© Grant Thornton LLP. All rights reserved. Fraud Awareness Profiling Fraudsters and Current Fraud Schemes Brian Lopez, CFE, MBA, CIDA Zach Snickles, CPA,

© Grant Thornton LLP. All rights reserved.© Grant Thornton LLP. All rights reserved.

Fraud Awareness Profiling Fraudsters and Current Fraud Schemes

Brian Lopez, CFE, MBA, CIDAZach Snickles, CPA, CFF, CITP

© Grant Thornton LLP. All rights reserved. 2

What is Fraud?


Definitions of “Fraud”

• Black’s Law Dictionary (8th Ed. 2004) - “A knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment. A misrepresentation made recklessly without belief in its truth to induce another person to act. A tort arising from a knowing misrepresentation made to induce another to act to his or her detriment.”

• ACFE - “The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”

• AU-C 240 (SAS 122) - “Fraud is an intentional act that results in a material misstatement in financial statements that are the subject of an audit.”


What is Fraud?

“Fraud is an intentional misrepresentation of a material fact that is relied upon by someone to their detriment”Misrepresentation

Of a material factRelied upon by someoneTo his/her detriment


The Fraud Triangle

Rationalization/Concealment

Opportunity

Pressure/Incentive


The Fraud Triangle

• Incentives and Pressures– What are the incentives and pressures that drive financial

performance?• Opportunities

– How strong are internal controls, internal audit department and anonymous reporting programs?

• Rationalization/Concealment– Character, ethical values, integrity and how management

may justify their actions


Three Occupational Fraud Categories

Asset Misappropriation Corruption

Financial Statement

Fraud

Source: ACFE 2014 Report to the Nations


Uniform Occupational Fraud Classification System



Fraud Quiz

• The least effective way to detect fraud is:a) External auditb) Whistleblower hotlinec) By accidentd) Internal audit


How is Fraud Detected?



Internal Control Weakness Observed by CFEs



Fraud Quiz

• How long, on average, does it take to detect most fraud schemes?a) 6 monthsb) 18 monthsc) 24 monthsd) 36 months


Gestation Period for Frauds to Be Detected



Frequency and Loss by Type of Organization


2014 Median Loss: $108,000


2014 Median Loss: $130,000

2014 Median Loss: $200,000

2014 Median Loss: $1,000,000

Frequency of Fraud by Type



Misappropriation of Assets Schemes

• Examples of misappropriation of assets schemes:– Check Tampering (forged endorsement; alternate payee) – Cash skimming (“off-book” theft of cash)– Fictitious vendors (may involve collusion)– Over-billing schemes (services not rendered)– Kickback arrangements (tied to over-billings)– Expense account abuse (fewer $ but frequent)– Payroll fraud schemes (phantom employees)– Theft of inventory, fixed assets, or scrap


Misappropriation of Assets Related Risk Factors

• Personal financial obligations may cause pressure to commit fraud

• Adverse relationships between the entity and its employees

• Characteristics of the assets on hand (cash, size, etc.)• Inadequate safeguards of the assets• Inadequate internal controls


Common Fraud Red Flags

• Weaknesses in the system of internal control, reliance on one or few

• Significant audit adjustments or passed adjustments• Problematic tone at the top• Significant declines in customer demand• Indication that errors may have been caused by possible

manipulation• Hotline calls not followed up• Turnover of senior management or key employees in financial

reporting and internal audit• Unusual transactions entered into with outsiders


Profiling of Fraudsters


33%67%

Median Loss By Gender


Losses attributed to males were 123% higher than losses caused by females.

Male fraudsters outnumbered females two to one.

Male Female

$185,000

$83,000


< 26 26-30 31-35 36-40 41-45 46-50 51-55 56-60 >60

$35,000$57,000

$90,000

$168,000 $153,000$190,000 $200,000

$238,000

$450,000

Age


52% of fraudsters were between 31 and 45 years old, but older fraudsters tended to cause larger losses.


Median Loss By Education Level


The higher the fraudster's level of education, the greater the losses tended to be.

High School Graduate or Less

$82,000

Some University

University Degree

Postgraduate Degree

$101,000

$200,000 $210,000


Median Loss By Tenure


$220,000

$200,000

$100,000

$51,000< 1 Year

1 – 5 Years

6 – 10 Years

> 10 Years

The longer a fraudster had worked for a company, the more harm he or she was likely to cause.


Tenure


7% of perpetrators committed fraud during their first year on the job. 53% had been with their organizations for more than five years.

40.7%

27.3%

25.2%

6.8%> 10 Years

< 1 Year

1 - 5 Years

6 - 10 Years


Position


The majority of occupational frauds were committed by staff at the employee or managerial level.

Employee Manager Owner/Executive

42%36%

19%


Median Loss By Position


The higher the fraudster's level of authority, the greater the losses tended to be.

