Holiday maker

As the holiday season approaches, most people start thinking about a couple of weeks in the sun. But, as Kevin Goulding, group head of internal audit at Dublin Airport Authority, explains,the season brings more complicated challenges
for those running airports.

9 July 2013 @ 11:14 in Features.

The airline industry has been one of the hardest hit since the global economic crisis gained momentum. While passenger numbers are moving back up to pre-2008 levels globally, profit margins have narrowed for most, and the environment is set to remain challenging for some time, according to the International Air Transport Association, the major industry body. 

Yet there are always some that buck the trend and succeed where others struggle. Dublin Airport Authority (DAA), which is state owned, but operates on a stand-alone commercial basis, runs Dublin and Cork airports and delivered a solid performance last year. Turnover increased by three per cent to €575m, while profits (excluding exceptional items) grew by 66 per cent to €43m. Group operating costs fell, while passenger numbers rose – 8.8 million passengers used the recently opened Terminal 2, which is driving the airport’s long-haul growth. 

So far this year, the positive upturn looks set to continue and there are signs that even more people will be jetting to and from the Irish capital over the summer.

Kevin Goulding, DAA’s group head of internal audit, is confident that the airports can cope with the projected surge in demand, and that the necessary controls are in place to ensure that passengers have a smooth journey and that internal audit is not run ragged. “Increased capacity and larger passenger numbers are always a risk issue, but the opening of Terminal 2 a couple of years ago reduced those capacity risks,” he says.

Care of duty

But Goulding’s internal audit team is working in a business that is far more complex than that of many airports. DAA has three strands to its operations. The most important and resource-intensive of these is running Dublin and Cork airports. In the past few years it has also developed a consulting arm that provides advice to airports that are, for example, planning to develop new terminals, facilities and business opportunities. Third, over the past 50 years, it has developed an enviable sideline in duty-free/duty-paid shopping with its retail business Aer Rianta International (ARI), one of the world’s largest airport duty-free and duty-paid retailing companies with an interest in 24 airports in 14 countries.

During 2012 ARI generated profits of just over€€27m. It saw strong sales growth in the Middle East and in India, where annual sales at its Delhi Duty Free passed US$100m for the first time. ARI also opened its first Chinese stores in 2012 and has recently been selected as the preferred bidder for the duty- free business at Mumbai’s new Terminal 2, which means that ARI will be operating the key duty free outlets at India’s two main international gateways. This will give DAA a very strong position in one of the world’s most important growth markets.

As a result, Goulding says that internal audit’s work is increasingly involved with the way that the business is expanding internationally. “Bidding for duty-free contracts is big business for DAA and the organisation keeps an ear to the ground to find out when a new opportunity might become available. Our work involves providing assurance on financial statements. In order to win these contracts, the organisation has to give guarantees and provide sound financial forecasts on the amount of revenue and customers it can bring in. We need to check the information behind those figures,” he says.

His team will audit the activities of each ARI subsidiary every two to three years. “This process is complex for a number of reasons. First, it is a question of resources. We have a small team so we need to ensure that resources are deployed in the most effective way possible. The other issue is that many of the ARI operations are joint ventures, and we may need to agree a ‘right to audit’ with the other party. Added to that, joint venture partners may have their own internal audit teams and external auditors, so sometimes we can leverage off their work,” he explains.

Fully automatic

Another area of financial risk for internal audit relates to loss of revenue or “revenue leakage”. “The financial controls we have in place are robust and the business model we use has been established for a long time, so we are aware of the risk profile,” says Goulding. “However, some of our invoicing involves a degree of manual input and that is a concern. The business is trying to automate more of these processes, and internal audit is monitoring progress,” he says.

IT risk is already at the heart of his team’s work. “Our business is very IT-driven,” he says. “There are around 180 different types of IT system across the organisation; everything from the usual desktops to check-in terminals, CCTV, security scanners and arrival and departure monitors. We have identified about 25 of these as critical. We have to make sure that these systems will work and that there is a back-up process we can switch to very quickly if anything goes wrong. Business continuity is a major focus for us.” 

To ensure that the risk of IT disruption remains low, internal audit has a policy of communicating the importance of “patch management” throughout the organisation. “It is hugely important that everyone is using the latest – and safest – versions of software on their systems, so the IT department sends out communications notices to remind people to install the latest patches made available by software providers to get rid of any vulnerabilities,” he explains.

Developing high flyers

Goulding believes that it is important for internal auditors to move into other departments in the organisation after two or three years. He also likes to “mix and match” his staff so that members of his team get to experience all aspects of internal audit work. “I don’t want people to be stuck looking at one area of work all the time, such as regulatory compliance. I want my team to be flexible and to experience the whole range of work that internal audit does so that they get variety, enhance their skills and can benefit the wider business if they move into another department in the organisation,” he says.

