Overview of ACFE Professional Ethics

Transcription

1 ACFE Czech Republic Two Credit CPE Workshop October 10, 2011 Overview of ACFE Professional Ethics Zachary Rosen, CFE, CIA

2 Understand Ethics based on two commonly considered philosophical principles Review and discussion of ACFE Code of Ethics General ethical violations in detail brief presentation of HealthSouth case & video Ways companies can improve ethical standards- video Additional sources of information

3 Most of us live by rules, obedience to which we take as a duty. Question: Do you cross the street only when the pedestrian light is green? Would you make any exceptions to this rule? What are the most important rules you live by? What were the most important rules in your family? What rules have you rejected as you have gotten older?

4 Dictionary interpretation Merriam Webster The discipline dealing with what is good and bad and with moral duty and obligation; A set of moral principles / theory or system of moral values; The principles of conduct governing an individual or a group (professional ethics); A guiding philosophy, a consciousness of moral importance. How are moral principles/values originated???

5 Immanuel Kant German Philosopher ( ) Moral requirements - rules (Maxims) based on the Categorical Imperative (CI) Never lie, Always file your tax returns Rules should be unconditional, applicable at all times Potential moral requirements are based on the Hypothetical Comparative (HI) If you want to gain the respect of others, then you should always be honest If you want to be successful in business, you should work hard every day Structure: if then An individual must act from duty based on two criteria: Good In Itself / Good without qualification Question: Are things usually thought to be good (i.e. Obedience) qualify? Kant s CI to ensure a person s action is based on a universal law of humanity. Morality should be fair, equal to all, and provide universal moral safety.

6 Jeremy Bentham (British Philosopher ) The right moral course of action is created by making the world a better place by considering the consequences - through several steps: For any given action, we must calculate: (a) No. of people affected negatively/positively (b) How intensely they will be affected; (C) Calculate other available alternatives (d) Choose action producing greatest utility; Example: Creating an Ethics / Anti-Fraud Compliance Program What would some of the benefits be? Employee awareness of fraud risks and importance of safeguarding assets; Reduction of theft in the workplace / cooking the books; Increased confidence for investors of the firm s ability to safeguard assets What would some of the costs be? Management time spent on training employees Financial costs for outside assistance by fraud prevention professionals Reluctance of buy in from management / ineffective tone at the top Let s also consider the Universality Principle (Marcus Singer) Utilitarian principles consider the consequences of everyone follow a rule by calculating the overall utility of accepting or rejecting the maxim.

7 Duty Be proficient in your job, technically and a leader; Make sound and timely decisions; Ensure tasks are understood, supervised and accomplished; Respect Know your subordinates and look out for their well being; Keep your subordinates informed; Build your team; Employ your team members in accordance with their capabilities Integrity Know yourself and seek improvement; Seek responsibility and accept responsibility for your actions; Is this Imperative or Utilitarian Thinking? Source: Wildland Fire Leadership Development Program

8 (1) A Certified Fraud Examiner shall at all times demonstrate a commitment to professionalism and diligence in the performance of his or her duties. Professionalism 5 Principles: A body of specialized knowledge acquired by formal education; admission to the profession by meeting the standards; recognition by society of professional status; standards of conduct with clients, colleagues, public; existence of national organization Specialized Knowledge & Formal Education Accounting, auditing, criminology, investigation, law. For CFE s annual 20 hour requirement including 2 CPEs on ethics. Professional Admission Standards Uniform CFE examination / certification & min. 2 years of experience in fields mentioned Social Recognition and Accepting Responsibility Upholding Public Interest Standards of Conduct ACFE Code of Conduct acknowledgement/compliance Diligence Planning assignments, supervising, avoiding conflicts of interest, performing with competence, maintaining confidentiality, avoid distortion of facts. Source: 2009 Fraud Examiners Manual - ACFE

