! "#"

Prepared for AGA by Mosley &

| Associates

" "#"

"$%"&

  ! "#"

º Ñ all, inority-owned business

º Predo inately wo an-owned
º Located in Ñpringfield, VA
º Provide a variety of quality, cost
co petitive contract services to the
public and private sectors.


''' """

Prepared for AGA by Mosley &

4 Associates
 "#"(")*

º 
÷onsultant, Manager of Do estic Operations
33 years of Federal Ñervice

Prepared for AGA by Mosley &

[ Associates
 "
+,

º A Historical Perspective of Fraud

º Definition/Discussion of Ele ents of Fraud
º ÷auses of Fraud
º Exa ples of ÷onte porary Fraud

Prepared for AGA by Mosley &

· Associates
 "-,

º Kho are Kenneth Lay and Bernie Ebbers and why

are they (in)fa ous?

º Khat about ÷larence Hatry and Jero e Kerviel?

º The for er are rather recent and infa ous. But

what about Jero e and ÷larence ± don¶t ring a bell?

 Prepared for AGA by Mosley & Associates

 .

º ÷EO of the energy giant that eventually beca e

known as Enron that collapsed co pletely in 2002
a id assive accounting fraud.

º Experts cannot even agree on the total a ount, but

the cost of the fraud is esti ated to exceed $30
billion. The ost disturbing result was the hu an
tragedy ² tens of thousands of people lost their jobs
and their retire ent savings, including one of the
³Big Eight´ accounting fir s that e ployed over
25,000 e ployees. All because of greed by a
handful of individuals.
o Prepared for AGA by Mosley &
Associates
 

º ÷EO of Korld÷o , Inc., a s all Mississippi

co unications co pany whose growth
exploded in the late 1990¶s but fell victi to
an $11 billion accounting scandal that
resulted in the co pany filing bankruptcy in
2002 ² the largest bankruptcy in U.Ñ. history
at the ti e. All because of greed by an
individual.
Prepared for AGA by Mosley &
ù Associates
 "/" "' &

Jero e Kerviel

A business an
A local politician
My brother-in-law

Prepared for AGA by Mosley &

' Associates
  

º ÷larence Hatry &

Associates, 1929

Prepared for AGA by Mosley &

 Association of ÷ertified Fraud Exa iners, Y
 Associates
  

º On Ñept. 20, 1929, the public beca e aware that

Hatry had forged $67 illion in unicipal bonds to
cover debts. As a result, any of his shareholders
had sold their holdings²setting of arket panic and
selling.

º Less than 30 days later, the stock arket crashed,

causing the worse financial crisis in history. All
because of greed by an individual. It took a world
war to end the Great Depression.

Prepared for AGA by Mosley &

|0 Associates

  &


1"

"
º Deception brought about by isrepresentation of
r
  
, or silence when good faith requires
expression, resulting in r
 
r  to one
who relies on it and has the right to do so (V


  
º Any intentional or deliberate act to deprive another of
property or oney by guile, deception or other unfair
eans (?



 Y

 )
Prepared for AGA by Mosley &
|| Associates

  &

Fraud enco passes an array of  
 


  
characterized by 

 

 .

$11

º A p 


º About a 
 


º Khich is Y

º a  


º Khich is !
? V

º To the u 



Prepared for AGA by Mosley &

|4 Associates

  "2

º ERROR

º MIÑTAKE

º BAD MANAGEMENT

Prepared for AGA by Mosley &

|[ Associates
 

1 

º The phases of fraud can best be illustrated

by à Y

 below.
E ployees who co it fraud generally are
able to do so because there is 
 

 
 
 
 .

