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Risk Assessment & Legal Issues COVERING THE BASES: RISK ASSESSMENT & LEGAL ISSUES INTEGRATING FRAUD PREVENTION AND DETECTION WITH COMPLIANCE RISK ASSESSMENT Compliance risk assessment is the cornerstone of effective fraud prevention and detection and has recently taken on greater importance for public and private organizations because of increased enforcement activity by federal and state regulators. This presentation will cover why organizations need a compliance program, the critical components, the practical benefits for having such a program, and best practices gained from having effective compliance and ethics programs. The presentation emphasizes an integrated approach between fraud deterrence, detection, and prevention on the one hand and a compliance and ethics program on the other. WALTER PAGANO, CFE, CPA, CFF Partner EisnerAmper LLP New York, New York Walter Pagano is a Partner in the Litigation Services Group and Tax Controversy Practice. He has more than 35 years of diversified and relevant litigation consulting and forensic accounting experience. He has testified in federal and state courts, as well as at arbitration hearings, and has served as a federal, state, and bankruptcy court appointed forensic accountant and special fiscal agent. Walter’s experience, knowledge, and expertise enable practicing attorneys and corporate counsel to rely on his objective and independent critical thinking and judgment as a source to ascertain the financial facts in a wide variety of civil and criminal cases that have included white-collar crime, internal investigations, adequacy of internal controls, commercial litigation, civil and criminal tax controversy, internal and external fraud schemes, financial statement fraud, shareholder and matrimonial disputes, guardianship litigation, accounting malpractice and third-party asset misappropriation. Walter has served as an expert witness in diverse cases such as IRS practice and procedure, breach of accounting and tax representations and warranties, damage calculations, criminal tax prosecutions, and guardianship accounting. Prior to joining the firm, Walter served as Partner-in-Charge of Litigation Consulting and Forensic Accounting at another public accounting firm. His background also includes serving 10 years as a revenue agent with the United States Treasury Department, Internal Revenue Service (IRS). In this position, Walter conducted forensic and tax audits of businesses and individuals, and also trained revenue agents and criminal investigation special agents in the applicable provisions of income tax law. In addition, he was an appeals officer, co-authored ©2011 the IRS’s Commodity Tax Shelter Training Manual, examined abusive tax shelters, and assisted federal prosecutors as a forensic accountant in prosecuting various tax crimes. Walter is a frequent guest speaker on topics such as forensic accounting, IRS investigations and white-collar crime. He received his B.S. from Saint Joseph’s University and master’s degree from New York University. He is a member of the American Institute of Certified Public Accountants (AICPA), New Jersey Society of Certified Public Accountants (NJSCPA), New York State Society of Certified Public Accountants (NYSSCPA), American Bar Association (ABA), and Association of Certified Fraud Examiners (ACFE). “Association of Certified Fraud Examiners,” “Certified Fraud Examiner,” “CFE,” “ACFE,” and the ACFE Logo are trademarks owned by the Association of Certified Fraud Examiners, Inc. ©2011 INTEGRATING FRAUD PREVENTION AND DETECTION WITH COMPLIANCE RISK ASSESSMENT Introduction NOTES Public and privately held organizations, including not-for- profits, face numerous daily challenges to their core principles and values; mission statement; federal, state, and local regulations; compliance and ethical environment; and professional standards. The challenges come from within as well as outside of the organization. For example, directors, officers, employees, vendors, customers, and competitors act either independently or in combination with one another to pose organization compliance and ethical risks that must be vigilantly and regularly identified, analyzed, assessed, and managed. Acting with integrity is among an organization’s most cherished core values. Without integrity as a core component of an organization’s principles and values, organizations can potentially face civil or criminal sanctions for violating not only their core values, but also their ethical and professional standards; federal, state, and local laws and regulations; and their very own policies and procedures. As is well known and generally accepted by all organizations, an organization’s unblemished reputation and record for compliance and ethics are some of its critical attributes