As a crisis unfolds, like Coronavirus, and markets decline globally, fraudsters will be adapting and new risks will emerge and some risks will increase.
Remember, white collar criminals adapt by profiling us, so they can exploit our weaknesses. That being said, companies need to develop a strategy that enables the deployment of appropriate tactics to manage these new or increasing risks.
White collar criminals build a wall of false integrity around them to gain the trust of their victims.
This writing explores some fraud, compliance, and integrity risks and is intended to provoke discussion.
The Human Factor –”Just One Time”
A crisis situation can and often does increase the pressure on senior management and of course salespeople to meet their sales targets! Deviant behavior, like overriding or circumventing controls “just one time”, is easily justified. So it should go without saying that companies and their boards need to recalibrate and in most cases increase their oversight today and subsequent to the crisis until things stabilize.
Why? Because of the likely mindset to maintain and if that’s not possible, make up for lost opportunities!
A study that I read states that individual behaviors in crisis situations do not correspond to everyday life behaviors, which makes sense to me. One example many of us can relate to is the 2008 Financial Crisis. During the Financial Crisis behaviors like anxiety, fear, confusion, and disbelief, pushed some to make a poor decisions and cross ethical boundaries. I believe the same can happen today!
Here are some behaviors to be aware of:
Individuals overlooking ethical violations and not reporting the alleged bad behavior. Remember most fraud is initially uncovered through a tip!
Using the crisis to delay, shortcut, or skip procedures and the likelihood of getting caught.
Live Human Interaction
A crisis could and today has restricted “live” human interaction, thus performing investigations, maintaining the compliance program, internal auditing, and conducting other procedures could be challenging.
Some areas that we should focus on:
Ethics and compliance training schedules.
Delays to time-sensitive internal investigations.
Collection of electronically stored data.
Challenges related to merger or acquisition due diligence.
Third party audits.
The observation of physical inventory or cycle counts.
Internal control walkthroughs.
Collaboration with legal, compliance, and internal audit.
Executive sessions with the Audit Committee.
Note: The Audit Committee will more likely than not will be focused on scenario plans, stress tests, and the company’s enterprise-wide risk management program. They will need to understand and then explore with senior management the plan for monitoring and dealing with emerging and increased risks and the possible impact.
I have some creative ways to tackle some of the challenges above. So please reach out when you are ready.
Other Risks that Should be Considered by Boards and Senior Leadership
While not all inclusive, the list below could increase risk:
Welcome to my site. I have spoken and been the keynote speaker for many conferences, including the ABA, ACC, ACFE, IIA, and IMA to name a few. I have designed customized training for the board, senior leadership, legal, compliance, internal audit, and others for some of the world’s largest organizations.
“I have had the pleasure to hear Jonathan Marks speak on a number of occasions. …most recently at a Fraud conference sponsored by the Long Island Institute of Internal Audit. Jonathan gave a dynamic and engaging half day presentation on fraud in financial reporting. He engages his audience with his expertise and knowledge of risk management, fraud and internal audit. His ability to share his experiences in fraud investigations over the past thirty years coupled with his interactive approach with his audience made for a compelling and memorable presentation.” Chief Audit Executive
If you are interested in booking me for your next event or need customized training, please email me with the date or dates, location and address of presentation, the audience make-up, the subjects you would like covered, and the duration of the talk or training.
I have provided you with some Selected Training Programs (See below) and please peruse my blog posts for some additional topics and ideas. Keep in mind I speak and provide training on most anything related to governance, risk, and compliance, with a focus on fraud and forensics.
I will do my best to get back to you quickly.
Jonathan T. Marks, CPA, CFF, CITP, CGMA, CFE and NACD Board Fellow
Selected Training Programs
Management Override of Internal Controls
The risk of management override of internal controls to commit fraud exists in any organization. When the opportunity to override internal controls is combined with powerful incentives to meet accounting objectives, senior management might engage in fraudulent financial reporting. This session will examine management override, focusing on the differences between the override of existing controls versus other, more prevalent breakdowns. It will also explore actions to help mitigate the threat of management override, approaches to auditing for management override and the psychology behind management’s override of controls. You Will Learn How To:
Identify red flags of management overriding controls
Ascertain an approach to auditing for management override
Assess the latest trends and research regarding management override of controls
Develop a better fraud risk assessment that highlights areas and gatekeepers that might have a greater chance of overriding controls.
Operationalizing Compliance – Master Class with Tom Fox, Esquire
The Master Class developed by Tom Fox, provides a unique opportunity for any level of FCPA compliance practitioner, from the seasoned Chief Compliance Officer (CCO) and Chief Audit Executive (CAE), Chief Legal Counsel (CLO), to the practitioner who is new to the compliance profession.
