The 2009 Ponzi Collapse

The great recession of 2009 brought with it 4 times the annual average of Ponzi scheme collapses (according to an AP report). Headlined by Bernie Madoff's $50 Billion blowout, there were over 150 Ponzi's revealed in 2009 compared to around 40 in 2008.

Was the Ponzi collapse a result of better governance or stricter enforcement? No. The economic situation created conditions which made it impossible for the schemes to continue. We still need better corporate governance, enhanced enforcement, and improved detection.

2009 - The Great Recession, 2010 - The Great Litigation?

An article this morning in the New York Times reported that 4.7 million cases were filed in the New York court system - the most cases ever filed. Most of these cases were either directly (bad debts and soured deals) or indirectly (domestic violence as a result of lost jobs and foreclosures) a result of the financial crisis. The article stated:

"Judges and lawyers say the tales behind any number of cases, including low-level offenses like turnstile jumping and petty theft, are often a barometer of bad times. And they said that the data showed that courts nationally would be working through the recession’s consequences for years, much as they did with the flood of cases stemming from the crack cocaine epidemic of the 1980s, even after the epidemic had slowed."

Read the article for yourself and make up your own mind -
NY Times Article.

Corporate Crime Task Force Created

It was announced on November 17th that President Obama's administration has created a Corporate Crime Task Force. U.S. Attorney General Eric H. Holder Jr. said, "Mortgages, securities and corporate fraud schemes have eroded the public's confidence in the nation's financial markets and have led to a growing sentiment that Wall Street does not play by the same rules as Main Street."

The L.A. Times reported, "The Financial Fraud Enforcement Task Force will attack what Holder called "unscrupulous executives, Ponzi scheme operators and common criminals" in much the same way that a similar task force created in 2002 by former President George W. Bush went after corporate malfeasance following the accounting scandals at Enron Corp. and WorldCom Inc."

The article continued: "The Fraud Enforcement and Recovery Act authorized $245 million annually in 2010 and 2011 to hire hundreds of prosecutors, agents and other federal officials to pursue financial fraud. It also strengthened and expanded money laundering laws and other statutes to apply to fraud committed by private mortgage lenders."

Is this something that should worry executives and corporate boards? Or... is this much ado about nothing?

A Proactive Response to Fraud Risk and Fraud Detection - The Fraud Penetration Study

One of the few truly proactive approaches to fraud prevention and detection, a Fraud Penetration Study is the application of specific audit procedures to increase the likelihood of detecting fraud in a core business system. Unlike the traditional audit approach, the Fraud Penetration Study does not focus on controls or control effectiveness, but rather the authenticity of the transaction.

There are six steps to the Fraud Penetration Study: Risk Identification, Scenario Development, Concealment Analysis, Scoping, Data Mining, and Fraud Analysis.

• Fraud risk identification starts with understanding the types of fraud risk. The starting point is accepting the concept of inherent fraud schemes. Once this concept is accepted, the auditor must understand how the scheme would occur in the specific business system; often times referred a fraud scenario.


• The fraud scenario is built from understanding the variations of the scheme based on the opportunities for fraud, entities involved, internal controls in place, and business processes currently performed. In essence, the fraud scenario is how the inherent fraud scheme would occur in a company’s business process.


• After the fraud scenario is developed, the auditor must identify and understand the common concealment strategies used to hide the fraud in this scenario. Common fraud concealment strategies are false documents, false representations and false approvals. The auditor should identify the red flags associated with the concealment strategies.


• The structure of the fraud scenario defines the audit scope for the audit plan. The audit plan may have several fraud scenarios, but each fraud scenario needs its own data mining plan and its own fraud audit procedures. Also, the audit plan provides the auditor with the necessary information to find and reveal the fraud scenario.


• Using a data mining tool like ACL(1) or IDEA(1), a sample of vendors would be selected consistent with the fraud data profile for the identified fraud scenario. Building the fraud data profile is the most important step in the fraud audit process. The goal is to select a biased and discreet number of transactions that are more likely to be fraudulent on which fraud audit procedures can be performed.


• The purpose of the fraud audit procedure is to gather evidence that is created and stored external to the perpetrator to form the basis of the Fraud Analysis. The procedure should be designed to pierce the concealment strategy. In the false billing scheme, the weakness of the concealment strategy is that the vendor does not exist. If the auditor develops an audit procedure to show that the entity does not exist, the concealment strategy will be unveiled, and the fraud exposed.

Using this methodology, you will find out if there is fraud in your business and if done well, you will find it within the first 3 days of analysis.

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1 ACL is a registered trademark of ACL Corporation and IDEA is a registered trademark of Caseware IDEA.

Looking for Ghost Employees in a Retail Environment

Payroll Fraud, specifically “Ghost Employees” can create a significant financial burden on companies. How much? Well, according to Occupational Fraud and Abuse, by Joseph T. Wells, Obsidian Publishing Co. Inc., Ghost Employee Fraud has the highest median loss relative to all payroll fraud schemes at $275,000 per case. If it is happening at your company, it is hurting your company. Unfortunately for those of you in retail, you are one of the most susceptible.