Goulding’s first dedicated internal audit role after qualifying was at paper and packaging company Jefferson Smurfit Group (now Smurfit Kappa), where he was mentored by a head of internal audit who constantly stove to make the function “best in class”. “That experience shaped the way that I think about internal audit a lot. My then boss always looked at what value internal audit could add to the business and he put a strong emphasis on having different skill-sets, and I share exactly the same view,” he says.

He took up the role of group head of internal audit at Dublin Airport Authority (DAA) in January 2012. Before this he spent over seven years at Kingspan Group, which provides environmental, construction and renewable energy products. He enjoyed
this job, which included setting up the internal audit and risk-management functions, but a seven-week spell in hospital after a routine appendix operation went wrong and nearly killed him put the constant travelling into perspective. 

“Around 96 per cent of Kingspan’s business was outside Ireland, so my work involved a lot of air travel. I felt like George Clooney’s character in the film Up in the Air – I always seemed to have a bag packed and I was constantly living out of a suitcase, collecting air miles and hotel booking points. My near-death experience put my lifestyle into perspective, and I thought I’d look for a new challenge that kept me close to home,” he says.

One of Goulding’s first tasks when he took charge of the internal audit function at DAA was to make personnel changes within the existing staff. “Over the previous three to five years some of the more experienced internal auditors had left the organisation to take up opportunities outside DAA. They had been replaced by personnel from other parts of the business with less traditional auditing experience, but with a great knowledge of the operation,” he says. 

“While their technical knowledge of the business was a huge asset, some of the team did not have all the requisite formal audit training and qualifications. Some of them had also been moved into the audit function temporarily and had stayed in the team longer than originally planned, so it was time to find new roles for them in the business. 

My approach is that the internal auditing department should be a springboard for new talent whereby recently trained and qualified auditors are brought into the organisation, and then move out into the business after about two years in audit,” he explains.

The redeployment took longer than expected, but Goulding says that he now has a team of five, including four qualified internal auditors. He is currently looking for an IT audit manager plus another internal auditor to focus on the international side of the business. This will make the team “about the right size for the organisation and quantity of work that we are doing”, he says.

His longer term plans could also involve internal audit working more closely with external teams. While he does not have a co-sourcing arrangement in place with any third-party provider at present, he concedes that he may look more closely at this option as the international side of the business grows. This could be particularly useful where the team needs local language skills, he points out. He also wants to build up the relationship internal audit has with external audit for “their shared mutual benefit”. 

“In my last role at Kingspan we carried out a number of joint audit assignments across the US business with the external auditor so that skills and experience were pooled and costs were reduced. In effect, for certain locations I ensured that the requirements of the external audit programme were fully covered by the internal audit programme and that work papers were robust enough to be relied on by external audit,” he says.

“It is more difficult to create that relationship here because external audit is statutory, there are issues surrounding independence and safeguards would need to be established. However, there can be real benefits from sharing certain work to minimise duplication of effort and to ensure there is sufficient leverage off internal audit work,” he adds.

Kevin Goulding in numbers

• 1998 to 2004 – senior internal auditor at Jefferson Smurfit Group plc (including secondments to the SAP implementation).
• 2004 to 2011 – head of internal audit and risk management at Kingspan Group plc.
• Jan 2012 to present – head of internal audit at DAA.
• He is a qualified accountant with the Chartered Association of Certified Accountants and part of the IIA’s heads of internal audit service

Black box: the business figures

Dublin Airport Authority (DAA) runs Dublin and Cork airports (Shannon Airport was ceded in December). In 2012 turnover increased by three per cent to €575m, while profits (excluding exceptional items) grew by 66 per cent to €43m. Group operating costs were slashed, running at eight per cent below 2008 levels when Dublin Airport was operating with only one terminal.Passenger numbers at Dublin and Cork airports were up by 1.6 per cent – equating to 340,000 extra passengers – while the number of long-haul passengers travelling through Dublin Airport grew by 16 per cent, owing to new capacity on routes to the Middle East and to North America. About 10.3 million passengers used Terminal 1 at Dublin Airport in 2012, while 8.8 million passengers used the recently opened Terminal 2, which is driving the airport’s long-haul growth. 

In the first three months of 2013 passenger numbers at Dublin were up four per cent and eight new services have started flying since the start of the year. The airport has secured new transatlantic capacity so that 224 flights a week will operate during the peak holiday season.