If you are looking for a training class to turbocharge your knowledge on the nuts and bolts of a best practices compliance program going forward, this is the class for you to attend. Moreover, as I limit the class to 20 attendees, you will have an intensive focus group of like-minded compliance practitioners with which you can share best practices. It allows us to tailor the discussion to your needs. Mary Shirley, an attendee at the recent Boston Master Class said, “This is a great two-day course for getting new folks up to speed on what matters in Compliance programs.”
Tom Fox is one of the leading commentators in the compliance space partners with Jonathan T. Marks to bring a unique insight of what many companies have done right and many have done not so well over the years. This professional experience has enabled him to put together a unique educational opportunity for any person interested in anti-corruption compliance. Simply stated, there is no other compliance training on the market quite like it. Armed with this information, at the conclusion of the Doing Compliance Master Class, you will be able to implement or enhance your compliance program, with many ideas at little or no cost.
The Doing Compliance Master Class will move from the theory of the FCPA into the doing of compliance and how you must document this work to create a best practices compliance program. Building from the Ten Hallmarks of an Effective Compliance, using the questions posed from the Evaluation of Corporate Compliance Programs and the FCPA Corporate Enforcement Policy as a guide, you will learn the intricacies of risk assessments; what should be included in your policies and procedures; the five-step life cycle of third-party risk evaluation and management; tone throughout your organization; training and using other corporate functions to facilitate cost-effective compliance programs.
Highlights of the training include:
Understanding the underlying legal basis for the law, what is required for a violation and how that information should be baked into your compliance program;
What are the best practices of an effective compliance program;
Why internal controls are the compliance practitioners best friend;
How you can use transaction monitoring to not only make your compliance program more robust but as a self-funding mechanism;
Your ethical requirements as a compliance practitioner;
How to document what you have accomplished;
Risk assessments – what they are and how you can perform one each year.
You will be able to walk away from the class with a clear understanding of what anti-corruption compliance is and what it requires; an overview of international corruption initiatives and how they all relate to FCPA compliance; how to deal with third parties, from initial introduction through contracting and managing the relationship, what should be included in your gifts, travel, entertainment (GTE) and hospitality policies; the conundrum of facilitation payments; charitable donations and political contributions, and trends in compliance. You will also learn about the importance of internal controls and how to meet the strict liability burden present around this requirement of FCPA compliance.
Ethics and Governance Training
This session will cover how ethics is key to good governance and how governance fits into your anti-fraud program. Moreover, we will explore the components of a Sample Code of Ethics, the cost of ethical lapses, organizational situations that encourage bad behavior, the new ethics paradigm, and how to spot a moral meltdown.
Corporate Governance During a Crisis
We also discuss leading practices in crisis management and present several scenarios allow the participant(s) to work though mock crisis scenarios. For example, in your first week at your company, you just received information about an alleged massive fraud and you are now in a crisis. In this session, members of the audience will play different roles within the company (members of the board, legal department, managers, etc.) to have a discussion, including:
What type of crisis plan do you have, if any?
What to do and how to formulate a plan of action?
Who to call first, how to prioritize tasks, and where to prioritize resources?
Who (internal and external players) to get involved and when to get them involved
What data is needed when a crisis hits?
How to prepare for the media and when to reach out?
How to communicate with customers, vendors and suppliers, regulatory agencies, and other parties?
Fraud Risk Assessment Process and Guidance
Many professionals struggle with developing a fraud risk assessment that is meaningful. We discuss the objectives of a fraud risk assessment, the components of a fraud, and key considerations for developing an effective assessment. Then we explore the sources of risk, the fraud risk universe, and some of the key components of the assessment. Lastly, we walk through the key steps in the assessment process and walk through a sample fraud risk assessment that considers COSO’s Principle 8, which contains considerably more discussion on fraud and considers the potential of fraud as a principle of internal control.
FCPA (Bribery and Corruption): Building a Culture of Compliance
This session covers why compliance is important and the new guidance issues by the DOJ. We also explore current regulatory enforcement trends, whistleblowers Under Dodd-Frank, the U.S. Federal Sentencing Guidelines, risk-based third-party due diligence, way to thwart an investigation, differences and similarities between the FCPA and the U.K. Bribery Act, successor liability, and provides the participant with a proven 13-Step Action Plan.
Knowing what to do when an allegation of fraud is presented is critical. Failing to understand the process could jeopardize the ability to prosecute wrongdoers. This session discusses why investigations are important, inherent risk and exposures, the types of investigations: internal and independent, board considerations, triaging an allegation, investigative challenges, and keys to running a successful investigation, and why root cause analysis should be considered after completing the investigation.
