If a conflict of interest results in financial or economical loss to the organization through waste, abuse or fraud, then criminal, civil and administrative remedies can be pursued as the situation or policy dictates.

What is Conflict of Interest?

Conflict of interest is usually described as any situation that would involve a person’s “self-dealing”, “non arms length relationships”, “serving two masters” or even “related party transactions” all of which could result in the gain or benefit for one party at the expense of another. A structured definition of the conflict of interest is:

• The convergence between an individual’s personal relationships/obligations/interests and his/her professional obligations towards the organization.

• So much so that an independent observer can rationally question the actions, outcomes and motives regarding the actions taken and decisions made by the particular individual, employee, director, officer as well as

• The individuals immediate family, third party or organization that might have a business association or interest where they might receive “things of value” as a result of the actions taken or decisions made by the particular individual whether they’re an employee, officer or even the director of the organization.

What Are “Things of Value”?

“Things of value” include various forms of financial benefits, such as commissions, salaries, raises, bonuses or even promotions that are not offered by the organization. It could even include receipts of automobiles and gifts of nominal values, there could be receipts of investments, annuities or even paid vacations. Payment of credit card bills, or any other forms of personal expenses, receipts for bonds, stocks, insurance policies which will be paid by the third party, a promise or offer of employment, realization of unfair competitive advantage, business profits or any other forms of compensation being provided by the organization to its employees, officer and directors.

Is Conflict of Interest a Crime?

In the U.S, conflict of interest generally is not considered as crime unless the individual with the “conflict” is actually a government employee or works with a government employee. However, if the conflicting interest of an employee, officer or director results in economic or fiscal loss or loss of competitive advantage of the organization then an intentional act of abuse or fraud which involves bribery or receiving rewards can be considered as a crime punishable by law.

Common Examples of Conflict of Interest

The following are considered to be the most common examples concerning conflict of interest:

Administrative Funding/Decisions:

An employee or officer hires a consultant who is related to them without getting any approval by the organization.

Business/Consulting Interests:

An employee, officer or director makes referrals to a business venture in which that particular individual, a member of his family or an associated entity, has some financial interest.

Use of Services, Materials and Equipment:

An employee or officer uses the organization’s resources and facilities for external business activities or private consulting.

According to the survey conducted by fraud experts from the Associate of Certified Fraud Examiners (ACFE), companies that believe they’re taking all of the necessary precautions to prevent fraudsters from wrecking havoc can also become victims.

To help businesses protect themselves, here are a few tips you should follow in order to protect yourself against fraud attacks.

Make Sure You Do Background Checks

Make sure you research and verify each of your employee’s backgrounds. The US Chamber of Commerce has estimated that employee theft can cost an organization over $40 billion per year. This value is 10x times greater than the value of street crimes in the US.

Verify Creditworthiness

Your customers come second to your employees, especially to the importance of your business. However, any kind of organization is susceptible to customer fraud, whether they’re from return frauds, stolen credit cards and bad checks. Organizations that conduct customer credits checks will always avoid any form of lost revenue.

Tighten Security

Organizations need to incorporate the use of physical internal and external security in the form of personnel, cameras and locks. One of the easiest ways to commit fraud is to obtain access to personal business files and leave with the material.

According to the Javelin 2013 Identity Fraud Industry Report, 2012 itself had seen over one million fraud incidents costing around $21 billion.

Passwords Should Be Changed Frequently

This is an essential ‘must do’ strategy; employees are simply required to change their passwords frequently in order to protect confidential information from leaking out. In accordance to the 2011, Cost of a Data Breach Study: United States, in 2012 alone, the cost per company on reported breaches amounted to $5.5 million

Use a Tip Line

Most fraud incidents are identified by whistle blowers in the company. An organization needs to either set up a text number, website, email address or phone number, ensuring the provider with complete security, if they identify any form of fraud incidents. The Associate of Certified Fraud Examiners (ACFE) said that most frauds are identified through whistle blower and tipsters from within the organization.

