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Fraud – What it Means to YouHFMA Great Lakes Chapter
February 16, 2018
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Who Are We?
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Who Are We?
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Benford’s Law
Amanda Fletcher, CPA, CFE, Manager
Kyle Sutton, CPA, CFE, Senior Consultant
We are members of Plante Moran’s Forensic Investigative Services Group. We have worked on expense reviews, asset misappropriation investigations, internal control assessments, and insurance claims. We have participated in interviews, performed financial analyses, conducted investigative research, and reviewed accounting records. We have also analyzed data to discover trends in expenses and detect fraud and have received extensive training in data analytics software.
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Who Are We?
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CASESTUDIES
RECENT TRENDSPREVENTATIVE/
DETECTIVE METHODS
Q&A
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Check Tampering
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Check Tampering
Preventative Measures• Have independent individual(s) reviewing checks• Restrict access to check stock, signature stamps, etc.• Utilize Positive Pay
Detective Measures (Data Analytics Testing)• Evaluate sequence of cleared check numbers• Compare cancelled checks to check registers• Search for duplicate check numbers• Search for multiple checks to the same vendor on the same day• Search for “off” invoice numbers
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Check TamperingWhat can you do?
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ACFE Report to the Nations
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Every two years the Association of Certified Fraud Examiners publishes a
study on occupational fraud and abuse.
The report is available for free at www.acfe.com
ACFE Report to the Nations
ACFE Report to the Nations
2010 2012 2014 2016
Annual Revenues lost to Fraud
5%
Median Loss per Incident $160,000 $140,000 $145,000 $150,000
Primary Factor of Loss Lack of internal controls
Typical Scheme Time Duration
18 months
Clean Employment Histories
85% 87% 87% 95%
Typical Occurrences of Fraud
Asset misappropriation
Percentage of AssetMisappropriation
90% 87% 85% 83%
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Summary of Trends
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ACFE Report to the NationsOccupational Fraud by Industry
What industry had the most occurrences of fraud?
A) GovernmentalB) ManufacturingC) HealthcareD) Banking/Financial
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ACFE Report to the NationsOccupational Fraud by Industry
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Fraud Schemes by IndustryACFE Report to the Nations
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DiscoveryACFE Report to the Nations
What is the most common method of identifying fraud?
A) TipB) Internal AuditC) External AuditD) Account Reconciliation
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DiscoveryACFE Report to the Nations
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DiscoveryACFE Report to the Nations
• Median loss: Male - $187,000 Female - $100,000 (previously
$83,000)
• Between 35 and 41 years old 55 percent
• Long-term employees = larger frauds
• May not take vacation/PTO
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ACFE Report to the NationsThe Typical Fraudster
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Behavioral Red FlagsACFE Report to the Nations
What was the most common behavioral red flag displayed by fraudsters?
A) Addiction ProblemsB) Living Beyond Their Means/Financial DifficultiesC) Complained About Inadequate PayD) Marital Problems
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Behavioral Red FlagsACFE Report to the Nations
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Impact of CollusionACFE Report to the Nations
Reimbursement Scheme
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• Anonymous tip to the Board regarding improper credit card spending by the CEO.
• Board performed a preliminary investigation and found evidence to substantiated the claim.
• We were engaged to investigate: Credit card spending; Related party payments; and Expense reimbursements.
The SituationReimbursement Scheme
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Reimbursement Scheme
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Preventative Measures• Properly segregate duties• Ensure reviewing/approving expenses process is appropriate Subordinate should not be reviewing supervisor’s expenses Reviewer should be able to differentiate a legitimate expense from an improper
expense
• Pay attention to statement balances, not just individual transactions.
Detective Measures (Data Analytics Testing)• Search for duplicate transactions (amount, location, date, people, etc.).• Search for transactions just below documentation requirement threshold.
Reimbursement SchemeWhat can you do?
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Reimbursement SchemeRelated Party Research
CEO
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Are You Insured?
Situation• Loan officer would increase
customer loan balances
• Loan officer would write check to a different bank and deposit the check in a personal account
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Are You Insured?
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Are You Insured?
Preventative Measures• Segregation of duties
Detective Measures• Review “unusual” transactions ALL the way through the process
Case Results• Insurance recovery: $115K paid to customers for direct losses. $20K paid to customers for interest accrued.
• Check your insurance policy!
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Fraudulent Credit Card Sales
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Fraudulent Credit Card SalesSituation• Medical textbook/subscriptions organization was being hit with thousands
of dollars of purchases from stolen credit cards
• Wanted to know – Why?! Suspicions of a former employee exacting revenge Potential that one of their vendors wanted to increase sales, and therefore
purchases
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Fraudulent Credit Card SalesResults• Still being determined; however, no links to former employees or vendors
identified
Testing• Data Analytics Geocoding
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Address Geocoding
Geocoding: The process of transforming a postal address description to a location on the earth’s surface (spatial representation in numerical coordinates).
