FRAUD UPDATE LATEST TRENDS IN HIGHER EDUCATION HOW

FRAUD UPDATE: LATEST TRENDS IN HIGHER EDUCATION & HOW TO FIGHT BACK Shauna Woody-Coussens, CFE National Practice Leader | Managing Director Public Sector Advisory Services | Forensics

GOALS • Recent trends in fraud – ACFE 2018 Report to the Nations • 3 top fraud categories in higher education • Effective anti-fraud controls and data analytics

© 2018 Association of Certified Fraud Examiners, Inc.

© 2018 Association of Certified Fraud Examiners, Inc.

© 2018 Association of Certified Fraud Examiners, Inc.

WHO PERPETRATES FRAUD?

WHY DO EMPLOYEES STEAL? • Legitimate financial need is rare anymore • Other basic reasons employees steal o Low morale o Feel employer has mistreated or “wronged” them o Feel underpaid and/or under appreciated o Consequences of theft are minimal o Lack of preventative measures

PROFILE OF A FRAUDSTER • No prior criminal history • Well liked by co-workers • Likes to give gifts/compulsive shopper • Gambling problems not unusual • Long-term employee • Rationalizes, starts small or “borrows” • Lifestyle clues © 2018 Association of Certified Fraud Examiners, Inc.

© 2018 Association of Certified Fraud Examiners, Inc.

WHO LOOKS SUSPICIOUS? $116, 000 $167, 100 $1. 0 million $1. 3 million $189, 000 $37, 000

PETTY CASH FRAUD: $116, 000 Tyler Liddle, a former Idaho State University employee charged with embezzlement, used fake invoices and receipts to steal $116, 000 from the university over a period of about four years, according to police reports. During an internal audit, investigators reviewed student petty cash reimbursement forms, receipts, invoices and correspondence from the student clubs and determined that the misappropriation of funds was carried out through a series of fake invoices and payments made to fictitious students, vendors and inactive student groups. Auditors were unable to find supporting documentation for 401 petty cash reimbursements and 199 of those were deemed fraudulent. The investigation also uncovered reimbursement for Costco receipts containing Liddle’s membership number but allegedly paid to other individuals. Templates used to create fake invoices and receipts were also found on Liddle’s work computer.

P-CARD FRAUD: $167, 100 A former Morehead State University employee has been indicted for fraud and forgery by a Rowan County grand jury. Sherri P. Ward, 51, was indicted Oct. 18, for one count fraudulent use of a credit card when police say she used a Morehead State Visa purchasing card to obtain $167, 072. 81 in merchandise for her personal use between Dec. 8, 2017, and July 1, 2019. The indictment claims Ward, who had worked in the department of art and design, also used a rubber signature stamp to forge the signature of Dr. Jean Petsch to a money transfer request from the MSU Foundation.

CORRUPTION: Over $1 Million Cecilia Chang was a successful fund-raiser for St. John’s University. Over her career, she reportedly raised over $20 million for the university. However, in hindsight, investigator opined that she was selling honorary degrees to wealthy individuals, many in Asian countries. At its peak, her salary from the university was $120, 000. Yet, she lived a lavish lifestyle and often bestowed expensive gifts on friends, associates and her superiors. She charged many personal expenses, including her son’s law school tuition to the university, some disguised as legitimate fund raising expenses, and her superiors approved the charges.

RESEARCH FRAUD: $1. 3 Million A Purdue University professor and his wife, accused of funneling more than $1. 3 million in National Science Foundation research money into a private company that served as a front to pay for their own personal expenses, pleaded guilty Friday, according to the U. S. Department of Justice. Qingyou Han, a mechanical engineering technology professor at Purdue since 2007 and director of Purdue's Center for Materials Processing Research, and his wife, Lu Shao, pleaded guilty to felony charge of wire fraud on behalf of themselves and Shao's company, Hans Tech of Lakewood, Ohio.