How to take a Financial Pulse

How to Take a Financial Pulse

Is That Deadbeat Really Broke?

ROBERT TIE

September 2011

 
John "Mick" Elliott, CFE, has a new client. She is in a family court battle — one of the arenas in which Elliott provides litigation support. Although no children are involved, the stakes are high.

The client, a financially strapped divorcée, came to Elliott for help when her ex-husband stopped paying alimony. The former spouse says he is broke. Perhaps believing that the best defense is a good offense, he is trying to turn the tables by making his own demand for alimony.

But Elliott's client thinks her ex is lying. As a high-end professional, she says, he has always been a big earner.

ALL IN THE FAMILY 

Elliott's practice and the former couple's now-separate residences are in California, which is one of ninecommunity property states; the others are Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

Under state law in these jurisdictions, couples have equal shares in all possessions they acquire during their marriage. If they divorce, those assets are divided between them. Each state's law provides its own criteria for determining what is an "equal" distribution of the couple's property and whether alimony to either party is warranted.

For example, to divide community property in California, the court would consider, among other things, a quantitative criterion — the provision in section 2550 of the California Family Code, which states that "… the court shall …divide the community estate of the parties equally."

Similarly, to determine whether spousal support is justified and, if so, who should pay it and how much, the court would consider, among other things, the qualitative criteria cited in section 4320 of the California Family Code. These include the "needs of each party based on the standard of living established during the marriage," and the "age and health of the parties."

As in all legal matters, relevant and factual evidence from reliable sources is essential to the effective administration of justice. Thus, the client engaged Elliott to obtain verifiable proof of her ex-husband's current income and other assets. If her suspicions prove correct, and his earnings are high and hidden assets are discovered, her attorney will be better able to persuade the family court judge to rule in her favor, mandating the resumption of alimony payments to her and denying them to her former spouse.

AN UNEXPECTED NICHE

After serving 26 years in federal law enforcement, Elliott retired as an FBI special agent, earned his CFE credential and became a licensed private investigator. His firm, Elliott Investigative Services, in Westlake Village, Calif., serves private and business clients in matters relating to family law and other civil litigation involving fraud.

"Family law turned out to be interesting work, and there's plenty of it," he said.

When Elliott opened his firm's doors in 1999, one of his first clients was a woman who was getting a divorce and suspected her spouse was hiding money from her. In building a financial profile of the client's husband, Elliott uncovered proof that she was right. Armed with that evidence, her attorney successfully argued for a better settlement than she would have gotten otherwise.

"Divorce is about money and emotions," Elliott said. "My job is to level the playing field. In the majority of my cases, the husband hides assets, and the wife engages me to find them. In fact, I can't recall a case in which a woman hid community property assets."

CRACKING THE CODE
During the 1940s, innovative private sector leaders and legal scholars believed that greater uniformity among the states' business laws would simplify and facilitate interstate commerce. To achieve this goal, they jointly developed a collection of standardized legislative models they hoped each state would implement with little, if any, modification. This body of recommendations was the first version of theUniform Commercial Code (UCC), and since then most of it has been widely adopted.

As a result, each state maintains an enormous store of UCC data that its financial institutions report on their transactions, such as business loans. While the information in these filings is sparse — perhaps only the name and address of the borrower — it is a strong lead that an experienced investigator can track to specific data, such as the amount of the loan and details on the collateral used to secure it.

The information in these records is in the public domain, and for a nominal fee, anyone can gain online access to it. Small wonder, then, that Elliott and many other experienced investigators consider UCC filings one of their most valuable sources of information for compiling a financial profile on the subject of an asset-related investigation.

UNCOVERING DIRTY TRICKS 

"A husband secretly planning a divorce will begin hiding assets about six months before taking any legal action," Elliott said. "Unfortunately, there is always a wife who has no idea what her husband has been doing with their community assets."

To take the pulse of a spouse's finances, Elliott sounds out sources that serve as his investigative "stethoscope." In this way, he constructs a profile of the subject — address history; properties owned; businesses associated with, owned or managed; professional licenses; bankruptcies, liens and judgments; and UCC filings. When building such profiles, he almost always encounters something that doesn't seem quite right.

"The financials of 97 percent of the people I've investigated were untruthful in some respect," he said.

Choosing the right source for each search requires care. Once, when combing through property records in what at first seemed like a comprehensive database, Elliott discovered that it contained only the current ownership information. It did not list sales and re-purchases of properties over time — a serious deficiency that left chronological gaps in the profile he was constructing. He then began using a database that contained properties' full ownership history.

Whenever Elliott finds that his target owns several properties, he searches further to determine how many loans the person took out on each property and to review its deed history.

