Values Ethics Fraud Confronting Fraud and Unethical

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Values, Ethics & Fraud Confronting Fraud and Unethical Behaviour in Government June 17, 2009 Gary Moulton Forensic & Dispute Services Leader Toronto

CBC News March 11, 2005 EX-BUREAUCRAT TO BE JAILED FOR DEFRAUDING GOVERNMENT A former assistant deputy minister with Health Canada is going to jail for a year, after admitting that he got more than $200, 000 in kickbacks for channeling millions of dollars to an addictions treatment centre. He pleaded guilty in an Ottawa court to charges of fraud and breach of trust. The kickbacks included travel to Florida and the Caribbean, several SUVs and cash, which he used to buy condominiums in Mont Tremblant. Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 1

The Ottawa Citizen July 24, 2007 MASTERMIND OF DND FRAUD PLEADS GUILTY The great invoicing heist perpetrated on the Department of National Defence took a surprise turn yesterday as the man accused of orchestrating it pleaded guilty to fraud and breach of trust. Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 2

What is Fraud? According to the CICA: “The term fraud refers to an intentional act by one or more individuals among management, other employees, those charged with governance, or third parties, involving the use of deception to obtain an unjust or illegal advantage. ” Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 3

The Toronto Sun October 26, 2001 WOMAN ARRESTED IN CHARITY SCAM A Cambridge women has been charged with fraud in a charity scam. Police allege that the women canvassed neighbourhoods last week to collect for a charity event that had taken place a month earlier. At least 16 people gave cash donations of $100 or more. Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 5

KSTP Eyewitness News Minnesota March 5, 2005 FORMER CHARITABLE ORGANIZATION PRESIDENT SENTENCED IN CHARITY FRAUD The former president and chief executive of the nonprofit Millennium Charity Plus pleaded guilty to using money from the charity to buy real estate for himself in Southern California. The Minnesota Gambling Control Board has revoked Millennium’s charitable gaming license as a result of the former president’s actions. Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 7

Fraud in Government • Transparency and accountability often challenged by the media, opposition parties and citizens • Financial transgressions are magnified, because taxpayer dollars are at stake • Elections are often held because of issues of accountabilty, ethics and the misuse of public funds • Canadian government scandals have been reported in the annual Global Corruption Report, published by Transparency International Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 9

Fraud in government • Governments must make efficient use of taxpayer money while delivering maximum value to communities and citizens • Governments also are expected to adhere to the highest standards of ethical conduct • Heavily scrutinized areas in government include: – Procurement and purchasing practices – Contract management – Use of grant monies – Hiring practices – Expense accounts Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 10

Fraud in government • Recent examples include cronyism, bid rigging and other unethical behavior • Many headlines about hiring or contracting with friends, political associates and supporters • Need for hiring and contracting policies and practices to be non-partisan, fair, open, driven by business needs and competency based • Senior leadership must demonstrate the highest standards of conduct of compliance Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 11

Fraud in government • Need to avoid accusations that normal procurement procedures were bypassed to reward “friends” of the governing party • A well designed procurement function is essential, including: – Proper competitive tendering – Sole source justifications Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 12

Findings of Justice Gomery re: Sponsorship Scandal • Evidence of political involvement in the administration of the program • Insufficient oversight at the very senior levels of the public service which allowed program managers to circumvent proper contracting procedures and reporting lines • Secrecy in the administration of the program and an absence of transparency in the contracting process • Fear of reprisal on the part of public servants to challenge a manager who was circumventing established policies and who had access to senior public officials Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 13

Findings of Justice Gomery re: Sponsorship Scandal (cont’d) • Overcharging by suppliers to the program for goods and services provided and inflated commissions charged • A lack of objectives, criteria and guidelines for the program • Deliberate actions to avoid compliance with legislation and policies • The existence of a “culture of entitlement” among political officials and bureaucrats involved with the program, including the receipt of benefits Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 14

Anti-fraud measures • Important to have a robust effective anti-fraud program in place • Formal fraud risk assessment to evaluate risk factors, detect possible fraudulent schemes and scenarios and prioritize fraud risk • Robust whistleblowing initiative should be in place to allow employees, suppliers and others to report wrongdoing without fear of reprisals • Fraud surveys consistently indicate that fraud is usually brought to light by tips Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 15

Anti-fraud measures • Codes of conduct and ethics are obligatory • Developers should be drawn from a cross section of departments, titles and locations • Code should include – a clear statement of the organization’s antifraud position, – consequences for breaching the policy – Examples of acceptable and unacceptable behaviors – Regular updates to reflect changes to the business and regulatory environment Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 16

Fraud Risk Assessment Fraud Schemes Fraud Triangle • What would the fraud look like? • What are the effects on the books and records? • What type of fraud is the area susceptible to? • Where could the fraud occur? Opportunity Pressure • Who has the ability to commit a fraud? • What is the likelihood that it may occur? Rationalization Source: Donald D. Cressey, “Other People’s Money: A Study in the Social Psychology of Embezzlement Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 17

Fraud Risk Assessment • Formal/systematic process for assessing fraud risks – Brainstorming • Consideration of internal and external factors – pressures & incentives, rationalization, opportunity • Consideration of frauds – types of fraud, past occurrences • Likelihood, significance, pervasiveness of fraud – resulting in misstatements Copyright © 2006 Deloitte & Touche LLP. All rights reserved. • Levels within organization – entity, significant business units and significant processes/accounts • Risk of management override of controls – journal entries, bias of estimates, non-routine or unusual transactions • Appropriate personnel involvement – management, business process owners, audit committee, internal audit 18