Third Party Risk Management and Oversight
Third party risk is the biggest nemesis when it comes to FCPA violations. This session discusses the key components of a compliance program and why it needs to be evolving to meet the business and compliance challenges, which are constantly occurring across the globe. We explore the latest DOJ guidance on the evaluation of corporate compliance programs. We build our discussion on the foundation of the key steps to be included in a third-party risk management program and cover some of the red flags of agents and consultants.
Putting the Freud in Fraud: The Mind Behind the White Collar Criminal
To properly fight corporate fraud we need to understand how a fraudster’s normal differs, so executives, managers and board members can develop more effective anti-fraud programs that take into account the behavioral and environmental factors that are common in cases of white-collar crime. By establishing an environment in which ethical behavior is expected — and by understanding how white-collar criminals look at the world differently — it is possible to begin closing the gaps in internal controls, develop a proactive fraud risk assessment and response program and significantly reduce the financial and reputational risks associated with fraud.
In this session, we take a closer look at the personality traits of individual perpetrators of massive fraud.
Discuss the basics of profiling and identifying elements of behavior common among white-collar criminals.
Discover what role company culture plays in the commission of fraud.
Hear cutting-edge ideas and methods to help detect and deter fraud.
This session is a “nuts and bolts” discussion about fraud and responding to fraud in an effort to reduce the incidence of fraud and white-collar crime. We go into the characteristics of fraud, who commits fraud, the fraud triangle and Pentagon™, the components of fraud, the regulatory environment & the focus on increased personal responsibility, internal controls to deter and detect fraud, and anti-fraud programs.
Triaging a Whistleblower Allegation
As corporations continue to adopt whistleblower programs, many find themselves struggling to manage burgeoning caseloads. As a result, serious internal fraud investigations can be delayed (with mounting losses) while less consequential complaints are being investigated. The lack of a timely, systematic and repeatable process for evaluating and prioritizing whistleblower tips, which can also expose an organization to increased regulatory risk. While there is no single, “right” method for following up on whistleblower complaints, this session discusses Why Investigating allegations or tips are important, why timeliness matters, investigation challenges, and provides the participant with a sample approach.
Skepticism: A Primary Weapon in the Fight Against Fraud
What happens when we don’t ask why? Professional skepticism occurs when those responsible for fighting fraud take nothing for granted, continuously question what they hear and see and critically assess all evidence and statements. This session we discuss the role of independent reviewer or inspector, particularly of your own assumptions, whether you are placing undue weight on prior risk assessments or discounting evidence inconsistent with your expectations, and pressures placed on you to truncate procedures or make unwarranted assumptions to beat time constraints.
Root Cause Analysis
The regulators are expecting more today and want to know that your remediation efforts are not treating the symptoms), but rather the root cause(s).
Root cause analysis is a tool to help identify not only what and how an event occurred, but also why it happened. This analysis is a key element of a fraud risk management program and is now a best practice or hallmark of an organizations compliance program. When able to determine why an event or failure occurred, it is then possible to recommend workable corrective measures that deter future fraud events of the type observed. It is important that those conducting the root cause analysis are thinking critically by asking the right questions (sometimes probing), applying the proper level of skepticism, and when appropriate examining the information (evidence) from multiple perspectives.
This program is designed to introduce the common methods used for conducting root cause analysis and to develop an understanding of how to identify root causes (not just causal factors) using proven techniques. In addition, we will demonstrate how to initiate a root cause analysis incident exercise and work with senior management, legal, compliance, and internal audit on an appropriate resolution. We also introduce the “spheres” acting around the “meta model of fraud” and how to use those “spheres” in the root cause process. Finally, this program will present the “three lines of defense”, which provides the audit committee and senior management with a better understanding where the break downs occurred.
On May 1st, join Baker Tilly for our next topic: Using Continuous Auditing and Monitoring in the Fight Against Fraud with our discussion leader, Robert Mainardi.
Organizations are under increasing scrutiny regarding ethical lapses and allegations of fraud. Fiscal year 2018 was a record-breaking year for the U.S. Securities and Exchange Commission’s whistleblower program, as more and more individuals have been coming forward with allegations of impropriety.
It is critical for organizations to have processes in place to triage an allegation, investigate, remediate, evaluate and then enhance their governance, risk management, compliance and internal audit programs. Failure to conduct an appropriate investigation may lead to significant exposure and disruption to the organization.