"I look for signs of equity-stripping, where someone has repeatedly re-financed a property without the spouse's knowledge," he said. "If that's been happening, I find out where the proceeds went. Often, they'll wind up in a shell account or false business set up solely to hide that money from the spouse. It's very important to understand the structure of such ‘hidden' businesses. The assets they hold could be inaccessible to a deceived spouse."

Elliott also searches for bankruptcy judgments and liens, which can legally encumber the community property assets his clients seek.

"If my client's ex-husband has a lien against him, it's important that she understand and prepare for the fact that she won't get her share until the lien is cleared," Elliott said.

TIME FOR A CHECK-UP
Using the above search methods, Elliott soon hit pay dirt in his current case.

"I discovered that my client's husband was the subject of three UCC filings in the last five years, including one a few months ago," Elliott said. "If he really is experiencing financial hardship, how was he able to qualify for a loan?"

Although the UCC filings did not provide much detail, they did reveal the loan's existence.

"This will enable my client's attorney to appear before the judge and obtain a subpoena," Elliott said. "That will require the lender to produce the loan application, revealing the husband's bank account information, including the assets he listed as collateral for the loan. I expect the resulting asset profile will demonstrate he is able to make those alimony payments to my client. The court might even order him to provide her with additional community property monies she is entitled to."
Elliott expects the case will be resolved by the end of the year.

PERSERVERANCE PAYS

"If a search doesn't turn up what you need, think it over and look elsewhere," Elliott said. "All it takes is one nugget of information to get to the next question and answer. But you won't find it unless you're thorough and persistent."

Robert Tie is a New York business writer.

The Association of Certified Fraud Examiners assumes sole copyright of any article published onwww.fraud-magazine.com or www.ACFE.com. ACFE follows a policy of exclusive publication. Permission of the publisher is required before an article can be copied or reproduced. Requests for reprinting an article in any form must be emailed to FraudMagazine@ACFE.com.

 

Health Care Fraud

James D. Ratley, CFE, is President and CEO of the Association of Certified Fraud Examiners.

Death and taxes. Add health care to that short list of certainties. And while you're at it, tack on the word fraud to health care.

In May 2012, U.S. authorities charged 107 people, including doctors, nurses and other licensed medical professionals, for allegedly trying to defraud Medicare of about $452 million — the largest Medicare fraud sweep to date. The sad thing is that chances are that we'll probably soon be reading about an even more serious case.

"Health care fraud shows no sign of abating," said Dr. Joseph T. Wells, CFE, CPA, founder and chairman of the ACFE, during his keynote message at the 23rd Annual ACFE Fraud Conference & Exhibition. "Don't expect a downturn anytime soon."

Because health care fraud affects everybody, and many ACFE members work in the industry, we've begun the new "Rx for Fraud" column and will occasionally include feature articles on the topic.

In the cover article, "10 popular health care provider fraud schemes," author Charles E. Piper, CFE, CRT, writes that the difference between the health care realm and many other industries is its huge, alluring, easy pile of cash. According to the Centers for Medicare & Medicaid Services (CMS), national health expenditures in the U.S. reached $2.6 trillion in 2010 — 17.9 percent of GDP.

The CMS projects U.S. health spending to rise to 7.4 percent in 2014, as a result of the major coverage expansions from the U.S. Affordable Care Act (ACA) — an estimated additional 22 million people will be insured. Over the period of 2015–2021, health spending is projected to grow at an average rate of 6.2 percent annually.

Piper's 10 schemes aren't exhaustive — providers have many more tricks up their lab-coat sleeves. But these are representative of classic crimes. Of course, most health providers, facilities and institutions are dedicated to giving, not taking. However, the small percentage who are fraudsters can steal large amounts because they're close to the money, and they enjoy the trust of institutions and patients.

To learn more about the subject, here are two great possibilities:  

• Healthcare Fraud: Auditing and Detection Guide. 
• Health Care Reform & the New Opportunities for the Ethically Challenged.  

Health care fraud — like death and taxes — isn't going anywhere. In fact, it will increase in the next decade. We're here to help deter and combat it.

what is control??

Control is any action taken by management to enhance the likelihood that established objectives and goals will be achieved.