Government Grant Abuse • Pressure to “spend” government grant money prior to year end • “Use it or lose it” mentality – “we found ways to justify the spending of year-end allocations. If we didn’t use it, we’d lose it. ” (Former DND employee quoted in the Ottawa Citizen, July 24, 2007) Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 19

NPO grant • $1 million grant provided by government to NPO to finance renovations to facilities • Funds received January 2002, had to be spent by March 31, 2002 • NPO signed a Request for Funds form in late March 2002 claiming it had spent $1 million on 10 suppliers • NPO cut cheques to the suppliers, based on invoices received • Government agency paid the NPO $1 million Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 20

NPO grant (cont’d) • In early April 2002 all suppliers returned funds to NPO, NPO recorded funds as “security deposits payable” • April 2002 to November 2002, suppliers performed the services, invoiced the NPO and the NPO paid the invoices • Scheme was uncovered during the year end audit Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 21

The Case of the Misspelled Words • Walt Johnson was the Parks and Recreation Director of Large Municipality • He and an accomplice set up dummy companies to defraud the municipality • The accomplice created the phony invoices and Walt personally delivered them to the accounts payable department • Walt also picked up the cheques for these suppliers • Scheme unravelled when an arena official saw an invoice for washroom painting which he knew was not done Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 22

The Case of the Misspelled Words Acme Contracting Ltd P. O. Box 202 Whitby, Ontario M 7 G 8 J 9 (905) 975 -3462 ACL 97 -004 Jan 15, 1997 Sold to: Large Municipality 200 Eglinton Ave. East Toronto, Ontario M 8 G 3 E 4 Description Painteing washrooms in Northwest Arena GST Copyright © 2006 Deloitte & Touche LLP. All rights reserved. Unit Price Amount $435. 00 30. 45 465. 45 23

The Case of the Misspelled Words Bosstown Renovations Inc P. O. Box 305 Markham, Ontario M 7 G 8 J 9 (905) 975 -3564 BOSS 3425 L May 15, 1997 Sold to: Large Municipality 200 Eglinton Ave. East Toronto, Ontario M 8 G 3 E 4 Description Paveing Civic Centre back-lot GST Copyright © 2006 Deloitte & Touche LLP. All rights reserved. Amount 1, 985. 00 138. 95 2123. 95 24

Bid Rigging What Happens? • Employee rigs tender to ensure corrupt supplier wins • Corrupt supplier often not most economical, paid more quickly, offers no discounts • Contract is worded loosely to allow for “extras”, “variations”, “change orders” over and above the fixed price • Corrupt supplier almost always gets the kickback Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 29

Corruption and Kickbacks: Bid Rigging Red Flags: • Specs only fit 1 contractor • Advance release of specs to 1 contractor • Unnecessary sole source justifications, usually stated to be for “technical” superiority • Exclusion of viable contractors from bid process • Splitting requirements • Vague specs • Limited time to submit bids • Sharing legitimate bidder information with favoured vendor • Inadequate shortlisting of qualified vendors Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 30

Corruption and Kickbacks: Bid Rigging Red Flags (cont’d): • Ownership interest in favoured vendor • Acceptance of late bids • Changes in vendor bid documents (especially if submitted electronically) • Improper disqualification of bids • Acceptance of non responsive bids • Unnecessary contacts with preferred vendor • Inappropriate evaluation criteria/scoring • Inappropriate weight between technical and financial criteria • Changes to contract shortly after award Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 31

The Case of the Phantom Supplier AS 26374 L Office Supplies Limited P. O. Box 101 Toronto, Ontario M 7 G 8 J 9 (416) 975 -3462 January 31, 1995 Sold to: Large Municipality 200 Eglinton Ave. East Toronto, Ontario M 8 G 3 E 4 Quantity Description Unit Price 1 dozen drafting pads 14. 95 tax Copyright © 2006 Deloitte & Touche LLP. All rights reserved. Amount $179. 40 14. 36 $193. 76 32

Office Supplies Limited - Red flags • no salesmen visits • no product catalogue • no Christmas card • telephone number was for an autobody shop • invoices always under $500 • cheques always under $2, 000 • all invoices approved for payment by Mr. Jones • Mr. Smith also responsible for accounts payable Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 33

Professional Scepticism • All signing authorities should adopt an attitude of professional skepticism, recognizing that circumstances may exist that causes the documents or representation to be improper. • It means the a signing authority officer should make a critical assessment, with a questioning mind, of the sufficiency and appropriateness of supporting documents being provided and is alert for evidence that contradicts or brings into question the reliability of the documents or employees representations • Professional skepticism does not mean a signing authority is obsessively sceptical or suspicious. Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 34

Professional Scepticism (cont’d) • The attitude of professional scepticism is necessary throughout an approval process in order to reduce the risk of overlooking suspicious circumstances. • In those instances where the transaction data is inconsistent with the source documentation supporting that transaction, the general ledger should be updated to reflect the correct information. • Prior to make such adjustments these errors should be monitored in order to ensure the appropriateness of the adjustments and also be approved by the appropriate level of management. Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 35

Public Accountability – A Sense of Belonging “The absence of commitment to corporate cultural standards leads more easily to deviant forms of behaviour by individual employees, who may disregard the reputation of their employer or even their own if a quick profit is to be made. ” Copyright © 2006 Deloitte & Touche LLP. All rights reserved. Source: Corporate Loyalty: A Trust Betrayed, Copyright Brian A. Grosman, 1988 36

Closing thoughts • Fraud and unethical behavior are a drain on taxpayer resources • Fraud risk can be minimized by: – Knowing who commits fraud and why – Strengthening internal controls and oversight – Training auditors and investigators Copyright © 2006 Deloitte & Touche LLP. All rights reserved. 37