Managing Fraud RiskManaging Fraud Riskin in

Higher EducationHigher Education

2014 UNC Fall Controller's Workshop2014 UNC Fall Controller's Workshop

November 10, 2014November 10, 2014

David A. King, CPA, CFE – Director, Special InvestigationsDavid A. King, CPA, CFE – Director, Special InvestigationsNorth Carolina Office of the State AuditorNorth Carolina Office of the State Auditor

Session ObjectiveSession Objective

Discuss challenges, trends, and strategies for managing fraud risk in higher education

Managing fraud risk requires awareness, tools, and proactive efforts, including collaboration with professional peers

Session OutlineSession Outline

The Tone at the TopExamination of University Fraud CasesCOSO Framework and the Audit CommitteeACFE Report to the NationsFinancial Aid Fraud Fraud Prevention and Mitigation

The Tone at the TopThe Tone at the Top

AICPA / ACFE Video: “The Tone at the Top” http://www.acfe.com/vid.aspx?id=4294974597

Steven Salbu

Georgia Institute of Technology – Atlanta, GA

Four Things Leaders Can Do to Four Things Leaders Can Do to Create An Ethical Climate within Create An Ethical Climate within

Their OrganizationTheir Organization

1.1. Lead with Lead with IntegrityIntegrity––By ExampleBy Example

2. 2. State Clearly and State Clearly and ConvincinglyConvincingly the the Organization’s Ethical Organization’s Ethical RequirementsRequirements and and ValuesValues

3. 3. Create a Path for Create a Path for ReportingReporting Misdeeds Misdeeds

(e.g., – a (e.g., – a WhistleblowerWhistleblower HotlineHotline))

4. 4. Reward (at least Reward (at least recognize) recognize) IntegrityIntegrity

Are you in a university leadership Are you in a university leadership role as a controller, accountant, role as a controller, accountant,

financial professional? financial professional?

What are you doing on your campus to promote an ethical

culture among your peers?

From the Headlines……..From the Headlines……..

Audit Uncovers Suspected Audit Uncovers Suspected Fraud at Georgia TechFraud at Georgia Tech

Former Georgia Tech Employee Former Georgia Tech Employee Indicted on Fraud ChargesIndicted on Fraud Charges

UC Berkeley Fires Administrator UC Berkeley Fires Administrator for Stealing Thousands to Pay for Stealing Thousands to Pay for Kids’ Tuitionfor Kids’ Tuition

UNIVERSITY OF FLORIDA UNIVERSITY OF FLORIDA NUCLEAR ENGINEERING NUCLEAR ENGINEERING PROFESSOR AND WIFE PROFESSOR AND WIFE

CONVICTED OF FEDERAL CONVICTED OF FEDERAL CONTRACT FRAUDCONTRACT FRAUD

Examination of Four University Examination of Four University Fraud CasesFraud Cases

Internal Control Deficiencies?Internal Control Deficiencies?

Circumvention of Internal Controls?Circumvention of Internal Controls?

Management Override of Internal Management Override of Internal Controls?Controls?

The Elements of FraudThe Elements of Fraud(The Fraud Triangle)(The Fraud Triangle)

RationalizationPressure / Need

Opportunity

The COSO Framework The COSO Framework

Control Environment Risk AssessmentControl ActivitiesInformation and CommunicationMonitoring Activities

The Updated COSO CubeThe Updated COSO Cube

The The

Control ActivitiesControl Activities

• Authorization of Transactions and Activities

• Segregation of Duties

• Use of Adequate Documents and Records

• Adequate Safeguards over Access to and Use of Assets and Records

• Independent Verification of Transactions

The COSO Framework and the Audit Committee

ACFE’s Report to the NationsACFE’s Report to the Nations

According to the 2014 ACFE’s Report to the Nations – tips were the most common means by which occupational fraud was detected

45% of the fraud cases in the ACFE study were initially detected through tips

15% of the fraud cases were detected

through management review

Initial Detection of Fraud SchemesInitial Detection of Fraud Schemes

Whistleblower HotlinesWhistleblower Hotlines(Federal – State – Universities)(Federal – State – Universities)

The State Auditor’s HotlineThe State Auditor’s Hotline

The State Auditor maintains a toll-free telephone number to report allegations of improper

governmental activities.

1-800-730-TIPS (8477)

Webpage link: www.ncauditor.net

Data Mining / Predictive Analytics Data Mining / Predictive Analytics / Benford’s Law / Benford’s Law

http://www.nigrini.com/

Financial Aid FraudFinancial Aid Fraud

Fraud Prevention and DetectionFraud Prevention and Detection

Verify the deliverable – payments should always require adequate supporting documentation

Know the people in your organizationPerform proactive auditsFocus on internal control Leverage technology – use data

mining / data analysis

Fraud Prevention and DetectionFraud Prevention and Detection

Internal Control / COSO Framework

Management Control

Employee Education and Training

The Role of Human Resources in Selecting and Screening Employees

Management Due Diligence in Selecting and Screening Employees

Establishing and Maintaining an Ethical Workplace

Managing Fraud Risk Requires Managing Fraud Risk Requires Effective Internal Controls Effective Internal Controls andand an an

Ethical CultureEthical Culture

ResourcesResources

http://antifraud.aicpa.org/

http://www.acfe.com/home.asp

http://www.coso.org/

http://www.acua.org/

http://www.theiia.org/

Contact InformationContact Information

David A. King, CPA, CFEDirector of Special Investigations

North Carolina Office of the State Auditor

Phone (919) 807-7606Email: david_king@ncauditor.net

State Auditor’s Hotline: 800-730-TIPS (8477)