9 (2) A Certified Fraud Examiner shall not engage in any illegal or unethical conduct, or any activity which would constitute a conflict of interest. What are some unethical conducts should we be aware of? Libel written defamation of another s character; Slander spoken defamation The contact of both which must contain words that injure another person s character or reputation Be communicated orally or in writing to others / cause actual damage to the person. False Imprisonment A fraud examiner should accomplish their task legally Compounding a Felony I.e. participating in a trade for restitution for agreeing to forgo prosecution. Plea bargains can be acceptable by the courts. CFEs not entitled to ignorance of the law / should consult an attorney Conflict of Interest / Independence Considerations A practitioner working for their employer should not engage in other jobs that create a hardship or loss to their firm. Should not be a double agent. Should not accept engagements from both sides to a controversy. AICPA and IIA conflict of interest frameworks are recognized by the ACFE Source: 2009 Fraud Examiners Manual - ACFE

10 (3) A Certified Fraud Examiner shall, at all times, exhibit the highest level of integrity in the performance of all professional assignments and will accept only assignments for which there is reasonable expectation that the assignment will be completed with professional competence. Integrity Requires honesty, truthfulness, trustworthiness, and confidentiality. Professional Competence Knowledge on the practice of fraud examination, degree of training, experience, skill, sufficient evidence, ability to recognize the indicators of fraud and stay informed of trends within the profession/industries. Programming Investigation Free access to books, records, correspondence, and other evidence. Must also have management cooperation. Professional Skepticism Beginning with the belief that something is wrong or someone is committing a fraud. At no time should a CFE assume a fraud problem does not exist. Source: 2009 Fraud Examiners Manual - ACFE

11 (4) A Certified Fraud Examiner will comply with lawful orders of the courts and will testify to matters truthfully and without bias or prejudice. Truth Telling A fraud examiner should always be represented by legal counsel in a courtroom, deposition, or other testimony setting. Respond to the Questions Asked No More and No Less Answer without bias or prejudice Source: 2009 Fraud Examiners Manual - ACFE

12 (5) A Certified Fraud Examiner, in conducting examinations, will obtain evidence or other documentation to establish a reasonable basis for any opinion rendered. No opinion shall be expressed regarding the guilt or innocence of any person or party. Evidence Information influencing a decision maker in reaching decisions can take the form of a report, recommendations, et. Quantitative or qualitative / objective or subjective. The fraud practitioner s role is to collect and evaluate a sufficient amount of relevant evidence to offer a reasonable and logical basis for decisions. Fraud practitioners may be assigned to seek truth of business records or try to determine whether some control procedures failed, if none is found they will report the results. In situations where the client might already know a fraud/thefts/control failures occurred: The fraud practitioner assignment is to determine how the improper activity is being carried out, by whom, and to what extent. This kind of fraud investigation demands sufficient evidence, examples, and documentation to prove the how/whom/extent of findings. Guilt and Innocence Present evidence in the report / decision of guilt or innocence is for the court to decide. Source: 2009 Fraud Examiners Manual - ACFE

13 (6) A Certified Fraud Examiner shall not reveal any confidential information obtained during a professional engagement without proper authorization. What is Confidential Information? Any or all information a fraud practitioner might obtain in the course of work, whether from the company or client for whom an investigation is performed or from any other source consulted during the work. The nature of a fraud examination might make it necessary for the practitioner to have access to sensitive information. What is Privileged Information? Information cannot be demanded, even by a court. Common US law contains husband-wife; attorney-client; physician-patient; priest-penitent relationships. However it can be waived. Fraud practitioners/cfes do not have such privileges. However if the client or employer consents to disclosure of information otherwise considered confidential. Then the fraud practitioner can transmit it to others proper authorization. Confidential information relationships do not die with the severances of the fraud practitioner-client/employer relationship. Future memoirs are a violation. What about Whistle Blowing? Higher management level / enforcement agencies Source: 2009 Fraud Examiners Manual - ACFE