Forensic Data Analytics: Geocoding is a precise method for performing address matches (such as vendor-employee matches) or finding addresses within a close proximity.
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https://en.wikipedia.org/wiki/Geocoding
What is geocoding?Address Geocoding
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Map of ResultsAddress Geocoding
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Excel Fuzzy Lookup MatchAddress Geocoding
• Add-in for Excel available on Microsoft’s website
• Useful for comparing data from two sources Address matching Name matching
• Simple to use
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Excel Fuzzy Lookup Match ResultsAddress Geocoding
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Detection Methods
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Detection Methods
• Surprise procedures
• Ask questions and get answers
• Anonymous hotline and/or cameras
• Forensic accountants
• Periodic data monitoring
Detection Methods
Definition – the process of analyzing many fields of data within databases to find correlations, patterns and anomalies.
Depending on the data and the source, examples include:
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Periodic Data Monitoring
IDEA
Access
Excel
ACL
Tableau
Alteryx
Detection Methods
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Periodic Data Monitoring
Checks on non-payroll days
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Beyond the Accounting Data
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• Allegations that the former Finance Director used the organization’s credit card for personal purposes.
• No paper documentation existed (all destroyed).
• The former Finance Director moved out of state (i.e., not available for interviews).
Beyond the Accounting Data
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Background research identified Finance Director’s daughter lived near Ft. Myers, FL
Beyond the Accounting Data
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Beyond the Accounting Data
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Beyond the Accounting Data
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Beyond the Accounting Data
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Beyond the Accounting Data
Takeaways:• Think about how you can use the information available when you are missing
the “ideal” information.
• You may not be able to see the answer using only one source of data; use multiple sources of information to piece together the puzzle.
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Billing and Corruption
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• $1B+ entity• Internal service arm considered small at
$15M/year in expenses• Internal audit finally audited them …
Address 533…on Manta matched residence
of employee per Spokeo
Billing and Corruption
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Initial engagement:perform background
research on select personnel and
vendors.
Found connections with multiple
vendors.
Billing and Corruption
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Email #1Senior Manager of the internal service arm
copied on a quote from one of their vendors (Vendor A) to another vendor (Vendor B).
Billing and Corruption Vendor A
Vendor B
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Email #2Senior Manager emails other
company employees to issue RFQ to Vendor B.
Email #3Employee emails Vendor B the
RFQ.
Billing and Corruption
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Email #4Senior Manager receives quote from
Vendor B.
Billing and Corruption
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• Quote from “original supplier” to vendor: $30,000
• Quote from vendor to company: $65,000
• Mark-up on transaction: $35,000
Billing and Corruption
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Billing and Corruption
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Total estimated loss from mark-up scheme:
Over $6 Million
Vendor Invoice TotalVendor 1 10,119,949.00$ Vendor 2 7,725,317.32 Vendor 3 7,220,706.32 Vendor 4 7,063,603.93 Vendor 5 4,506,756.93 Vendor 6 3,581,829.00 Vendor 7 3,506,255.35 Vendor 8 3,296,604.40 Vendor 9 2,353,896.95 Vendor 10 1,049,634.88 Vendor 11 741,366.00 Vendor 12 563,455.50
Top Paid Vendors Total Invoiced April 20, 2009 through June 30, 2016 Vendor 1Vendor 12 Vendor 2 Vendor 4
Billing and Corruption
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• Corruption can be VERY difficult to detect and even more difficult to prove. We needed to: Utilize our background research tools. Perform social media research. Perform an exhaustive review of email activity using key-word searches. Even surveillance was performed to supplement our findings.
• However, a simple Google search by internal audit was all it took to start unraveling the scheme.
• Follow-up if you see something that doesn’t make sense. Identifying that the quote from one vendor to another vendor seemed unusual and digging in further was key to piecing together the mark-up scheme.
Billing and Corruption
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What do you look for?• Missing information: Addresses Invoice numbers Logos
• Inconsistent information: Fonts Formats Addresses
• What is the business purpose? Ask ownership
• Confirm the legitimacy, not the existence• Think outside the box!
Billing and Corruption
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Dixon, IL
Dixon, IL
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2013 Population – 15,333
2012 Median household income - $38,719
2012 Median house/condo value - $83,601
2012 Total expenses $15.6M
Dixon, IL
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Long-term employee
Started as in intern in high-school in 1970
Named Treasurer and Comptroller in 1983
Lack of internal controls
Reconciled accounts
Made deposits
Requested funds
Controlled the mail (PO Box)
The Background
Dixon, IL
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What’s Wrong?
Dixon, IL
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What’s Wrong?
Dixon, IL
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Real Invoice
Dixon, IL
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The Scheme
Dixon, IL
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How Much Did She Take?
Dixon, IL
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How Much Did She Take?
Dixon, IL
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How Was She Caught?
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