$75,000Employee

$130,000Manager

$500,000Owner/Executive


2014 Median Loss: $130,000

2014 Median Loss: $200,000

2014 Median Loss: $1,000,000

Frequency of Fraud by Type



Profiling of Fraudsters - Embezzlement


2013 Marquet Report on Embezzlement

• Most major embezzlers begin their schemes in their early 40s (43.9, on average)

• The average major embezzlement spans a 4.7 year period• Embezzlers are most likely to be individuals who hold

bookkeeping or finance positions (68.2% of all cases) • The financial services industry suffers the greatest losses from

embezzlement (more than 28.8% of all losses in the data) • Non-profits and religious organizations together account for

nearly one-eighth of all the incidents (11.9% of all cases)

*2013 Marquet Report on Embezzlement is based on an analysis of 2,698 cases from 2008 to 2013



• Women are more likely to embezzle than men (61.1% vs. 38.9% overall in the data)

• Men embezzle significantly more than women ($1.8 million vs. $800,000, on average)

• The vast majority of embezzlements are caused by sole perpetrators (nearly 85% of all cases)

• More than 5 percent of major embezzlers have prior criminal histories




• The most common embezzlement scheme involves forgery or unauthorized use of company checks (35% of all cases in which the method was known)

• California has experienced the greatest number of major embezzlements over the past six years (336 cases or 12.5% overall), followed by Michigan (141/5.2%), Pennsylvania (127/4.7%), New York (113/4.2%); Virginia (110/4.1%); and Texas (109/4.0%)



Fraud Quiz

• Which behavior would be the most indicative of a motivation to perpetrate a fraud or embezzle funds?a) Gamblingb) Family problemsc) Shopping addictiond) Lifestyle


Embezzlement Study – Motivating Factors*

*2013 Marquet Report on Embezzlement is based on 6 years of data in which the motivating factor could be guessed in 685 cases.

Motivation Cases %

Lavish Lifestyle 394 57.5%

Gambling Addiction 199 29.1%

Finance Business 30 4.4%

True Need 17 2.5%

Substance Addiction 11 1.6%

Romance 9 1.3%

Support Family Member 9 1.3%

Sense of Entitlement 7 1.0%

Shopping Addiction 7 1.0%

Coercion 2 0.3%

Total 685 100.0%


Embezzlement Study – Industries

*2013 Marquet Report on Embezzlement is based on 6 years of data for a total of 2,676 cases.

Industry Frequency % Total Amount % TotalFinancial Services 394 14.7% $925,121,000 28.8%

Non-profit & Religious Organizations

318 11.9% $174,395,000 5.5%

Government Entity 316 11.8% $298,901,000 9.3%

Healthcare 188 7.0% $159,009,000 4.9%

Manufacturing 175 6.5% $244,939,000 7.6%

Real Estate 139 5.2% $129,146,000 4.0%

Education 136 5.1% $112,561,000 3.5%

Professional Services 125 4.7% $135,843,000 4.2%

Construction 108 4.0% $130,035,000 4.0%

Business Services 72 2.7% $54,361,000 1.7%

All others 705 26.3% $848,748,000 26.5%


Embezzlement Study – Scheme by Gender

*2013 Marquet Report on Embezzlement is based on 6 years of data for a total of 2,676 cases. The data above represents 2,032 cases where the scheme and gender type of the perpetrator could be determined.

Scheme by Gender (6 years) Male % Frequency Female % FrequencyBogus loan scheme 44 5.5% 35 2.8%

Credit card/account abuse 50 6.3% 90 7.3%

Forged/unauthorized checks 215 26.9% 512 41.6%

Fraudulent reimbursement scheme 41 5.1% 40 3.2%

Inventory/equipment theft/conversion

21 2.6% 1 0.1%

Payroll shenanigans 45 5.6% 103 8.4%

Theft/conversion of cash receipts 148 18.5% 278 22.6%

Unauthorized electonic transfers 117 14.6% 135 11.0%

Vendor fraud scheme 119 14.9% 38 3.1%

TOTALS 800 100.0% 1232 100.0%


Current Fraud Schemes


Case Study 1 – Family Embezzlers

• One of the oldest embezzlers included in the Marquet study involved 80-year old Marilee Garrison and her 37-year old daughter Susan Hilgeman from Indiana.

• They were convicted of embezzling $290,000 from a non-profit Masonic affiliated women's group called "Evansville 555 Eastern Star".

• The mother served as treasurer from 2002 to 2008, followed by her daughter. The mother became the chapter's president.

• They drained the non-profit's accounts by writing checks to themselves and each other.

• Hilgeman forged bank statements to conceal the missing funds from other Eastern Star Members.

• Garrison was sentenced to 4 years of home detention and Higleman was sentenced to 3 years in prison.