Discussion Leader – Robert Mainardi, CIA, CRMA, CFSA – Author of “Harnessing the Power of Continuous Auditing: Developing and Implementing a Practical Methodology”, will be presenting at Baker Tilly’s Philadelphia Office on May 1, 2019.
With the focus on internal controls and monitoring today many are being scrutinized and judged by regulators and others whenever results are presented. Regulators have used the failure to institute appropriate internal controls alone as the basis of the enforcement actions.
One of the significant challenges facing internal audit, compliance, enterprise risk management teams, and management is being able to understand what continuous auditing and continuous monitoring is and how the approach can be used effectively to mitigate risk, including fraud.
This two-hour session will explore what an internal control is and the best practices for using both continuous auditing and continuous monitoring, which are different, and how to transcend that knowledge in the fight against fraud. Specifically, we will provide an executive overview of the differences, keys to the methodologies, and practical guidance on how to operationalize both.
We will also facilitate a discussion around the obstacles attendees may be facing and provide suggested solutions on how to overcome those challenges. Your investment in this session will help ensure you’re developing proper methodologies that will save numerous hours of potential rework, stand scrutiny, and possibly improve the overall governance, risk management, and compliance processes.
Information about CPE eligibility
There are no prerequisites for this seminar, and advance preparation is not required. There is no cost to attend this seminar.
CPE credit: Two (2) hours total credit
Field of study: Regulatory Ethics
CPE host: Kendra Bergin
A certificate of completion will be emailed to you four to six weeks following the event.
For more information regarding administrative policies such as complaint and refund policies, please contact Heather Eggers at 608 240 2522.
Baker Tilly Virchow Krause, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: learningmarket.org.
We live in a disruption-intensive world and complacency is no longer an option!
To support my statement is the DOJ and their writing on the Evaluation of Corporate Compliance Programs (“Evaluation”), which states “prosecutors should also consider ‘[t]he effectiveness of the company’s risk assessment and the manner in which the company’s compliance program has been tailored based on that risk assessment’ and whether its criteria are ‘periodically updated.’
(See, e.g., [Justice Manual] 9-47-120(2)(c); [Sentencing Guidelines] § 8B2.1(c) (‘the organization shall periodically assess the risk of criminal conduct and shall take appropriate steps to design, implement or modify each requirement [of the compliance program] to reduce the risk of criminal conduct’.”)
The Evaluation further states, “prosecutors may credit the quality and effectiveness of a risk-based compliance program that devotes appropriate attention and resources to high-risk transactions, even if it fails to prevent an infraction in a low-risk area.”
When the original Federal Sentencing Guidelines for Organizations (“the Sentencing Guidelines”) were issued in 1991, there was no mention of a risk assessment as part of compliance programs. It was not until the Sentencing Guidelines were amended in 2004 that this alarming omission was remedied. But even then, the risk assessment had not fully “arrived,” as some of the early compliance program requirements in FCPA settlements failed to include a risk assessment component.
As risks continue to expand and intensify many struggle to ring-fence them in and manage them appropriately. Relying on manual processes like spreadsheets, email, and other disparate methods more likely than not are not effective.
The recipe below must be adapted accordingly. Also, the risks that are identified need to be monitored appropriately. I suggest you strongly evaluate and consider automating, where possible, the management of risks and controls with the mindset of continuous improvement or tuning of the fraud risk management program.
In addition to establishing an ethical environment, board members and management must also take the lead in implementing and maintaining a formal fraud risk management program. One key element of such a program is a fraud risk assessment, which should be updated annually at a minimum or more frequently if conditions warrant. Recall that GRC means, Governance, Risk, and Compliance because it’s a waterfall concept – meaning that good governance includes risk management, and risk management should be driving the compliance initiative or program. Why? Because how can you design an effective compliance program to deter and detect ethical breaches, or worse, fraud, including bribery and corruption, unless you understand the risks your organization faces.
The risk assessment, which some say is easy and I disagree, should identify at a minimum fraud schemes and the acts that could potentially occur, possible concealment strategies that could be used by the fraudster to avoid detection, possible conversion tactics, the individuals or gatekeepers who pose the highest risk of committing fraud, controls that are in place to deter or detect fraud and a list of warning signals or “red flags” that are useful in many ways, including assessing the design of controls.
The success of the fraud risk assessment process hinges on how effectively the results are reported and what the organization then does with those results – in other words, “How is it operationalized”? – See Practice Pointer below.
Here is My Recipe or Methodology*
Having a documented risk-based methodology will help in many ways, including properly tailoring your internal audit and compliance programs.
Inventory the various risk assessments within the organizations. Ensure risk ratings are consistent.
Identify, understand, and evaluate the company’s business, their strategy, and operating environment along with the pressures that exist.