Purpose of Monitoring

A Baseline of Understanding

.1 Internal control effectiveness is an ongoing process. People design and implement internal control processes, which can change over time. In some instances, the system was not designed or properly implemented at inception. In other instances, the controls are prop-erly designed and implemented, but changes occur in the surrounding environment in which they operate. Also, properly designed controls are implemented and are then faced with a change in the way the business or entity operates. All of these factors represent underlying reasons for monitoring internal control on a regular basis.
.2 Poorly designed and improperly implemented controls are two of many reasons for evaluating internal control effectiveness. In other instances, the surrounding environment is subject to changes in risks,
Monitoring Internal Control
1-6
personnel, processes, or technology. When this occurs, the internal control system may not change or properly modify to cope. This is probably one of the most compelling reasons for monitoring the inter-nal control system—to ensure that it continues to provide reasonable assurance for achieving the entity’s objectives. These changes, along with the potential for operational shifts, make monitoring a critical component of the COSO framework.
.3 Because of the three primary conditions described, it is essential to establish a baseline for monitoring, since it provides a starting point to conduct and engage in the monitoring process. Creating a baseline understanding of internal control provides the foundation for devel-opment and the design of monitoring procedures. Monitoring procedures include both ongoing monitoring steps and separate eval-uations. These procedures address any changes needed in the operation of controls or those that have been implemented. In either case, the ongoing monitoring process is designed to determine that proposed or implemented changes in internal control are functioning as intended.

Key Elements of Establishing an Internal Control Baseline
.1 There are four key elements of establishing an internal control mon-itoring baseline:
(A) Control baseline
(B) Change identification
(C) Change management
(D) Control revalidation
.2 Each of these four elements will be described and discussed in greater detail.
.3 It is essential to have a starting point when monitoring internal control that requires providing a thorough understanding of the internal control system design. The next step is determining whether the con-trols have been implemented so that the organization’s objectives are being achieved.
.4 Change identification evolves from a combination of ongoing mon-itoring and separate evaluations to establish if any changes have occurred in the internal control system. The change identification
Overview of the Monitoring Process
1-7
process deals with both changes that have been implemented and any contemplated modifications.
.5 Change management addresses changes in the internal control sys-tems that have been identified. This forms the establishment of a new control baseline and involves documenting any revisions that have been implemented. This effort produces a new control baseline.
.6 Control revalidation or updates deal with confirmation of the internal control system to determine and revalidate the system when no con-templative changes have occurred.
.7 The four steps do not create an established format for monitoring that is engraved in stone. Instead, it provides a suggested process of deter-mining if changes have been either identified or needed. If no changes are required, the process revalidates those conclusions in addition to verifying if necessary changes have been implemented. Changes in the operating environment, typically, are addressed with the risk assessment component of the COSO framework. Application of the framework should be linked to monitoring so that each of the five components support identification and management of changes impacting internal control.

When Employees GO BAD

When Employees GO BAD
Conducting internal investigations, part one

FraudBasics

This FraudBasics article is adapted from part of the ACFE course, "Conducting Internal Investigations." For more information on this and other courses, visit Seminars.   

In a perfect world, employees wouldn't steal from their employers. However, this is far from a perfect world. Here are some basics in beginning an internal investigation.

As a new internal auditor at Jenkins Manufacturing Company, you've been reviewing work from previous audits. Two years ago, an audit was conducted of the purchasing function of a small division of the company in which the purchasing director, Thomas Brackens, was extremely uncooperative. While that might be a fairly common occurrence in audits, this audit was never completed.

There's a notation in the file that the CEO of the company asked the department to conduct another audit of an area that had been having serious problems as soon as possible, which required all resources to be pulled to satisfy his request. The internal audit department had planned to finish that audit but never did. The auditors who worked on the purchasing audit have since left the company as has the internal audit manager.

There were some notations that the auditors were having trouble locating some invoices and requisitions that had been selected for audit and that there were some purchases that looked like they had been split. The internal audit department had previously audited the area but they didn't note any major findings. In fact, there's a memo in the file from Jim Miller, the former director of purchasing (now retired) who thanked the internal audit department for its assistance and that he would implement its recommendations immediately.

With too many flags flying, you've decided it's time to start an examination. Here are some tips to get you started.

A perfect world 
In a perfect world, employees wouldn't steal from their employers, so there would be no need for internal investigations. However, this isn't a perfect world and employees do steal from their employers for a variety of reasons most of which involve need or greed. Sometime, auditors and fraud examiners need to conduct full-fledged fraud examinations.

Fraud examination
A fraud examination is a methodology of resolving fraud allegations from inception to disposition. More specifically, a fraud examination involves:

	obtaining evidence and taking statements;
	writing reports;
	testifying to findings; and
	assisting in the detection and prevention of fraud.

Initiating the internal investigation
Frauds are discovered by one of several sources - a tip or complaint, an auditing procedure, or by luck. No matter how the initial indicator comes to light, the accumulation of evidence to prove or disprove an allegation of fraud is substantially different than auditing.