Always Be Prepared

Form a knowledge based team who will be ready to aggressively investigate, address and correct any issues, irregularities and concerns in the organization. In order to perform such a task, the individuals in the team need to have strong working knowledge of the company’s policies. The team needs to be capable enough to handle various incidents that may arise, through snail mail, social media phone, email or fax.

A dynamic and flexible case management system that is capable of assembling pieces from various sources is highly crucial. Technology offers access to various pieces, no matter where they’re hiding, and knowing when the incident occurred is important too. Today, smart phones and tablets are the perfect tools for the knowledge worker and the success of your business relies heavily on the support of these devices.

Trying to put together a business case that requires financial investment in today’s environment can be a daunting task. So things are definitely much tighter. However, most organizations still realize that if they stop investing in new processes, projects and personnel altogether it would be a really big mistake. It just means that in today’s day and age, senior managers need to have greater evidence and confidence about how new investments in technology and systems can improve the organization overall.

Investing in risk management software is simply no different. So, let’s take a look at the few benefits that organizations can receive if they decide to invest in risk management software.

Seizing Opportunities

Through the process of risk analysis opportunities can be seized and recognized. However, the problem faced by many organizations without a dedicated risk management software system is that they do more than capture easily identifiable, historic and obvious risks with no consideration to their relevance. This reactive approach to risk management systems can help organizations “tick boxes” as well as comply with standards, but it adds very little value to the organization itself.

Risk management has actually become a necessity for corporate governance, so why not focus on it completely? Taking a more proactive stance like implementing a fully functional risk management software and embedding clear strategies would allow an organization to relate risks according to departments, objectives, and even a simple search could identify opportunities and threats much more efficiently and quickly.

Enhancing Project Risk Management

Trying to achieve your project objective in a timely manner and within budget is not easy, thus risk management is important for project managers to ensure the best possible outcomes. By using risk management software, project managers can actually delegate ownership of control and risk measures to relevant departments and personnel, making sure that they are kept up to date through the generation of automatic reminders.

A dedicated software system ensures that the projects risks are all identified, managed and that accountability has been well defined. It even prevents issues such as “fire fighting” which are failures that should have been prevented.

Consistency and Communication

Communication is very essential for risk management, but with large and global scale projects it can be quite difficult. And as a result consistency can be lost if departments decide to hold their own risk registers and employees who could benefit from access to these risk registers do not have access to it.

The risk management software needs to be flexible. Employees can be given access to single and multiple departments or even the entire organization, which would allow simple assessment ensuring that there’s a uniform approach when it comes to maintaining risk.

Clear Strategy for Risk Based Audits

Risk based auditing is actually becoming an increasing practice. Many organizations have been experiencing significant advantages when it comes to viewing business processes in a risk environment, since risks are often the root cause for financial surprises. This does not just apply to financial audits, but audits covering operations, reputations and various other aspects are all included.

Organizations that manage their risk through spreadsheets often find it difficult to manage version control, especially if multiple users access the document and edit it. Having a highly dedicated risk management software that records a full history and audit trail can make the entire audit process much more effective and easier.

In simple words, a risk assessment is just a very thorough examination of all the factors in your business that can cause harm to your employees, customers or to the success of the product itself. Once you know these, you will be able to evaluate if there are enough precautionary measures in place or if more preventive steps need to be taken.

The main phases in risk assessment have been summarized in the figure and are describe below.

1. Identify possible hazards

The most initial step in a risk assessment is to identify all possible ways in which people can be harmed. There are several ways of observing this. Survey your workplace and try to figure out anything that signifies a warning. You could also ask your employees about this. Since they are directly involved, they might be able to give you a deeper insight. You can also refer to instruction manuals and data-sheets of the equipment and chemicals which you use. They usually state the hazards and can give you a very good idea.

2. Analyze who can suffer and in what ways

For each risk that you determine, you need to find out who can be harmed because this would make it easier for you to manage the risk. You do not have to list down names, just identify those groups which are more prone to the risks. For instance, if there is dangerous chemical, then the people in close vicinity of its storage place are likely to suffer more than others.