GRANT FRAUD: $189, 000 A former university professor in Philadelphia spent federal grant money on strip clubs, sports bars and other personal expenses, prosecutors said. Chika Nwankpa misappropriated grant money from the Navy, the Department of Energy and the National Science Foundation over a period of 10 years, the U. S. attorney's office said. Drexel University discovered the alleged fraud in 2017 during an internal audit and alerted the government.

PROGRAM FRAUD: $37, 000 • Feng “Franklin” Tao, an associate professor at KU’s Center for Environmentally Beneficial Catalysis (CEBC), is charged with one count of wire fraud and three counts of program fraud. • • Tao is alleged to have defrauded the U. S. government by unlawfully receiving federal grant money at the same time that he was employed and paid by a Chinese research university — a fact that he hid from his university and federal agencies. • While Tao was under contract with Fuzhou University, he was conducting research at KU that was funded through two U. S. Department of Energy contracts and four National Science Foundation contracts. The indictment alleges that he fraudulently received more than $37, 000 in salary paid for by the Department of Energy and the National Science Foundation.

FRAUD IN HIGHER EDUCATION • Corruption • Billing Schemes • Expense/P-Card Reimbursement Schemes • Median loss is $68, 000

CORRUPTION

CORRUPTION • An employee misuses his or her influence in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect benefit • In most businesses, the most common form of corruption is the payment of kickbacks related to purchases 19 // experience reach

COLLEGE ADMISSIONS SCANDAL • Bribing coaches and administrative staff of elite universities to nominate unqualified applicants as elite recruited athletes, thus facilitating the applicants’ admission • Some payments disguised as “consulting fees” • Payments were not made through normal university channels

RED FLAGS FOR CORRUPTION • Off-book fraud, so very hard to detect o Payments often do not go through the organization’s accounting records o Payments often paid in cash • Look for “behavioral” red flags o Rapidly increasing purchases from one vendor o Excessive purchases of goods and services o Too close of a relationship with a vendor 21 // experience reach

BEHAVIORAL RED FLAGS

ANTI-FRAUD CONTROLS FOR CORRUPTION • Publicize your fraud/ethics hotline • Implement a strong ethics and conflicts of interest policy • Require annual disclosure/reporting of potential conflicts of interest • Limit gifts from vendors and contractors • Develop/follow a well defined procurement process • Rotate buyers • Conduct contract audits 23 // experience reach

DATA ANALYTICS FOR CORRUPTION • Overpaid purchase orders • Invoices greater than goods receipt o Compare quantities ordered and received • Compare order quantity to optimal reorder quantity • Compare purchase volumes/prices from like vendors • Split transactions

BILLING SCHEMES

BILLING SCHEMES • Fraudster creates false support for a fraudulent purchase, causing the college or university to pay for goods or services that are nonexistent, overpriced or unnecessary o Invoicing via shell company o Invoicing via an existing vendor § False invoicing for non-accomplice vendors § Pay-and-return schemes o Personal purchases with college’s or university’s funds 26 // experience reach

$2. 2 MILLION FICITIOUS VENDOR FRAUD • Supervisor inquires about “emergency purchases” from two unfamiliar vendors • Requested report of purchases under sole authority for previous 2 -year period • Two fictitious vendors o Used his own cell phone number and a PO Box • Pressure was a significant gambling addition

POTENTIAL RED FLAGS FOR BILLING SCHEMES • Invoices for unspecified consulting or other service • Unfamiliar vendors • Vendors with PO boxes • Vendor name consisting of initials • Rapid increases in purchases • Employee/vendor address match • Consecutively numbered invoices from a vendor • Repeated requests to expedite payments to particular vendors • Invoice for round dollar amounts 28 // experience reach

ANTI-FRAUD CONTROLS FOR BILLING SCHEMES • Prior to authorizing payment, verify validity of vendor, receipt of goods/services, and accuracy of pricing • Prior to processing payment, check invoice for proper authorization • Strictly control access to the Vendor Master file • Implement a mandatory approved vendor lists

ANTI-FRAUD CONTROLS FOR BILLING SCHEMES • Control over selection of new vendors o Who can select them? How are they selected? • Due diligence performed on new vendors o Is vendor real? Is pricing reasonable? Periodically reassess vendor relationships • Minimize or eliminate conflicts of interest o Is vendor related to an employee?