Evaluating tips
According to a study, about a third of all internal investigations begin with a tip from a co-worker, manager, or other employee. Audits uncover about 20 percent of internal thefts, while the rest are discovered by "accident."
Companies generally should encourage a reporting system that allows anonymous tips to be furnished to security, audit, or management. Not all (or even most) tips are valid, and it's important to understand the motives of persons willing to supply information to evaluate whether the tip merits further inquiry. The three principal reasons people furnish tips are revenge, genuine concern, and money.

Revenge:	Co-workers frequently furnish information because of some grudge against a fellow employee. Through careful screening of the information, which often is without value, many investigations can be avoided.
Genuine concern:	The tipster observes some suspicious activity and feels obligated to report it.
Money:	Sometimes a tipster will furnish information for financial rewards. Fraud examiners should be circumspect in paying for information. Though the tipster may have valuable information, he may be lying to gain a little side money.

From the beginning, your counsel must direct the legal aspects of a case.

Examination methodology
Regardless of the nature of a fraud examination, three tools are available to the fraud examiner.

Document examination
The fraud examiner must be skilled in the examination of financial statements, books and records, and supporting documents. He or she also must know the legal ramifications of evidence and how to maintain the chain of custody over documents.

Interviewing
This is the process of obtaining relevant information about the matter from those with knowledge.

Observation
The fraud examiner is often in a position to observe behavior, to search for graphic displays of wealth, and in some instances, is able to observe specific offenses.

Steps in a fraud examination
Fraud examination methodology is constructed so that all cases are handled in a uniform fashion. The methodology involves working from the general to the specific beginning with the examination of documents.

Document examination
As a general rule, documents should be examined before interviews begin. This gains an understanding of the potential evidentiary value of the case and protects the security of documents.

Neutral third-party witnesses
After conducting sufficient document examination, witnesses should be interviewed in a logical fashion starting from the least likely to the most likely to be involved.

Corroborative witnesses 
Interviews from witnesses to corroborate facts should be done after the neutral third-party witnesses. These witnesses may be cooperative or not.

Co-conspirators
Those suspected of complicity should be interviewed next, from the least culpable to the most. If appropriate, law enforcement and prosecutors can frequently promise leniency in return for cooperation.

Subject
In general, the subject of the investigation is examined last. Even if it's felt the accused won't offer a confession, an interview usually is scheduled; in many instances, it can be used for later impeachment.

Elements of fraud
"Misrepresentation" fraud
To prove a civil claim of "common law" fraud, all the following elements must be proven:

	a representation (usually of fact)
	about a material point
	which is false
	and intentionally and knowingly so (or, in some circumstances, recklessly so)
	which is believed
	and acted upon the victim
	to the victim's damage.

Many criminal fraud statures don't require proof of all the above elements. A criminal offense is complete if a knowing false statement is made with the intent to defraud, even if the victim doesn't rely on it or suffer damage.

How to prove intent or knowledge
Intent or knowledge must be proven in all fraud cases. Knowledge, as defined by the courts, can vary from actual knowledge to negligent failure to inquire to "willful blindness."

There are no "accidental" frauds. Mistakenly entering incorrect numbers on a financial statement isn't fraud; knowingly entering incorrect numbers with the intent that someone will take action from relying on them, if the other elements are present, is fraud.

Intent can be the most difficult element to prove. Because intent or knowledge is a state of mind of the defendant, and therefore difficult or impossible to prove directly, the courts permit the jury to infer knowledge and intent from all the facts and circumstances in the case. In other words, intent or knowledge can be proven indirectly by circumstantial evidence. If proven circumstantially, the jury is instructed that the evidence must reasonably exclude all legitimate explanations.

Methods of proving fraudulent intent or knowledge recognized by the courts include evidence that the suspect:

	couldn't have had a legitimate motive for his or her actions;
	altered documents or took steps to conceal his actions by destroying evidence or attempting to obstruct the investigation;
	gave false, misleading statements concerning the matters under investigation ("false exculpatory");
	repeatedly engaged in activity of an apparent wrongful nature ("pattern evidence"); and
	personally gained from the fraudulent act.

Breach of fiduciary duty
An agent (including an employee or director) owes three fiduciary duties to the principal:

	duty of loyalty;
	duty of candor; and
	duty of care.

The duty of loyalty means that the agent must act solely in the best interest of the principal and may not seek to advance personal interest to the detriment of the principal. The duty of candor means that the employee has an obligation to answer reasonable inquiries about their work performance and work-related issues and to do so in an open honest manner. Finally, the duty of care means that the employee has a responsibility to the employer to be attentive in the performance of his or her duties and to protect the interests of the employer.