3. Choose suitable precautionary measures for every risk

Once you identify all the risks, you will have to decide what you should do with them. The laws state that you should implement as many precautionary measures as possible so that you can offer maximum people who are prone to the hazards. True you can always think up of measures on your own, but a much better way of handling this is to follow a set of proven standards. Not only will this ease the process for you, but the measures will also be more effective.

4. Implement the measures

Once you decide on the measures, implement them and make sure that everyone follows them. You should also properly document all your results because it would make it easier for you to conduct a review in the future if a need arises.

Internal Auditors are obligated to be familiar with the warning signs and characteristics of fraud. Let’s take a look at how we can examine some of the characteristics of individuals who commit fraud.

Here are the following general characteristics that you can find in the profile of an individual who commits fraud within an organization:

• Male

• Intelligent (someone who’s bored of the routine job, and is challenged by “secure” systems”)

• Egotistical (I usually scornful of the “obvious” flaws in the system, “dumb” managers, etc)

• Highly Inquisitive (tempted at discovering various vulnerabilities in the system)

• Risk taker (willing to take chances)

• Rule breaker (will look for short cuts and loop holes)

• Hard worker (an employee that arrives early to work and leaves late and even takes fewer vacations)

• Stressed Out (an employee suffering from financial or personal problems)

• Greedy or is in Financial Crisis

• Complainer or disgruntled at work

• Big spender (over indulges in expensive hobbies and luxurious items)

Seems like a really generic description right? If asked “who is most likely to commit fraud?” the answer would simply be about 80% of the world’s population, according to the right combination of motives, opportunities and abilities to rationalize the act.

However, an easy way to figure out how a “law-abiding” citizen would be drawn towards committing fraud is to look at the most typical motorist who speeds very often over the legal speed limit, especially if they know there are a few patrols out there. So, the motive here for speeding could depend on certain situations such as being late for work, having a fast car and the simple fact of rationalization like “everyone’s doing it, so can I, it doesn’t harm anyone, and I’ll never be caught”.

Individuals that commit fraud often think in the same way. It might start by accident like an inattentive supervisor, something that makes its way through the system without being detected or by an internal control that failed to work. The potential fraudster will test the system for any defects; once it occurs a second time, the potential fraudster will pursue the activity and thus another fraud is born. The fraudster could be anyone in the organization, it could be the mail room clerk, the CEO or anyone from the middle management level; all that’s required is rationalization, opportunity and the need to pursue the fraudulent activity.

The Association of Certified Fraud Examiners (ACFE) even published “A Report to the Nations Occupational Fraud and Abuse”. The report consists of interesting facts and statistics. For instance, most frauds are committed by white collar lower level employees who average about $60,000, however, the largest damaging frauds about $1,000,000 and more are committed by business owners or senior executives. And, larger frauds of $100,000 or more are generally committed by individuals over the age of 35. The reports can be found posted on the ACFE website.

So, that’s how you’ll find a potential fraudster. Simply follow the basic characteristics and you’ll be able to profile individuals in the organization who could attempt to commit fraud. The purpose of this article was to simply educate individuals about understanding the warning signs and characteristics of fraudulent activities and how it’s our responsibility to keep an eye on things.

Chris Mather is your good old fashioned crime fighter and has even worked undercover for many law enforcement agencies in both Canada and the U.S. At the Association of Certified Fraud Examiners conference held at Las Vegas offered his words of wisdom to the audience, “People don’t steal money to save it”. If you think about it, Mather did have a point. If you remember when Madoff was busted after the investigation, he had a penthouse in New York, a place in Palm Beach, some nice watches, a yacht and many other things.

This simple principle actually applies to smaller crimes as well, but the question is how does one go about gathering information and investigating leads on suspects committing white-collar crimes? Well, the answer is the Internet.

One thing that everybody loves to do, whether they’re honest or dishonest people, is that they love to brag about their interests. And there’s no better place to do that other than social media sites such as LinkedIn, Facebook, Pinterest and Twitter. In fact, fraud Investigators are turning towards social media networks to gather information on targeted individuals.

Cynthia Hetherington, who’s the president of Hetehrington Group, spoke about social media investigation techniques at an ACFE breakout session. She discussed the various techniques that were used to conduct the investigation on various criminal activities as well as routine background checks on employees. Why is that important? Well, it would be really important to know that “Bill in Accounting”, who makes $100,000 a year, is tweeting about his brand new Ferrari.