Prepared for AGA by Mosley &

|· Associates
 
 "

--"


"3"

Prepared for AGA by Mosley &

| Associates
 
 " (cont¶d)


 
 is generally provided through

weaknesses in the internal controls. Ño e
exa ples include inadequate or no:

º Ñupervision and review

º Ñeparation of duties
º Manage ent approval
º Ñyste controls
Prepared for AGA by Mosley &
|o Associates
 
 " (cont¶d)

  can be i posed due to:

º Personal financial proble s

º Personal vices such as ga bling, drugs,
extensive debt, etc.
º Unrealistic deadlines and perfor ance goals

Prepared for AGA by Mosley &

|ù Associates
 
 " (cont¶d)

p
 
 occurs when the individual develops a

justification for their fraudulent activities. The
rationalization varies by case and individual. Ño e
exa ples include:

º Ëa 
 


a  
 a
 
 
º Ëa
 
 




 
ap

º Ëa  
 



  ! 
"
"
  
º Ëa  
 







 
Prepared for AGA by Mosley &
|' Associates
 
1 4 5")
--
"

%6
""%
.$"1
6--"1""- %

º Failure to enforce existing controls

º Failures to act on fraud are signs of weak
anage ent
º Executives who do not follow the rules and
focus on personal achieve ent
Prepared for AGA by Mosley &
| Associates
 
1  4 5") --

"(")*

""

º Declining Econo ic ÷onditions ± Has the local

environ ent undergone a substantial down-turn of
business fortunes?

º Occurrence of Disaster or ÷ivil ÷onflict ± Has the

civil society been subjected to the chaos that co es
with a breakdown of the civil order - whether an-
ade or natural disasters?

Prepared for AGA by Mosley &

40 Associates
 
1  4 5") --

"(")*

."""

º Keak Legal Environ ent ± Does the civil

society have effective anti-corruption statues
and echanis s to deter/detect fraud?
º ÷o placent Business Environ ent ± Do
local business practices help or hinder fraud
deterrence?

Prepared for AGA by Mosley &

4| Associates
 
1  4 5") --

"(")*

$ ""
º Inadequate separation of duties involving cash
anage ent, inventory, purchasing/contracting
º Pay ent syste s allow the perpetrator to co it
fraud
º History of i propriety²Past audits and
investigations with findings of questionable or
cri inal activity

Prepared for AGA by Mosley &

44 Associates
 
1  4 5") --

"(")*

"%," 1 

º ÷ash Grants or Entitle ents Activities ± nu erous s all,
individual incidents susceptible to widespread abuse through
anipulation of eligibility and use of phanto clients.

º ÷o odity Delivery/Acquisition Activities ± substitution of

inferior co odities, products, or services that do not eet
specifications, billing sche es.

º Major ÷onstruction Activities ± bid rigging, substitution of

inferior co odities, products or services, billing sche es.

Prepared for AGA by Mosley &

4[ Associates
 
77"1 

"
'
1
,'"1-1"
,6""1
""11


º "6
""%
- Persons living beyond their eans,
- High turnover of personnel,
- Uncharacteristic behavior by e ployees
or coworkers.
Prepared for AGA by Mosley &
4· Associates
 
77"1 (")*

º 6
""%
- Unexplained entries in records,
- Unusually large a ounts or nu bers of
cash transactions,
- Altered, inadequate, or issing records
and docu ents,
- Non-serial nu ber transactions,

Prepared for AGA by Mosley &

4 Associates
 
77"1 (")*

º
-"6
""%
- Lack of internal controls,
- One person in control with no separation
of duties,
- Inventories and financial records not
reconciled,
- Unauthorized transactions.

Prepared for AGA by Mosley &

4o Associates
 
77"1 (")*

º %6
""%
- Tone at the top,
- Overly focused on ission achieve ent,
- Lack of supervisory oversight,
- No prior audits.

Prepared for AGA by Mosley &

4ù Associates
 "-"
11

º "86


º "1"1 

º  $$

Prepared for AGA by Mosley &

4' Associates
 "-"(")*

Prepared for AGA by Mosley &

4 Associates
 
,,'

º Major U.Ñ Ar y and Depart ent of Justice Public

÷orruption / Fraud ÷ase

º $370 in Fraud Tainted Procure ents

º Largest Recorded Ñeizure of Bribe Money ($730K)

in Ar y and DOJ History

º First DOJ Prosecution for 41 UÑ÷ 423

Prepared for AGA by Mosley &

[0 Associates
 6


º In exchange for bribes, Moran provided Independent

Govern ent ÷ost Esti ates and influenced
procure ent process.

º To insulate and protect hi self, Moran used

surrogates to collect the bribes.

