ponzi Scheme, luring in clients with promises of astronomical returns while secretly blowing tens of

company more than $7 billion, the biggest loss ever recorded in the financial industry by a single trader.

believed to exist in a Bank of America account, did not exist at all. By the end of January 2004, Parmalat filed for bankruptcy, with an audit classifying its debt near €14.5 billion.

y gmillions of dollars on bad trades and conspicuous spending

The Shell Oil Reserves Scandal• The oil industry has been gripped by scandal since Royal Dutch/Shell, one

of the giants, twice in 2004 downgraded its proven oil reserves by 20 percent, or nearly 4 billion barrels.


What fraud is…

No legal definition of fraud, but common denominators (SAS 99 – ISA 240)

An intentional behavior INTENTION (planned to favor the fraudster)

Intent for the misrepresentation to be acted upon.

The deceptive intention from the perpetrator

MISREPRESENTATION (words, conduct, failure to disclose)

Intentional material false statements or willful omissionof a material fact, either orally or in writing.

An advantage for the fraudster PREJUDICE (actual or potential loss)

Reliance by the victim on the statements made to the detriment or to the benefice of the organization (financial loss or gain).

A reference frame (law, policy, procedure)

UNLAWFULNESS (against law and customs)

Knowledge by the perpetrator that the statements or omissionsprocedure) (against law and customs) that the statements or omissionsare false and misleading.


What fraud is… Typology of fraud according to ACFE

O��

A�� C�� F�� E��

F�� T��

F��

I E

C ��

S��

F��

N��

F��

C��

��

B��

��

G��

E ��

E��

A��

M��

C��

I�� A��

O�� A��


What fraud is… Statistics

• “According to research conducted by the Association of Certified Fraud ( C ) S % fExaminers (ACFE), U.S. organizations lose an estimated 7 % of annual revenues

to fraud. Based on the projected U.S. Gross Domestic Product for 2008, this percentage indicates a staggering estimate of losses around $994 billion among organizations, despite increased emphasis on anti-fraud controls and recent legislation to combat fraud.

• All sectors are affected with fraud:

► Telecommunication ($800 000)► Telecommunication ($800,000)► Agriculture/forestry/Fishing/Hunting ($450,000)► Manufacturing ( $441,000)► Technology ($405 000)

E��

► Technology ($405,000)► Construction ( $330,000)► Banking and financial services ($250,000)► Oil and Gas ($250 000)

�� F��

��

► Oil and Gas ($250,000)

Source : « 2008, ACFE Report to the Nation ».


What fraud is … Average loss by fraud category

I��

F��

��

Corruption Asset FraudulentCorruption27.4%

$ 375,000

Assetmisappropriation

88.7%$

Fraudulent statements

10.3%$ 2 000 000$ 150,000 $ 2,000,000

Most frequent but

Low impact

Less frequent but

High impact

Source : « 2008, ACFE Report to the Nation ».


What fraud is… How fraud can damage your company

F��

T��

� ��

T��

��

�

E��

�

C��

R��


What fraud is… Indirect financial consequences

Market priceHigh staff turnover

The real impact of fraud goes beyond financial

loss: it ruins the turnovercompany’s reputation and generates distrust

which affects theLoss of

Market sharesLawyer’s fees

which affects the managements' goals

Non achievement ofI t f Reputation damageNon achievement of

company’s goalImpact of

reassessment


Industry thoughts – Statistics and trends

• The FBI is bracing for a wave of fraud and corruption cases stemming from the government’s multitrillion-dollar effort to get the economy moving again, the agency’s g g y g g , g ychief told congress (Washington Reuters, March 25, 2009).

• According to a study by the Mortgage Asset Research Institute, the number of mortgage fraud reports among loans made last year grew 28% from a year earlier (Associated P M h 17 2009)Press March 17, 2009).

• Economic crisis exposes financial crime. Industry experts estimate fraud cases on an increase because of the global economic meltdown (Finance News March 14, 2009).

• Top FBI and Justice official said they believed mortgage fraud and other types of corporate criminal behavior has contributed to the economic tailspin. And they said they already have more than 2,300 open investigations into suspected illegal financial activity- including 38 probes specifically linked to the crises. (Los Angeles Times February 11, 2009)2009).