Hetherington told the audience during her presentation that “Pinterest represents all the things you used to pin up on your wall when you were in high school and it tells a story about you” and that story reveals everything about you like things that are important to you and what you like to share. Social Media Sites such as Facebook and Pinterest do not only provide information about an individual, but they also provide information about friends who are associated with them in their lives. If the clerk working at your company is sending his children to an expensive private school, that’s a red flag. If the purchasing agent in your company is friends with one of the major vendors, that calls for an investigation.

Most of the time fraud activities are simply a click away. However, it might take a number of searches to gather information that would lead investigators to uncover any misdemeanors. Hetherington focused on four different aspects you need to consider when conducting an online investigation of a person:

1. Pay Close attention to where the person is spending their time – By looking at the person’s Facebook and Pinterest pages, an investigator can create a list of interests that an individual has. All you have to do is follow the interest and you’ll know exactly where they’re spending their money.

2. Analyze the Person’s “Likes” and “Dislikes” – While investigating if you find a person that just “Loves” Vegas and high stakes poker, you have a red flag.

3. Search for Lings on the Social Media Sites – Pinterest is growing annually by over 1,000%. And just a few years ago no one had even heard of it. If you’re investigating someone, you need to keep a track of all of the social media sites in one place, and a good place for that is to go to www.Pipl.com. Once you put in a person’s name it will list down all of the social media sites that person is on. Another site to go on would be www.Delicious.com, which lists down everything that person as bookmarked on the Internet.

4. Focus on who people are following and who’s following them – You major focus should be towards conflict of interest relationships, which relate to work (competitors, buyers, vendors etc).

Hetherington also warned people about collecting all of that information, “You better capture the images you are finding with a screen-shot software (Jinga, Snagit, Fireshot, or print to PDF, etc.) because once someone knows you are on to them they will either change or delete their information.” Even if someone were to delete all of their information, you can always obtain the information from the social media network through a subpoena. “If you go to www.Search.org, you will find a list of contacts at social media companies handle legal/subpoena matters,” Hetherington said.

And one final piece of advice from Hetherington, “Don’t “Friend” the people you are investigating.”

In fact, to make matters even worse, well planned out cost cutting program by a company may actually reduce the efficiency of the anti-fraud measures, especially when they’re needed the most.

Pick up newspapers in the US, Europe or even Asia and you will likely come across an article based on fraud and fraud management. Key examples include Bernard Maddoff’s Ponzi schemes as well as the India’s Satyam Computer’s over-inflation billion dollar cash reserves. Australia on the other hand may not seem to be weathering well under the Global Financial Crisis as compared to the Northern Hemisphere, but regardless of it making the press, fraud tends to increase when economics conditions begin to tighten.

Why? Well, to an extent impropriety and fraud are inextricably connected to economic slump. All forms of workplace, financial, personal pressure can encourage an individual to commit fraud.

Many leading organizations believe that they already have (or are developing) strategies to detect, prevent and respond to misconduct, risk and fraud.

Here are a few strategies that would be an effective starting point for the senior executive and the board of directors:

Prevention Strategies

• Improve and review all of the internal controls

• Develop code of ethics/conduct

• Screen new hires

• Management’s focus should be on fraud risk

• Carry out fraud risk assessments

• Develop strategies for Fraud control

• Perform due diligence on business partners and suppliers

• Train staff and managers according to fraud awareness.

Detection Strategies

• Incorporate an internal reporting system for fraud

• Use data analysis as a tool for fraud detection

• Dedicate adequate internal audit resources for fraud detection

• Develop an external reporting mechanism for fraud.

Response Strategies

• Review all of the internal controls for fraud detection

• Develop a disciplinary method to handle fraud

• Incorporate an investigative response to the fraud

• Employ a police referral policy

• Institute an internal investigative unit

During a recessionary period optimization and cost reduction may be critical for corporate survival, but organizations need to ensure that they do not weaken the effectiveness of the major controls needed to prevent as well as detect fraud risks. All of which can make it quite difficult for business to strike a balance between being vigilant, whilst making cost reductions.