Case Study 1 – Family Embezzlers


Case Study 1 – What are the fraud elements?

Rationalization/ Concealment

Opportunity

Pressure/Incentive

Lifestyle

Other Financial Problems?

Access to chapter's bank accounts

Position of authority as Treasurer and President

Forged Bank Statements

Money was donated and didn’t belong to anyone


Case Study 2 – Rubber Stamp

• Lorena Varela, 47, embezzled $427,000 from the Arc of Ventura County, which serves residents with developmental disabilities.

• She was the bookkeeper for the organization for 10 years and committed the fraud from 2004 to 2012.

• During the 8 years she was perpetrating the fraud at the organization, there were 500 separate acts of theft.

• She falsified electronic ledgers to show money had been paid to vendors and used a signature stamp of an authorized Arc signatory to actually pay the checks to herself.

• She relied on her hope that no one would look at the canceled checks that she made out to herself.

• The fraud was discovered by another employee who noticed a discrepancy between check and the ledger.

• When confronted with the fraud, she immediately broke down and admitted to what she did. Varela said she was going through a "life crisis and trying to save her house and marriage."

• Varela was sentenced to 4 years and 8 months in prison.


Case Study 2 – Benford's Law Analysis

Why do these values occur more often?


Case Study 2 – Benford's Law Analysis

19

99

98

15

97

96




Opportunity

Pressure/Incentive

LifestyleFailing marriage

Trust

Access check stock & signature stamp

Adjusted ledger

No one will ever find out

Lack of GL controls

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Case Study 3 – Corrupt Official

• Rita Crundwell, former comptroller of the City of Dixon, IL, diverted $53 million of city funds to her own account over a span of 20 years. She pleaded guilty in November 2012 and was sentenced to 19 ½ years in prison. At the time of her arrest, she owned 400 horses.

• Ms. Crundwell was a trusted employee of the city since 1970. In 1983 she was promoted to the city comptroller/treasurer. This position gave her enormous control and power over the city’s money, from budgeting to initiating payments. In 1990, she started her scheme.

• How did she do it? Ms. Crundwell created an account named Reserve Sewer Development Account (RSCDA), and was the only signatory on the account. She had the ability to transfer city funds to the city’s Capital Development Fund, in addition to the ability to make payments from the fund. She then created fictitious invoices and submitted to the fund for payment. She made the checks out to “Treasurer” to pay these invoices, and would then deposit these payments to her RSCDA account. The bank assumed the account and the money were for the benefit of the city.




Opportunity

Pressure/Incentive

LifestyleEntitlement

Trust

Control & Access to City Funds Fake invoices

No one will ever find out

Separate Bank Account


Case Study 4 – Bad Investment

• A non-profit organization that provides outreach activities to inner city students had the majority of its endowment embezzled by it's financial advisor.

• The fraudster was a board member and trusted financial advisor for over 10 years.• The advisor lived a very extravagant lifestyle with many expensive cars, properties,

and art work. • He advised the non-profit to move the majority of it's investments into private

equity funds. Through these funds and via his unrestricted access to the organization's accounts, he embezzled almost $600,000.

• He was able to evade internal controls at the brokerage and wire large, round-dollar, sums of money into his personal account.

• The advisor falsified account statements to hide the fraud and used holding accounts to mask the transfers.

• When confronted, he suggested that some of the transfers were to cover "normal business expenses" and that he was going to pay the other money back.

• He and the brokerage are currently being investigated by authorities for embezzling approximately $2,000,000 from other clients.


Case Study 4 – Bad Investment




Opportunity

Pressure/IncentiveLifestyle

Trust

"Holding" accounts

Fraudulent account statements

Access to accounts

Was just borrowing the money


Additional Resources

• 2014 ACFE Report to the Nations– http://www.acfe.com/rttn/docs/2014-report-to-nations.pdf

• 2013 Marquet Report on Embezzlement– http://www.marquetinternational.com/pdf/Marquet-Release-12.19.1

4.pdf

http://www.acfe.com/rttn/docs/2014-report-to-nations.pdf

http://www.acfe.com/rttn/docs/2014-report-to-nations.pdf

http://www.marquetinternational.com/pdf/Marquet-Release-12.19.14.pdf

http://www.marquetinternational.com/pdf/Marquet-Release-12.19.14.pdf


Questions?


Contact Info

Brian Y. Lopez, CFE, MBA, CIDADirector – Los AngelesGrant Thornton [email protected]

Zach Snickles, CPA, CFF, CITPSenior Manager – PhoenixGrant Thornton [email protected]

© Grant Thornton LLP. All rights reserved.© Grant Thornton LLP. All rights reserved.

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© Grant Thornton LLP. All rights reserved. Fraud Awareness Profiling Fraudsters and Current Fraud Schemes Brian Lopez, CFE, MBA, CIDA Zach Snickles, CPA,