F d A d P ti Fraud Awareness and Prevention Corporation for Public Broadcasting Office of Inspector General May 2014 May 2014 The CPB/OIG was created by Congress in 1988 to promote the efficiency, effectiveness, and integrity of CPB by conducting audits, investigations, and other evaluations of CPB initiatives and operations. To report potential fraud, waste, or abuse in CPB initiatives and operations, please call 800-599-2170 or go to www.cpb.org/oig/contact.php
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F d A d P tiFraud Awareness and Prevention
Corporation for Public BroadcastingOffice of Inspector Generalp
May 2014May 2014
The CPB/OIG was created by Congress in 1988 to promote the efficiency, effectiveness, and integrity of CPB by conducting audits, investigations, and other evaluations of CPB initiatives and operations. To report potential fraud, waste, or abuse in CPB initiatives and operations, please call 800-599-2170 or go to
www.cpb.org/oig/contact.php
• Why we have to pay attention
• What is fraud
• Detecting and preventing fraud
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Ch l i• Charles Ponzi
E• Enron
• Bernard Madoff• Bernard Madoff
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h i G• Euphonia Green
D S l• Deen Sanwoola
• Lela West• Lela West
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Washington Post investigative seriesfraud in nonprofits
fall 2013
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Association of American Medical Colleges
Administrative Assistant Ephonia Green – stole more than $5 million
• had sole sign-off authority on invoices up to $20,000
• opened bank accounts using company names that looked legitimate
• created phony invoices for legitimate vendors then approved themcreated phony invoices for legitimate vendors then approved them
• issued invoices to her private business, not listed in her budget records
Association President: “We are truly stunned.” She was a “long-time, trusted employee.”
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American Legacy Foundation
Assistant Vice President Deen Sanwoola – allegedly diverted more than $3.4 million
• charismatic computer specialist one of the first and most beloved employees• charismatic computer specialist, one of the first and most beloved employees
• had authority to both order and log in electronic equipment
• used dummy purchases and payments
• foundation waited almost 3 years before calling investigators• foundation waited almost 3 years before calling investigators
Foundation CEO: “We’re not innocent in this. . . . We are horrified it happened on our watch. . . . The truth hurts – we screwed up.”watch. . . . The truth hurts we screwed up.
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Virginia Scholastic Rowing Association
Volunteer Treasurer Lela West stole a quarter to half million dollarsVolunteer Treasurer, Lela West – stole a quarter to half million dollars
• highly respected, sat on the board of the national organization that selects Olympic rowers
• balanced the books, wrote the checks, tallied up cash collected from parking and concessions at more than 100 regattas
• association tipped off by sporting good company complaining about an unpaid bill
• spent association money on clothing car repairs flowers vacations passes to Disney• spent association money on clothing, car repairs, flowers, vacations, passes to Disney World, Redskins season tickets, and cable TV bills
Association President: “People are going to say ‘You stupid people ’ They’re exactly rightAssociation President: People are going to say, You stupid people. They re exactly right. You have to pay attention.”
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Why are nonprofits fraud targets?
Oversight at nonprofits often thinner, staff limited.
Supervisors often more trusting; people are committed to the mission.
Control structures often much weaker.
Tight operating budgets.
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“It’s sadder when it happens to a nonprofit. You go out of your way to trust a nonprofit. People give their money and expect integrity. And when integrity goes out the window, it just hurts everybody It hurts the community it hurts the organizationeverybody. It hurts the community, it hurts the organization, everything. It’s just tragic.”
Reaction of an official of the Maryland Bible Society of Baltimore, which was defrauded by a former employee.
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What is Fraud?What is Fraud?
C i i l d• Criminal Fraud• Civil Fraud
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Government Auditing Standards definition of fraud:
Fraud is a type of illegal act involving the obtaining of something of value through willful misrepresentation.
Section 7.30, ftnt 95.
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Fraud schemes can include:
- Embezzlement- Bribery- Kickbacks- Obstruction of justice- Obstruction of federal audit- Destructions of records
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Federal Criminal laws used to charge fraud
§§ 287 and 286 - false claims and conspiracy to defraud inconnection with claims
§ 371 conspirac§ 371 - conspiracy§ 641 - theft of public funds§ 666 - theft/bribery§ 666 theft/bribery§ 1001 - false statements§§ 1341/43 - mail and wire fraud§ 1516 - obstruction of audit
(all from Title 18 of the United States Code)15
False Claims Act for Fraud
• False Claims Act, 31 U.S.C. § 3729 – can apply fines and penalties for knowingly presenting false claims (or statements i f l i ) hin support of claims) to the government
• Has a broad standard for “Knowing” - includes actual knowledge deliberate ignorance or reckless disregard of theknowledge, deliberate ignorance or reckless disregard of the truth; no requirement that the actor had specific intent to defraud
• Penalty – $5,000 - $10,000 for each false claim plus 3 times the amount that was falsely claimed as damages
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Certifications to CPBCertifications to CPBAnnual General Provisions and Eligibility Criteria for Radio and g yTelevision contain a certification:Section 4- Recordkeeping, Audit and Documentation R i tRequirements
• C. Certificate of Compliance: CPB requires Grantees to annually certifyC. Certificate of Compliance: CPB requires Grantees to annually certify their compliance with the General Provisions and Eligibility Criteria. Compliance is subject to audit by the Inspector General, and improper certification may result in penalties under the Federal False p p y pClaims Act.
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Detecting and Preventing FraudDetecting and Preventing Fraud
Association of Certified Fraud Examiners(ACFE) 2012 Gl b l F d S d(ACFE) 2012 Global Fraud Study
• Typical organization loses 5% of its revenues to fraud–• Typical organization loses 5% of its revenues to fraud–projected to be $3.5 trillion globally (1,388 cases / 778 cases in U.S.)
• Median loss of $140 000 20% are more than $1 million• Median loss of $140,000 – 20% are more than $1 million • Duration of fraud schemes was 18 months before
detection• Asset misappropriation most common type of fraud 87%• Fraud more likely to be detected by tip • Most fraudsters are first-time offenders with cleanMost fraudsters are first-time offenders with clean
employment records• Organizations with anti-fraud controls resulted in less
funds lost and shorter duration of fraud schemesfunds lost and shorter duration of fraud schemes
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Auditor’s Responsibilities D F dto Detect Fraud
– “In planning the audit, auditors should assess risks of fraud occurring that is significant within the context of the audit bj ti ” GAS 6 30objectives.” GAS 6.30
– “The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the aud t to obta easo ab e assu a ce about w et e t efinancial statements are free of material misstatement, whether caused by error or fraud.” AU 316.01H di d i d i h ll– However,… an audit made in accordance with generally accepting auditing standards provides no assurance that illegal acts will be detected …” AU 317.07g
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Myth that External Audits U F dUncover Fraud
– Tip 43.3%– Management review 14.6%– Internal audit 14.4%– By accident 7.0%
A t ili ti 4 8%– Account reconciliation 4.8%– Document examination 4.1%– External audit 3 3%– External audit 3.3%
– Billing schemes 26.1%g• Submits invoice from fictitious company controlled by employee• Employees overpays a vendor and pockets the overpayment when it
was returned• Employee bills company for a personal purchase or uses company