The very deliberation of defrauding our own employers, ever during a great need, is innately wrong for all of us. Unfortunately, it simply takes one to blemish the entire bunch. In the current economic situation, the potential effect of a significant fraud risk can be commercially catastrophic.

It’s for the very reason that fraud risks need to be taken seriously, since they can shadow the entire corporate landscape.

During an internal fraud investigation, situations will dictate the amount of effort that will be required to define the extent of the fraud. Although every situation is different, there are still two very important considerations that need to be taken into account during this process:

1. When do you consider hiring an outside consultancy firm?
2. When or if the company should report the fraud to law enforcements?

Running an internal fraud investigation from within the company does have its own benefits. These very benefits can actually diminish the minute outside forces are called in and can actually disappear when law enforcements are involved.

As the company moves closer towards making a decision, it needs to weigh its advantages and disadvantages that are currently present. Soon it will see other benefits emerge from such a process.

While making the right decision, the most important factor to consider is how the decision affects the company’s control over aspects such as:

1. The disclosure of facts being uncovered.
2. The cost of investigations.
3. The manner and timing in which the investigation will be conducted.

These can be summarized further into segments like:

• Cost Control – human resource and financial

• Disclosure Control – public and regulatory disclosure

• Investigative Control – objectivity and timing

These control factors actually have an inverse relationship, where benefiting in one area of control might cause a disadvantage in another area. Depending on the company’s objectives, having the right balance in the control structure is an important aspect for a successful fraud investigation.

The Internal Investigation

According to the Association of Certified Fraud Examiners ACFE, the typical length of fraud incidents reported actually lasted two years from the inception of fraud to the detection of it. So any fraud that may be uncovered might simply be the tip of the iceberg and by simply dismissing the employee will leave many unanswered questions.

Internal Cost Control

An increasing number of companies have internal resources that are capable of conducting their own internal investigations. Conducting the investigation from the internal audit department or the general counsel’s office might be a more practical option instead of involving a law enforcement agency or consulting firm.

Internal Disclosure Control

According to ‘Managing the Business Risk of Fraud: A Practical Guide’, which is sponsored by the ACFE, the American Institute of Certified Public Accountants and the Institute of Internal Auditors, “Fraudulent acts can damage an organization’s reputation with customers, suppliers, and the capital markets.”

Internal Investigative Control

By not including a third party law enforcement entity or specialty firm, the company can actually have a much stronger grip when it comes to investigative controls, since it has no outside forces influencing the direction of the investigation.

Assessing the control factors, concerning hiring an outside consultancy firm or bringing in law enforcement entities is crucial to the success of an internal fraud investigation. Each direction the company takes can put different areas of the control structure under pressure. The human resource and financial elements of cost control, the objectivity and timing of investigative control, and the public and regulatory disclosure control requirements, all have an inverse relationship that are essential for the investigation.

The importance of making the right decision is based on knowing the rewards and risks associated with each of the control elements and trying to balance them in ways that allows the company to achieve its objectives.

A government agency official will direct the owner of an enterprise that is doing business based under a contract stating to provide equipment and contractor staff that will be used to perform non contract related work for the agency. When seeking payment for the services, the contractor bills the hours of the non-contractual work that has been spent on contract related activity. The billing of those services occurs only with the knowledge of the agency official, who instructs the lower level staff to approve the billing from the agency’s accounts. Since the contract is a part of the federally funded program, the agency will have to file a claim with the federal government for reimbursement, which in good faith always pays.

Some may believe that the agency official is a creative manager, while most would consider him a crook, and here’s why:

Fraud can occur only when of the following factors exist:

• When an individual or an organization “intentionally” provides an “untrue” representation of an important event or fact.

• If that “untrue” fact is believed by the “victim”.

• If the “victim” decides to “act” upon those “untrue” facts based on belief.

• With the result of the “victim” suffering from loss of property or/and money, because of relying on that “untrue” fact.