that it must foster and nurture among its employees regardless of their position, vendors, contractors, and customers. This is done to demonstrate to federal and state regulators, law enforcement, the marketplace, and the general public the organization’s commitment to maintaining compliance and ethics programs. The integration of effective fraud deterrence, detection, and prevention programs and compliance and ethics serves to demonstrate this commitment. nd 22 Annual ACFE Fraud Conference and Exhibition ©2011 1 INTEGRATING FRAUD PREVENTION AND DETECTION WITH COMPLIANCE RISK ASSESSMENT The objective of this presentation is to make the case for NOTES the value proposition that organizations must have and should integrate these programs. Background and Historical Perspective About Fraud, Compliance and Ethics The vast majority of organizations that are concerned about deterring, detecting, and preventing fraud have programs in place to combat occupational fraud as well as internal and external fraud schemes. But all too often, their programs fail in large measure due to the misbehavior of senior executive and middle managers, as well as employees who override and/or circumvent the organization’s control environment. During the previous decade, examples abound to demonstrate this phenomenon. In 2000, Lernout & Hauspie, a Belgium company, engaged in fictitious. transactions in Korea and improper accounting methodologies in other countries. In 2000, Xerox, a U.S. company, falsified financial results. In 2002, AOL, a U.S. company, inflated sales. In 2002, Bristol-Myers Squibb, a U.S. company, inflated revenues. In 2002, U.S. companies CMS Energy, Duke Energy, Dynegy, and El Paso engaged in round-trip trades. In 2002, Merrill Lynch, a U.S. company, engaged in a conflict of interest. In 2002, Peregrine Systems, a U.S. company, overstated sales. In 2002, Tyco International, a Bermuda company, engaged in improper accounting. In 2002, WorldCom, a U.S. company, overstated cash flows. In 2003, Parmalat, an Italian company, falsified accounting records. nd 22 Annual ACFE Fraud Conference and Exhibition ©2011 2 INTEGRATING FRAUD PREVENTION AND DETECTION WITH COMPLIANCE RISK ASSESSMENT In 2004, Chiquita Brands, a U.S. company, made illegal NOTES payments. In 2004, AIG, a U.S. company, structured financial transactions. In 2008, Bernard L. Madoff Investment Securities, a U.S. company, engaged in a massive Ponzi scheme. In 2009, Satyam Computer, an Indian company, falsified accounts. In 2010, Lehman Brothers, a U.S. company, failed to disclose Repo 105 transactions to investors. The above cited examples illustrate different accounting and business scandals caused by the misbehavior of just one or a few individuals. Oftentimes, driven by their own zeal for self and perhaps unjust enrichment, these individuals devised simple as well as complex methods to (1) misappropriate assets; (2) accelerate or overstate revenue; (3) defer or understate expenses; and (4) misrepresent the value of assets or liabilities. In the past several months preceding this conference, the scandals that plagued the previous decade have not diminished. In fact, they have occurred with regular frequency. For example, in March 2011, the following misbehavior by individuals was reported in the press: A former Wachovia Bank manager in Virginia pleaded guilty to stealing $14.1 million from bank clients over seven years by persuading them to invest in a bogus wealth-management account. A former top Fry’s Electronics’ executive charged with shaking down vendors in an elaborate multi-million dollar kickback scheme reportedly plead guilty. An Indiana pharmacist faces a possible 10-year prison sentence if convicted of health care fraud and money nd 22 Annual ACFE Fraud Conference and Exhibition ©2011 3 INTEGRATING FRAUD PREVENTION AND DETECTION WITH COMPLIANCE RISK ASSESSMENT laundering in a scheme that netted him more than $3.57 NOTES million, federal prosecutors say. The owner of an Illinois-based technology company has pleaded guilty in a plot to bribe school officials in Louisiana and Arkansas in exchange for awarding computer contracts. The Securities and Exchange Commission filed a complaint against Steven T. Kobayashi alleging that between 2006 and 2009, financial advisor Steven T. Kobayashi, at the time a broker in the Walnut Creek, California office of UBS Financial Services, Inc., defrauded his customers out of millions of dollars. The Securities and Exchange Commission filed a complaint against Lawrence R. Goldfarb and Baystar Capital Management, LLC alleging that since at least 2006, Mr. Goldfarb, a San Francisco Bay Area hedge fund manager, and Baystar Capital Management misused and secretly diverted $12 million in proceeds that belonged to a fund of other
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