VERIFICATION TIPS • A fake company might be a “real” company (registered w/secretary of state) • Free and easy internet resources – use them • Secretary of State websites are great • Google Maps/Streetview • Hit the vendor/subcontractor website • Look at the principals behind the company • Use caution with fee based searches on internet 31 // experience perspective

DATA ANALYTICS FOR BILLING SCHEMES • Vendor attribute analysis • Trending of vendor payments • Identification of high risk payments 32 // experience reach

VENDOR ATTRIBUTE ANALYSIS EMPLOYEE/VENDOR MATCHING 33 // experience reach

TRENDING OF VENDOR PAYMENTS Vendor: JLM Plumbing Authorized: Janice L. Mc. Phearson Getting Greedy Acceleration as confidence builds Test phase 34 // experience reach

VENDOR PAYMENTS- TIME SERIES ANALYSIS Possible fictitious vendor Possible abuse of dormant legitimate vendor Possible abuse of active legitimate vendor

IDENTIFICATION OF HIGH RISK PAYMENTS – PROXIMITY ANALYSIS Vendor (A) Shauna’s Design Company, 123 5 th Street Anytown, MO (Total Payments = $84, 337) Employee (B) Shauna Woody, 4300 Oak Street Anytown, MO 36 // experience reach

37 // experi ence reach EXPENSE REIMBURSEMENT/P-CARD FRAUD

EXPENSE REIMBURSEMENT/PCARD FRAUD • Any scheme in which an employee makes a claim for reimbursement of fictitious or inflated business expenses o Employee files fraudulent expense report, claiming personal travel, nonexistent meals, etc. , as incurred business expenses o Employee purchases personal items and requests reimbursement from the employer 38 // experience reach

$25, 000 TRAVEL REIMBURSEMENT FRAUD • Three employees of a university were charged with submitting false reimbursement requests to the university • A supervisor had submitted fraudulent travel reimbursement requests and collected more than $25, 000 for mileage for driving to and from work over a nearly three year period • The director of the department had allowed for the travel reimbursements, and they were approved per the university’s policies

RED FLAGS FOR EXPENSE REIMBURSEMENT/P-CARD SCHEMES • Photocopies of the receipts are provided instead of originals • Overall expenses for the organization are considerably over budget compared to other years • Expense reimbursement amounts are regularly just below the threshold for review • Excessive or unusual reimbursements to one employee compared to other employees in the organization • A lack of supporting documents 40 // experience reach

RED FLAGS FOR EXPENSE REIMBURSEMENT/P-CARD SCHEMES • Employee/manager becomes defensive when asked to provide supporting documents • Purchases appear to be for non-business products or services • Parts of the dates or amounts on receipts appear to be altered or missing • Submitted receipts are consecutively numbered • Expenses in round dollar amounts • Expensive business lunch/dinner expenses without names/organizations of attendees and business purpose noted 41 // experience reach

ANTI-FRAUD CONTROLS FOR EXPENSE REIMBURSEMENT/PCARD SCHEMES • Get supporting documentation for purchases o Original itemized receipts – not just credit card statement • Address possible weaknesses in review process o No review/weak review o Wrong person doing the review • Question any potentially inappropriate purchases • Strengthen your expense/purchase related policies • Do not allow personal purchases on organization credit cards/p-cards as a standard practice 42 // experience reach

DATA ANALYTICS FOR EXPENSE REIMBURSEMENT/P-CARD SCHEMES • Identify transactions on weekends, holidays or while employee is on vacation • Identify split transactions in which a large purchase are split into smaller transactions just under approval threshold • Identify unusually high or frequent expense reimbursement/p-card usage • Identify expenses in round dollar amounts • If utilizing “bankcard” electronic data, ask for Level 3 data 43 // experience reach

SUMMARY OF CATEGORIES

Questions? Shauna Woody-Coussens, CFE National Practice Leader | Managing Director Public Sector Advisory Services | Forensics swoodycoussens@bkd. com 816 -701 -0250

Thank You!