º ÷o and cli ate at UÑA÷÷K allowed bribery

sche e to flourish.
Prepared for AGA by Mosley &
[| Associates
 6
(")*

Prepared for AGA by Mosley &

[4 Associates
 "'

"19" %""46
"%" "

º  "
- Lack of separation of duties, checks and balances.
- ÷ontract award a ounts were uch closer to the
independent govern ent cost esti ates after the
co ander took co and.
- The percentage of bids that the ÷ontracting ÷o and
found unacceptable increased substantially.
- Allegations of favoritis to contractors and certain
e ployees ---awards, pro otions, etc.

Prepared for AGA by Mosley &

[[ Associates
 !"
4·6+ 1
- 9 Defendants Indicted
- 7 pleaded guilty
- 2 found guilty at trial
- 5 Ar y ÷ivilian E ployees Ter inated


"1"" "
- 90 onths (54 onths in prison, and 36 of supervised
release)
- Forfeiture of all illicit onies
- Dropped fro rolls (No retire ent, no VA Benefits)
- Debarred fro contracting for 25 years

Prepared for AGA by Mosley &

[· Associates
 " 
%%6


º ,""1
"


Prepared for AGA by Mosley &

[ Associates
 ," ""
6


: 6","

:  
16
%


Prepared for AGA by Mosley &

[o Associates
 !"%6


º "6


º "% %6


Prepared for AGA by Mosley &

[ù Associates
 "% %6


UÑAID Accounting Office Ñche e

Killia John Burns,  à
u
 

Prepared for AGA by Mosley &

[' Associates
 "% %6


Prepared for AGA by Mosley &

[ Associates
 "% %6


º Killia John Burns was a Ñupervisor at

UÑAID¶s Fiscal Ñervices Office in
Kashington, D. ÷.
º His office disbursed about $74 illion per
year of UÑAID¶s $6.5 billion budget. Of this
about $4 illion per year was disbursed for
travel expense rei burse ents.

Prepared for AGA by Mosley &

·0 Associates
 "% %6


º At UÑAID, bureau chiefs authorized

obligations for travel expenses which were
often esti ated high when deciding how
uch to obligate.
º This procedure allowed the to avoid having
to add to an obligation; and also tended to
µsupport¶ future year budget requests.

Prepared for AGA by Mosley &

·| Associates
 "% %6


º Bureau chiefs were usually careful to de-

obligate and reprogra unspent funds in the
current year. But, obligated a ounts were
often spent in subsequent years rather than
in the current year.

Prepared for AGA by Mosley &

·4 Associates
 "% %6


º De-obligated prior-year oney reverts to the

UÑ Treasury and cannot be reprogra ed
for agency use; hence, bureau chiefs did not
track it or care about it FÑO¶s top priority was
de-obligating current-year funds.

Prepared for AGA by Mosley &

·[ Associates
 "% %6


º In 1982, Burns began his fraud spree when

he took upon hi self the accounting chore
no one else wanted²reconciling prior year
unliquidated obligations.
º The organization was ecstatic that he took
the initiative.

Prepared for AGA by Mosley &

·· Associates
 "% %6


º Little did they know that Burns established a

false identity²Vincent Kauff an²and
diverted unexpended travel oney to
µKauff an¶s¶ bank account. Khen his spree
ended in 1988; he stole ore than $1.2
illion.

Prepared for AGA by Mosley &

· Associates
 "% %6


º Despite longstanding concerns about weak

accounting controls, Burns¶ cri es were not
discovered by IG audits or reviews.

Prepared for AGA by Mosley &

·o Associates
 "% %6


º During a routine security check for renewing

Burns¶ clearance, an investigator decided to
drive by Burns¶ ho e, located in an upscale
neighborhood in Poto ac, Maryland. He
found the ho e and expensive cars to be
inconsistent with Burns¶ GÑ-12 salary.

Prepared for AGA by Mosley &

·ù Associates
 "% %6


º In the end, Burns plead guilty to

e bezzle ent, fraud, and evading taxes in
August 1988. He forfeited nearly all of his
assets and agreed to repay the balance of
his esti ated $1.2 illion theft. Burns was
sentenced to 6 years in prison

Prepared for AGA by Mosley &

·' Associates
 8 ,"

Prepared for AGA by Mosley &

· Associates