"Breach of fiduciary duty" is a civil action that can be used to redress a wide variety of conduct that may also constitute fraud, commercial bribery, and conflicts of interest.

The elements of proof of breach of fiduciary duty are considerably simpler than fraud, and don't require proof of wrongful intent. To state a claim for breach of fiduciary duty, the plaintiff must show that the defendant:

	occupied a position of trust or fiduciary responsibility with respect to the plaintiff (such as an employee or agent); and
	breached that duty to advance a personal interest.

Definition of evidence
Anything perceivable by the five senses and any proof, such as testimony of witnesses, records, documents, facts, data, or tangible objects, legally presented at a trial to prove a contention and induce a belief in the minds of a jury.

Direct evidence
Proves the fact directly; for example, eyewitness identification or a confession.

Circumstantial evidence
Proves the desired fact indirectly, and depends on the strength of inferences raised by the evidence. Circumstantial evidence can be as strong as or stronger than direct evidence. It must exclude all reasonable explanations other than guilt.

Burden of Proof
In criminal cases, the burden of proof is beyond a reasonable doubt. In the United States, the jury (if it's a jury trial) deliberates and tries to reach a verdict. Most states require unanimous agreement; however, Oregon and Louisiana are exceptions and, depending on the circumstances, can allow convictions with only 10 of 12 votes. U.S. federal criminal trials require a unanimous verdict.
In civil litigation, the standard of proof is much lower and may be decided by merely a preponderance of evidence. The verdict also doesn't necessarily have to be unanimous.

Admissibility of evidence
To be admissible, evidence must be both relevant and material.
Relevance
Evidence is relevant if it tends to make some fact in issue more than it would be without the evidence.
Some types of evidence considered relevant include:

	occupied a position of trust or fiduciary responsibility with respect to the plaintiff (such as an employee or agent); and
	breached that duty to advance a personal interest.
	motive for an offense;
	opportunity;
	elements of the offense;
	threats or expressions of ill will;
	means of committing the offense;
	physical evidence linking the suspect to the offense; and
	attempts to conceal or destroy evidence.

To know whether a piece of evidence is relevant or inadmissible, you must know what's offered to prove. The same piece of evidence may be relevant or not, admissible or not, depending on what it's offered to prove.

Material
Evidence is material if it's important (or potentially important) in the decision-making process of the victim. In other words, in most contexts, the victim must rely on the information to make a decision.

Evidence of other 'bad' acts
Evidence that the defendant committed other crimes, wrongs, or acts may be used to prove intent, absence of mistake, common scheme or plan, or other elements of the offense. Such evidence may not be introduced merely to prove bad character.

