Association for Credit Union Internal Auditors

2. Association for Credit Union Internal Auditors How to Interview a Fraud Suspect June 15, 2011 Presented by: Harvey Johnson, CPA Witt Mares, PLC hjohnson@wittmares.com

3. Types of Credit Union Fraud • Two primary categories of fraud: • External Fraud • Internal Fraud

4. Types of Credit Union Fraud • External Fraud • Credit/debit card fraud • ACH and wire fraud • Hacking (phishing, vishing, identify theft) • Synthetic identity theft • Create new identities by combining real and fake information to establish new accounts • Burglaries / robberies • Counterfeiting • Check kiting, forgery • Money laundering • Mortgage fraud

5. Types of Credit Union Fraud • Internal Fraud • Fraudulent financial reporting • Rare, but potential for unlimited damage • If senior management is bound and determined to perpetrate fraud, preventative controls can provide little assurance • Increased risk ask pressures on and within financial sector continue to rise

6. Credit Union Fraud • Internal Fraud • Misappropriation of assets • Can occur anywhere within the organization • Can range anywhere from a few dollars to a few million dollars • Includes: • Simple theft • Fraudulent loans • Related party transactions • Embezzlement • Internally-assisted robberies

7. Shocking Statistics • According to the ACFE’s “2010 Report to the Nations on Occupational Fraud and Abuse”… • Median loss caused by occupational fraud across all industries was $160,000 • Nearly 1/4 of frauds involved losses of at least $1 million or more • Nearly 1/3 of causes involved loss of $500,000 or more • More than 60% cases involved losses of at least $100,000

8. Shocking Statistics • According to the ACFE’s “2010 Report to the Nations on Occupational Fraud and Abuse”… • Median loss caused by occupational fraud in the banking/financial services industry was $175,000 • The banking/financial services industry had the highest percentage of internal fraud incidents – 16.6% of reported cases – of all industries

9. Shocking Statistics • According to the FICO’s 2010 “Faces of Fraud: Fighting Back” survey… • Over 75% of all reported fraudulent activity is reported to institutions by their customers • The indirect cost of fraud is hidden, but high • 45% of institutions surveyed reported lost productivity • 37% of institutions surveyed reported a loss of customer confidence • 18% of institutions surveyed reported attrition

10. Shocking Statistics • Fraud never sleeps • From the Credit Union Journal Daily Briefing, June 6, 2011 • “Ex-Worker at Hidden River CU Convicted of $58,000 Embezzlement.” • “Branch Manager Got $80,000 in Fraudulent Loans” • “Mortgage Broker Guilty in $4.6 Million Fraud” • “CEO Says He Was Fired For Whistle Blowing”

11. The Fraud Triangle

12. Addressing the Fraud Triangle • Attitude/Rationalization – Occurs entirely within the individual • Incentives/Pressures – Can be addressed with policies, procedures, and environment, but only indirectly • Opportunity – Can be addressed directly

13. Focus on Reducing Opportunity

14. Fraud Interview Tips • Work your way to the suspect • Start with neutral third-party witnesses – people who have access to evidence, but are not involved • Next are corroborative witnesses – people with direct knowledge of fraud, but are not involved • Finish with the target – interview all suspects separately once significant evidence is collected

15. Fraud Interview Tips • Structure the interview • Introduction – Establish a rapport, provide background information • Body – Ask “who, what, when, where, why, how?” • Conclusion – Confirm your understanding, ask for suggestions on others to interview

16. Fraud Interview Tips • Expect difficulties • Make a list of possible obstacles, and how they should be overcome • Make a list of things that could go wrong, and how they can be put right • Expect attacks on your character, qualifications, competence, etc – don’t let them detract from the task at hand • Reluctance can be overcome with a sympathetic, cooperative tone

17. Fraud Interview Tips • Get to know the subject • Spending time going over the subject’s background at the outset of the interview can be invaluable • Observe how they answer non-threatening questions • Get a feel for vocal tone, body language, etc. • Observe how they answer questions to which you already know the answers

18. Fraud Interview Tips • Use silence to your advantage • Leave space between an answer and the next question • People have a natural inclination to fill long periods of silence, especially in tense situations • Off-hand comments, non-verbal cues, and unsolicited clarification of previously-given answers can indicate a need to change the direction of the interview or investigate certain matters further • Use this time to assess the interview and make any “tweaks” that may be necessary

19. Fraud Interview Tips • Know what you are looking for • Know which types of fraud are most likely to occur in the subject area that you’re investigating, and tailor your approach accordingly • Direct your evidence gathering appropriately • A well-directed fraud interview is more productive, and less likely to result in difficulty than an unfocused, meandering one

20. Fraud Interview Tips • When following up on an issue, use the subject's own words • Avoids ambiguity • Deters backtracking • Shows that you are following the subject closely

21. Fraud Interview Tips • Always clarify • Fraud, especially in the financial sector, can be very complicated. Make sure that questions and answers are as exact as possible • A misunderstanding on a key matter can have disastrous consequences • Have the subject sign your notes, if applicable

22. Fraud Interview Tips • Move in the right direction • General questions to specific questions • Comfortable areas to sensitive areas • Easy questions to difficult questions • A fraud interview should be like a funnel

23. Fraud Interview Tips • Use a script • Can be as formal or informal as deemed necessary • Fraud interviews are stressful, and crucial items can be omitted in the heat of the moment • A script helps to organize and focus an interview—and give the impression of being an organized, focused interviewer

24. Fraud Report • Contents of a fraud report • Background • Briefly discuss why fraud examination was conducted • Executive summary • Summarize what actions were performed during examination • Summarize outcome of examinations • Scope • One paragraph explaining scope of fraud examination • Approach • Briefly describe team, interview subjects, documents examined

25. Fraud Report • Contents of a fraud report (cont’d) • Findings • Detailed description of procedures performed and what was found • Summary • Briefly summarize the results of the fraud examination • Impact • Briefly summarize the effects of the fraud on the institution • Recommendations • Briefly discussed remedial measures • Optional

26. Best Practices • Institute a fraud hotline • Encouraged by the FDIC for all financial institutions • Set the “tone at the top” • Code of Conduct • Clearly define fraud • Require employees to read and sign • Institute an EAP (Employee Assistance Program) • Helping employees deal with personal issues creates a culture of openness, honesty, and assistance

27. Best Practices • Hire, promote, and train ethical employees • Implement fraud education for all employees on a department-by-department, job-by-job basis • Dispense fair and balanced discipline • Deal swiftly and consistently with fraud regardless of source or scale • All corrective actions should be aligned with the employee code of ethics

28. Best Practices • Identify and measure risks • Management must asses the organizations’ exposure to fraud risk and identify potential fraud schemes that can be mitigated and measured • Implement internal controls • It is not enough to have controls in place; they must be tested, updated, and—most importantly—used

29. Best Practices • Maintain a strong and independent supervisory committee • The supervisory committee is the heart of active fraud prevention • Implements anti-fraud measures • Hires and evaluates internal and external auditors • Leverage technology • Analytical tools, detailed financial information, and historical data are widely available—and usually already exist within institutions

30. Questions Please Contact: Harvey Johnson, CPA Manager Witt Mares, PLC 150 West Main Street, Suite 1150 Norfolk, VA 23510Phone: (757) 627-4644 hjohnson@wittmares.com