What can be done?

A large retail organization, one of the Fortune 500 with well over 200,000 employees, has retained Vonya Global to search for Fraud in Payroll. Specifically we will be looking for Ghost Employees which (in our methodology) includes Fictitious Ghosts, No-Show Ghosts, Pre-employment Ghosts, Terminated Ghosts, Temporary Ghosts, Family/Friend Ghosts, and Temp Agency Ghosts.

Unlike an investigation, this project is a proactive approach to fraud detection. The company has no evidence or indication that payroll fraud is occurring, however they understand that based on their size and their industry they are susceptible. Our approach takes an inventory of all payroll data and files. Once we have all the information we will segregate it into groups with similar characteristics and through detailed data analysis we will identify anomalies. We are confident that we will identify Ghost Employees and as a result return hundreds of thousands of dollars to the company.

Contact us if you would like to find out more about this project or how we would help you identify fraud in your business.

House Financial Services Committee passes Garrett-Adler amendment

The anticipated roll-call vote on the Garret-Adler amendment happened today... passing by a 37-32 vote. The amendment would exempt Small Caps from SOX 404 compliance. There is a long way to go before this bill becomes law, but it is said that the White House supports the bill.

Is this amendment a good thing? You can start a discussion here or follow the one going on now on LinkedIn.

Investors Opposed to Further SOX Delays

The House Financial Services Committee is considering two amendments to either delay or repeal the requirement for SOX 404(b). The first would require separate studies by the Government Accountability Office and the Securities and Exchange Commission to evaluate the costs and benefits of complying with Section 404(b) for non-accelerated filers. The second would exempt all companies with less than $700 million in market capitalization from Section 404(b).

Investor groups quickly voiced their opposition to the amendments in an Oct. 26 letter to several key members of Congress. Signed by leaders from the Council of Institutional Investors, the Consumer Federation of America, the American Association of Individual Investors, and the CFA Centre for Financial Market Integrity, the letter opposes any effort to further defer or exempt any public companies from the internal control requirements of Section 404, which they say “would do a grave disservice to investors whose trust in the markets is an essential ingredient in any financial recovery.”

“It is our view that the Section 404(b) requirements under SOX provide significant benefits to investors, are valuable regardless of a company’s size and represent an appropriate use of a company’s resources given the importance a strong system of internal controls has in producing reliable financial reporting,” the letter states.

Excerpt taken from October 30, 2009 Compliance Week article written by Melissa Klein Aguilar

A roll-call vote is slated for November 4th.

Construction Auditing: the Foundation to Risk Management and Internal Control

As the global economy slowly recovers, companies will begin to invest once again in large construction projects. Many projects that had been on hold through the downturn are now beginning to find funding. These projects include both new construction and significantly upgrading facilities such as: Distribution Centers, Manufacturing Facilities, Shared Service Centers, Retail Sites, Data Warehouses, Educational Facilities, and Healthcare Facilities.

While a multimillion dollar project represents one of a company’s largest capital expenditures, it is sometime on of the least controlled expenditures. On October 21st, the Senior Supervisors Group issued a report on the financial crisis and in it they stated, “…weaknesses in risk management and internal controls contributed to industry distress during the financial crisis.” Similarly, weak risk management practices and internal controls could lead to significant losses or delays in a large construction project.

Companies need to learn the lessons of the financial crisis and embed risk management and internal control into all processes, especially construction. The first step to improving risk management and internal control is to leverage the principals of audit. An audit, in this case a construction audit, provides the foundation.

Construction Auditing starts with the Construction Contract
A construction contract will include a variety items such as project description, project timeline, cost estimate, payment terms, documentation requirements and sections on insurance and indemnification. However, the contract should also include certain provisions to specifically protect the owner’s interest. The American Institute of Architects provides a series of standard construction contracts which can be used as a template for construction projects. While these templates provide a solid framework, they are not necessarily written with a bias towards owners rights. Provisions such as “Right-to-Audit” and “Change Orders” plus other internal control enhancements need to be customized. These modifications will improve the owner’s control over project costs, allow for recoveries, and are necessary to strengthen the ability to audit.

"The audit is an integral part of the construction project process. Performed well by seasoned professionals it will assure the Owner that financially they received the product contracted and paid for."

Knowing what to modify and even how to modify is not common knowledge and can’t be done through the legal review process. It is critical to have this review completed by an experienced construction audit professional and it should be done prior to executing the contract. Doing so will save thousands, if not hundreds of thousands of dollars throughout the project.

Pro Bono Construction Contract Health Check
Are you confident in your construction contracts, but would like a second look? For a limited time, Vonya Global will provide a pro bono review of your construction contracts. Certain limitations apply, please call or email for additional information.

Fraud Detection Workshop in Chicago October 27 - Afternoon Session Added

Due to popular demand an afternoon session has been added to this workshop. The session will begin at 2:30 pm and conclude by 5:00 pm. Admission is free but registration is required. Please confirm by October 20, 2009.