Understand the legal and regulatory aspects of your business. For example: If your organization is subject to the Foreign Corrupt Practices Act (“FCPA”) then your risk assessment will in all likelihood need to be expanded to include the appropriate elements to assess FCPA risk, which should focus on foreign government “touch points”.
Many miss here as they focus on sales/revenue. Sale volume and materiality shouldn’t matter – again focus on foreign government touch points!
Consider the strategy and objectives put forth. This helps with assessing pressure and possible override then link the objectives to controls.
Evaluate and determine your Fraud Risk Universe (See graphic above).
Identify the business processes and consider differences across the organization.
Review prior allegations of fraud and actual frauds. Understand the root cause(s) of the actual frauds.
Consider at a minimum audit results (internal and external), investigations, results of root cause analysis, recent litigation or settlements, compliance complaints, employee claims, industry enforcement trends, and the existence and sufficiency of policies covering an area.
Identify the Process Owner for each Process and understand their duties and roles. Throughout the risk assessment exercise consider segregation of duty conflicts and document them so they can be remediated.
Identify how Fraud may occur (fraud schemes) in each process and at each location through interviews and meetings.
Understand if the scheme involves financial statement fraud, asset misappropriation, or corruption. Note: It may include all three.
Look at the potential fraud manifestations (scenarios) within each process and location.
Identify the parties and profile (not stereotype) the individuals who have ability to commit the potential fraud. Process Owners, Gatekeepers, etc., who are competent and arrogant enough to possibly override/circumvent controls, if they exist, and misbehave.
Evaluate the likelihood that each of the identified frauds could occur and be significant/material as well as the persuasiveness of the potential fraud without considering controls and possibility of management override of those controls.
Consider the strategy to commit and conceal the fraud and the conversion to determine the effort / controls required to prevent, detect and deter the fraud.
Document the inherent risk.
Identify red flags by reviewing the fraud schemes, scenarios, concealment strategy, and conversion. This helps in evaluating the controls that are or should be in place and the design. These “red flags” can be organized into four general categories:
Transactions conducted at unusual times of day, on weekends or holidays or during a season when such transactions normally do not occur;
Transactions that occur more frequently than expected — or not frequently enough;
Accounts with many large, round numbers or transactions that are unusually large or small; and
Transactions with questionable parties, including related parties or unrecognized vendors, which may or may not be disclosed.
Missing or altered documents;
Evidence of backdated documents;
Missing or unavailable originals;
Documents that conflict with one another; and
Questionable or missing signatures.
Lack of Controls
Unwillingness to remediate gaps;
Inconsistent or nonexistent monitoring controls;
Lack of clear management position about conflicts of interest;
Inadequate segregation of duties;
Lax rules regarding transaction authorization; and
Failure to reconcile accounts in a timely manner.
Rationalization, changes in behavior, contradictory behavior or recurring negative behavior patterns;
Lack of stability;
Inadequate income for the individual’s lifestyle;
Resentment of superiors and frustration with job;
Emotional trauma in home or work life;
Undue expectations from family, company or community; and
Attendance! Perfect attendance or severe absenteeism.
Determine the appropriate audit response and investigate the characteristics of potential fraud manifestations within each process identified, where “Residual Fraud Risk” exists.
Determine the fraud risk expectancy (quantify).
Document the residual risk.
Remediate fraud risk by designing control activities or exiting/ending the activity, relationship, etc. Use the “four eyes principle”. Ensure there is an appropriate segregation of duties. Note: Also use this to insure you have proper insurance coverage.
Harmonize. Make sure the fraud risks identified are evaluated similarly and are in sync with your Enterprise-wide Risk Assessment and other risk assessments you have done. A savvy regulator will pick up on this and could conclude that from a governance perspective your risk management program is deficient – siloed.
Use the “red flags” identified as part of your training! Teach people what to look for and how to report any suspicious activity.
Review the fraud risk assessment frequently, especially after an event – like a fraud, change in senior leadership, merger, acquisition, reduction in force, system upgrade, etc.
Compliance, internal audit, legal, and the organization’s stakeholders can use the results of, or operationalize, the fraud risk assessment, which includes the identified “red flags” to fine tune or strengthen controls, policies, procedures, training, and testing strategies/programs.
Risk assessments are critical today more than ever.
Having a risk assessment may help in resource allocation and prevent punishment for areas not in scope.
Please reach out to me if you have any comments or questions.
*Note: This is a standard approach. It has been customized and modified accordingly over the years. Also, for a complete assessment there are other procedures that more likely than not need to be performed in order to properly assess the risk of bribery and corruption.