14 (7) A Certified Fraud Examiner will reveal all material matters discovered during the course of an examination which, if omitted, could cause a distortion of the facts. Full and Fair Reporting Materiality evidence and conclusions are material if knowledge of them would affect clients decisions based on a fraud examiner s report. Fraud examiners need to learn directly from clients and employers the type of information they consider important. Distortion of Facts A stretching of the facts to make them look as if they support a preconceived conclusion would be a distortion that could cause the users of the report to undertake inappropriate actions. In situations where evidence to support a definitive conclusion or recommendation is not obtainable then the fraud practitioner is obligated to avoid rushing to judgment or jump to conclusions. Source: 2009 Fraud Examiners Manual - ACFE

15 (8) A Certified Fraud Examiner shall continually strive to increase the competence and effectiveness of professional services performed under his or her direction. Source: 2009 Fraud Examiners Manual - ACFE

16 OCCUPATIONAL FRAUD Based on the 2009 Ethics Resource Center Survey, nearly half of respondents observed some type of misconduct taking place in the workplace, as percentage is based on employees indication they have observed at least one behavior in the past 12 months: Company resource abuse Abusive behavior Lying to employees or Internet abuse Conflicts of interest Discrimination Lying to outside stakeholders Employee benefit violations Health safety violations Employee privacy breach Improper hiring practices Falsifying time/exp. Poor product quality Stealing Sexual harassment Substance abuse Document alteration Misuse of information Customer privacy breach Environmental violations Accept gifts-kickbacks Use competitor s info Anti-competitive practices Bribe public officials Insider trading Illegal political contributions Source: 2009 National Business Ethics Survey: ERC

17 FINANCIAL REPORTING ETHICAL VIOLATIONS / RED FLAGS Falsifying or manipulating financial information Overriding routine procedures (altering cut-off revenue, holding books open, misdating revenue) Ignoring unusual activities at higher levels (i.e. side Agreements, unusual business deals) Creating fictitious vendors or invoices Stealing or misappropriating assets Submitting false or misleading invoices to customers Entering into contracts that lack proper terms, conditions or approvals Violating contract terms with customers or suppliers Source: 2009 National Business Ethics Survey: ERC

18 Opportunity Inadequate controls Abuse of authority Exploiting errors Fraud can be hidden Pressure Revenge Financial problems Family pressures Addictions Rationalization Pay not adequate I won t get caught I deserve it No one cares Source: 2009 Fraud Examiners Manual - ACFE

19 Largest US operator of inpatient rehabilitation hospitals Accounting scandal in 2003 involving CEO (Richard Scrushy) directing financial management to overstate revenues by $2.7 billion between Overstatement of revenues/accounts (ie. fixed assets, estimated insurance reimbursements). At the height of the scandal in 2003, HealthSouth reported $4.5 billion in revenues. Accounting problems first surfaced in 2002 when CEO sold $75 million in shares after company posted a large loss. In Scrushy was acquitted on all 36 accounting fraud counts. Fraud Triangle in Perspective Pressures: Financial pressure from extravagant lifestyle; fear of investor disappointment; inflated ego. Opportunity: CEO did whatever deemed necessary to exploit his opportunity to demonstrate HealthSouth s continuing growth through directing management. Rationalization: Personal financial pressures, inflated ego drove him to created a continuing image of HealthSouth s financial success. Video: Founding HealthSouth Owner/CFO Perspective Aaron Beam Sources: 2011 Wikepedia.org 2010 Applied Ethics Center, Santa Clara University

20 1. Pressure to maintain numbers 2. Fear and silence 3. Young uns and a bigger-than-life CEO 4. Weak board of directors 5. Conflicts of interest overlooked or unaddressed 6. Innovation like no other company 7. Goodness in some areas atones for evil in others Video: How Do Companies Manage Ethics Sources: 2007 How to Spot Moral Meltdowns Before it s Too Late A Focus on Ethical Culture, Marianne Jennings, Arizona State University 2011: How Do Companies Manage Ethics, 4 Strategies Kirk Hanson, Santa Clara University.

21 ACFE The Markkula Center for Applied Ethics, Santa Clara University Marianne M. Jennings The Ethical Barometer Ethics Resource Center (ERC) Society of Corporate Compliance and Ethics (SCCE) members