About the Workshop
Fraud schemes are not complex. Yet, fraud is rarely caught until it is too late. Why? Understanding the fraud scheme is not enough. Identifying the fraud concealment strategy and how it is portrayed in data is the only way to detect fraud. It is essential to learn how to detect fraud before it is too late.

Data mining is the key tool to locate and recognize fraudulent transactions. This workshop will demonstrate:

- How to build a fraud scenario approach
- How to map data fields to fraud scenarios
- How to interpret data for patterns and frequency of fictitious vendors
- How to build the fraud audit plan to include data mining

Please visit the Vonya Global website to register or request additional information.

SEC: In-House 404 Costs Top Audit Fees (from CFO.com)

A two year study conducted by the SEC revealed two very interesting statistics. First, Small companies pay more for SOX compliance than do Large companies. Not in absolute terms, but in relative terms. This information comes as no surprise to CFO's of small companies.

"Although larger companies incur higher compliance costs, smaller companies incur higher scaled costs (i.e., relative to their assets) on average," the SEC wrote in a report released Friday.

Second, internal SOX compliance costs are larger than external audit fees by a large percentage. This comes directly from the CFO.com article:

"What may come as a surprise is that the majority of Sarbox-compliance costs aren't going into auditors' pockets; rather, companies' in-house work to follow the 2002 law's internal-controls provision — Section 404 — is more largely to blame for the expense. The highest cost of Sarbox, the SEC said, is "internal labor costs," followed by audit fees and then costs related to another third party, such as a consultancy, used for help with compliance."

This all comes on the heels of the 4th extension the SEC has given Small Caps to comply with Section 404 of the Sarbanes-Oxley Act. As stated in an earlier post, Vonya Global has a proprietary methodology for helping Small Caps and IPO companies comply with the rigors of Sarbanes-Oxley. Sox OnPOINT™ is a top-down risk based approach which streamlines the compliance effort and is consistent with the PCAOB Audit Standard Number 5. Sox OnPOINT™ helps our clients reduce the cost of compliance.

For more information please visit our website or send us an email.

Small Caps Get Another SOX Reprieve

The SEC announced on Friday, October 2, 2009 that the SOX deadline for Small Caps is pushed to June 2010. The effort by the regulatory body to make the compliance process easier for the Small public companies makes one wonder if the compliance requirement will ever stick. If so, Vonya Global has a proprietary methodology geared to help Small Caps and IPO's (newly listed public companies). SOX OnPOINT(TM) is a top-down risk based approach which streamlines the compliance effort and is consistent with the PCAOB Audit Standard Number 5.

http://www.vonyaglobal.com/sarbanes-oxley-sox-sarbox.html

The full release from the SEC can be found at: http://www.sec.gov/news/press/2009/2009-213.htm

2010 Hot Internal Audit Topics - what will be on top of your list?

This is quick poll created by Veronika Fritz of Vonya Global. Check it out if you have a chance: http://polls.linkedin.com/p/59060/dsoui

FINAL REPORT: Strategic Plan for Fraud Prevention, Fraud Detection, and Fraud Deterrence

Vonya Global surveyed Executives and Internal Auditors from private, public, and not-for-profit organizations, spanning many industries to gather opinions on strategic planning for fraud prevention, fraud detection, and fraud deterrence.

"Companies should do more to deter and detect fraud. Costs go far beyond the simple dollars someone steals or gains through materially misstated financial statements. Loss to employees and stockholders can be substantial.”
- Internal Auditor Response


Historically, there have been several studies conducted about fraud and fraud statistics, but none that deal directly with the strategic plans to manage fraud risks. The timing of this study is appropriate due to the heightened sensitivity to fraud due to the economic conditions. It seems more groups, including regulatory bodies, investors, clients, and suppliers are increasingly concerned about the ability to demonstrate effective fraud prevention and fraud detection strategies.

One of the goals of this report is to help organizations begin to evaluate the investment in fraud prevention, fraud detection, and fraud deterrence to determine if there are more effective ways to manage fraud risk.

A copy of the full report can be downloaded by following this link: Fraud Prevention, Fraud Detection, & Fraud Deterrence Report

Fraud Detection: An Executive Briefing on Data Mining Techniques

Fraud Detection Workshop, October 27, 2009

Fraud schemes are not complex. Yet, fraud is rarely caught until it is too late. Why? Understanding the fraud scheme is not enough. Identifying the fraud concealment strategy and how it is portrayed in data is the only way to detect fraud. It is essential to learn how to detect fraud before it is too late.

Data mining is the key tool to locate and recognize fraudulent transactions. This workshop will demonstrate:

• How to build a fraud scenario approach
• How to map data fields to fraud scenarios
• How to interpret data for patterns and frequency of fictitious vendors
• How to build the fraud audit plan to include data mining
  

The workshop will be held in Chicago, IL USA on Tuesday, October 27, 2009. The session will run from 8:30 am through 11:00 am. Coffee and a light breakfast will be served.

http://www.vonyaglobal.com/fraud-detection-workshop.html