The Perfect Storm is Brewing

Budgets are decreasing.Companies and

Opportunitydecreasing.

Companies and organizations are

doing more with less.

Companies and organizations are downsizing which has an immediate effect on internal

Increase use of

government controls

With Increased d

funds

Layoffs are increasing

Opportunity to Commit Fraud

pressure and decreased

internal controls –People will

explore more

Internal Internal and External

Stock prices are declining

opportunities to create fraud

ControlsPressure Credit crisis and other external

factors are increasing Pressure Rationalization


Prevent an protect

M��

► I��

P��

► M��

P ��

��

► I��

► ��

► histleblowing and detective

��

��

��

��

► Whistleblowing and detectivetools and efficientcontrols…


Mitigating fraud risk – Ernst & Young Methodology

R tiP tiS tti th P T ReactiveProactive Setting the Proper Tone

Code of FraudPrevention Fraud Risk ControlsCommunica-

tion andFraud

ResponseEthics PreventionPolicies Assessment Monitoringtion and

TrainingResponse

Plan

DetectPrevent InvestigateDetectPrevent Investigate

Permanent Controls Periodic Controls


Short exemples of fraud schemes


Purchasing process Modification of sensitive data

ccess rights to sensitive data are insufficiently monitoredP�� Access rights to sensitive data are insufficiently monitored(access code to master files, tables, types of operations …)

E DE��

��

T��

Employee resets

P��

��

��

M��

��

��

��

��

��

��

modificationsto the

supplier’s ��

��

��

��

Recording of name,address and bankaccount details…

��


Sales process Side contracts

P�� T��

��

Si fSales are booked in the

financial accountson the basis of the contract A

Signature of an “usual” commercial

Signature of a side

contract (contract B) between the

The engagements

due to the customer in respect of

contract (contract A)

customer and sales

employee / the

information

The financial statements does not include the engagements

(ie. liabilities due to the

pcontract B are

booked in year +1 or +2

information is not

disclosed to top

management

(customer) in respect of

contract B

Sales employee receive a

bonus


Other processes Fictitious employee

P�� Creation of a fictitious employee, whose wages will beid h f d ( i li )paid to the fraudster’s own (or its accomplice’s) ��

HR master fileEmployee X payroll

slip

Diversion of employee X

payroll

Wages diverted to fraudster’s accountslip payroll

Creation of a fictitious

employee X


Fraud Response Plan Forensic competencies /skills and methodologyand methodology

Riskassessmentassessment

Deterrence/ PreventionInvestigations Promotion Prevention

Detection/

Investigations

Detection/monitoring

F�� I�� R�� M��

��

W��

��

B��

not the ideal investigator; hire external experts: lawyers, IT, forensic,accounting


accounting…

9 Key Questions to Board Members9 Key Questions to Board Members

Prevent Detect React►Do you have a strategy to handle media/regulator interest in the event of fraud to demonstrate you are taking robust, independent and

iti ti ?

►Do you know what kind of fraud your organization is susceptible to within specific business functions or locations?

►Are you happy that the company would be adequately resourced and know how to respond in the event of a significant fraud coming to positive action?

►Do all employees receive regular and relevant anti-fraud training?

►Is the audit committee keeping a watching brief on the ongoing risks the organization is exposed to?

g glight?

►Are you happy that the company would be adequately resourced and

►How does your company demonstrate the effectiveness of your anti-fraud program to shareholders, employees and regulators?

the organization is exposed to?

►Are you happy that controls are still working effectively post-i l i f

know how to respond in the event of a significant fraud coming to light?

regulators? implementation of any redundancies or consolidation that has occurred in your organisation?

►Has the company kept a focus on fraud following identified incident?

What is the Board doing to manage the anticipated increased risks of fraud during the economic downturn?


Thank you for your attention!

Documents

Fraudulent substance over legitimate formover legitimate formproxy.siteo.com.s3.amazonaws.com/...Fraudulent substance over legitimate formover legitimate form September 19th 2009September