Fraud is an element that can benefit an individual or an organization through a particular activity or program. When an individual commits fraud, the benefits are usually direct such as property or money, but can be indirect as well like gaining influence, power, bonuses and promotions.

When an organization commits fraud, which generally consists of an employee representing the organization, the direct benefits received by the organization are usually in the form of financial gains.

Some states in the US have specified fraud statutes, while some may specifically have laws targeting corruption and bribery; others may prosecute other fraud types that include embezzlement, robbery, larceny and various other specific statutes. Whenever the US government suffers due to fraudulent activities, the matter then falls under the jurisdiction of the US Justice Department as well as the Federal Courts. Thus, fraudulent activities could be prosecuted under both federal and state laws.

Typically, there are seven types of crimes that fall under fraud:

Bribery

Bribery consists of the action of giving, soliciting, offering or receiving any “thing of value” with the sole purpose of influencing an official’s performance or failure to perform the lawful duties of that official.

Bribery also falls into the category of commercial bribery which consists of the same elements, but are focused more towards influencing business related decisions without the victims consent or knowledge.

Illegal Gratuity

Illegal gratuity consist of the activities of either receiving, giving, soliciting or offering any “thing of value” because of or for an official act which has taken place.

Conflict of Interest

A conflict of interest only occurs when an individual or an organization acts on the behalf of another individual or organization and has hidden self interests or biases in the activity that being undertaken.

False Claims and False Statements

False claims and false statements occur only when an individual or organization willfully and knowingly falsifies materials facts and resources or produces fictitious representation or claims that result in the financial and economic loss of a party that is being falsely represented.

Extortion

Extortion occurs when an individual or organization obtains possession of “something with value” from another individual or organization through the use of threatened or actual force or by fear of fiscal or economic loss.

Conspiracy

Conspiracy occurs when there’s a specific intent of committing a crime. And there’s an agreement with another individual to carry out or engage in that crime.

Embezzlement

Embezzlement is considered a fraudulent conversion of personal property by an individual who possesses that property, where possession was acquired due to a trustful relationship.

So, in conclusion we have an obligation to exercise due care in our work ensuring that no fraudulent activities are being performed based on our position and we need to be alert to the possibilities of “wrong doings” in our organization. Only then can we ensure that no fraudulent activities will take place.

Whenever allegations arise concerning conflict of interest that involve a public official, the person usually never seems to have a problem with being accused, instead he rationalizes and justifies the activity which gave rise to the allegation.

Public officials are expected to act in the best interest of and behalf of the citizenry. A conflict of interest can arise by a public office official who has or appears to have self interest in an activity to which the citizenry is unaware of and can be potentially adverse to the interests of the citizenry. When a person’s conflict of interest results in financial or economical loss to a government entity, then it is considered as fraud. Public servants and those working with the government can be criminally liable for misconduct, receiving rewards, bribery, unlawful gratuities and coercive use of position. All these crimes include a conflict of interest.

Conflict of interest can also result in Fraud when a government entity has hidden agendas or hidden benefits from the outcome of a transaction or event. This type of conflict of interest occurs only if government officials who are representing a government entity, decide to obtain funds alone or in conspiracy and decides to use those funds for other intended purposes. In this situation, the government agency acts as a channel for these public funds, and has a hidden self interest which could be potentially unfavorable when concerning the interests of the citizenry.

The following is an example of conflict of interest in the government. A government agency official will direct the owner of an enterprise that is doing business based under a contract stating to provide equipment and contractor staff that will be used to perform non contract related work for the agency. When seeking payment for the services, the contractor bills the hours of the non-contractual work that has been spent on contract related activity. The billing of those services occurs only with the knowledge of the agency official, who instructs the lower level staff to approve the billing from the agency’s accounts. Since the contract is a part of the federally funded program, the agency will have to file a claim with the federal government for reimbursement, which in good faith always pays. The fraud that was perpetrated against the federal government by filing false claims and providing false statements resulted in almost $30,000,000 in settlements and fines in lieu of the criminal prosecution.

Thus this simply concludes that conflict of interest should not be treated disdainfully. The mere presence of a conflict of interest is always a red flag revealing that officials acts are being conducted which are not within the law.