When Dates do not Match

When dates don't match

Anatomy of a Bank Fraud

JAMES E. MUIR, CFE, CPA

January/February 2005

 Discrepancies between the dates on three bank loans and the resulting mortgages turned a routine audit into a laborious search for possible fraud. The result may have staved off collusion between a loan officer and the mortgagee.
During the course of the large loan review, three new loans - all made to the same borrower - appeared on the list. This wasn't an uncommon event. Because turnover within the large loan selection was normal, loans to borrowers were always in a constant state of flux between advances and repayments. The bank had classified these loans as substandard but again, this wasn't uncommon because loans do go bad from time to time. The only information our team had at this point was that these three loans now fell within the scope of our loan review due to two factors: the aggregate balance of the loans qualified the borrower for the large loan review and the adverse classification also flagged the loans for review.
The bank had loaned the money to the borrower for constructing houses. The loan documents indicated that the borrower was constructing one of the houses to be his personal home. After inspecting the documents - the notes, mortgages, title opinions, and other pertinent papers - we were concerned about one area in particular.
Questions for the loan officer
The three loans had been issued on different dates but the mortgages on each of them actually were recorded three to six months after the loans were made, even though the mortgages carried the same dates as when the loans were made. Occasionally, a mortgage from a borrower won't be recorded in a timely manner due to some mix-up between the loan officer or the attorney handling the closing. However, recording three mortgages at different dates to the same borrower on three loans made by the same loan officer was highly circumspect.
Immediately, we asked the loan officer (we'll call him Fred) why the mortgages were recorded late. Fred said the attorney handling the closings had misplaced the mortgages for months but finally found them and took them to the courthouse for recording. We on the audit team weren't entirely satisfied with the explanation. We decided to ask some more questions. The attorney performing the title searches and the loan closings disavowed the loan officer's story and said that the mortgages had never been given to her for recording.
We then reviewed transactions for disbursements, payments, late fees, and interest rate changes. The histories on two of the three loans didn't show any anomalies. However, the history on the third loan revealed discrepancies between the actual posting date of the loan transaction and its effective date. All but six of the numerous loan postings had been posted on the same date into the system although the effective date of the posting was different in each instance. The longest interval between the posting date and the effective date of the transaction was about 3 1/2 months.
It was obvious these transactions weren't booked in the normal course of business. The immediate question we asked was: "If all these transactions weren't booked to the loan until that later date, and the effective date of the transaction indicated that the transaction occurred at a much earlier date where was the transaction booked from the moment it first occurred until it was posted against the loan?"
The loan history provided us with a starting point to search the transactions and answer this question. We quickly realized that searching backwards from the point at which the transaction was booked to the loan was going to be a very complex process.
Backwards is forwards
When searching backwards we found that instead of a direct line to the originating disbursement the transactions were branching off into many different and seemingly unrelated transactions.
We decided to search the related transactions from the point at which the borrower obtained the loan advance. Loan advances are accomplished in a variety of ways: through escrow accounts, wire transfers, official checks drawn on the lending institution, or by direct deposit into a checking account in the name of the borrower at the lending institution. We found that Fred, the loan officer, used this last choice to disburse the loan proceeds. We then reviewed all the borrower's transactions with the bank. Of course, the review included the borrower's demand deposit accounts (DDAs). One of the DDAs had several deposits that matched the effective date postings to the borrower's loan account. These deposits were then traced to their points of origin, which led to the unmasking of the deception.
The race to trace
The tracing of transactions in a bank (including the tracing to the actual source documents) is a time-consuming process. The tracing must first be located in a specific transaction within the body of the bank's daily work. In our case, we did this by searching an optical disk containing archived transactions. To find the deposits made into the borrower's DDA, we performed a search on those deposit dates for all transactions in the daily work that carried the borrower's identifying DDA account number. The transactions immediately adjacent to the deposit amounts on the daily work usually constituted the debit side of the transactions.
The daily work could not tell us to whom the checks were made out to or the dates on the checks. We found the source documents - the actual checks - to ascertain that information. For disbursements done by official checks the daily work usually supplied the official check number. The source documents would show payees, endorsements, clearing dates, dates on which the checks were written, and signatures of the persons creating the checks. If the check numbers were missing or the disbursement occurred through the use of tickets (debit and credit "tickets" are used at banks to post transactions to accounts) then we'd search for the source documents on microfilm by looking for "proof" numbers that appeared on the reverse of the documents.
A tangled weave
Tracing the deposits from the borrower's DDA to the point of origin revealed a tangle of transactions that resulted in a complex combination of float and lapping of funds involving both general and subsidiary ledger accounts. Not all the proceeds flowed through the DDA. For instance the purchase of the building lot occurred outside of the DDA. Some of the official checks utilized a form of float where the check would clear the bank on the debit side but the credit portion of the check wouldn't be posted for several days or weeks after the check cleared. In some instances, official checks were used and run through the bank and than later voided with the endorsement "Not used for intended purpose." In other transactions, the amounts deposited into the borrower's bank account were posted against the loans of other borrowers. Fred, the loan officer, covered up the transactions by rapidly increasing the volume and amount of transactions. Fred had to implement approximately 150 transactions totaling $1.7 million to cover up a disguised loan with approximately 30 disbursements totaling $100,000 to the borrower.
Fred never gave a reason for attempting to conceal the loan. (I suspected it involved blackmail but I couldn't prove it.) If he had never booked the loan to the borrower with the differences between the posting and transaction dates, the scheme probably wouldn't have been uncovered - assuming Fred continued to manipulate the accounts. Perhaps Fred felt he was juggling too many balls and couldn't keep up the pace. Before he was a loan officer, Fred was a loan clerk at the same bank. When he was promoted to the loan officer position, the bank's controller neglected to delete Fred's access to booking loan transactions. Normally only loan clerks have this authority. This internal control probably wouldn't have prevented the scheme from occurring but it would have made it much more difficult for Fred to execute his plan.
The bank declined to pursue the issue with the borrower because the borrower had already declared bankruptcy and the bank probably didn't want to throw good money after bad. However, the bank ended up charging off a substantial portion of the loan to the borrower, restored the affected accounts to their proper balances, and dismissed Fred. The bank lost money on the loan to the borrower and on other accounts that it had to restore to their previously unaltered balances.
In this case, some sharp eyes noticed an anomaly between the time the mortgages were executed and the time that they were recorded. This discrepancy led to the examination that uncovered the fraud. The examination also revealed some internal control weaknesses previously unknown to the bank. A routine audit discovered an unusual fraud that will prevent future losses at the bank.