Fraud Topics & Cases - Blackburn, Childers & Steagall PLC for participants.pdfOne City, Two Fraudsters, & Three Schemes • The mayor, police chief, and city recorder all failed notify

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Fraud Topics &Cases

Presented by Blackburn, Childers and Steagall

Objectives and Outline• Fraud Warning Signs: Profile of a Fraudster

• Fraud Costs to an Organization

• Fraud Triangle

• Case Studies

• Fraud Risk and Internal Control Considerations

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Profile of a Fraudster

Position

• 42% Employee

• 36% Manager

• 19% Owner/Executive

Source: ACFE’s 2014 Global Fraud Study, Report to the nations on Occupational Fraud and Abuse

Employee Manager Owner/Executive

Profile of a Fraudster

Median Loss by Position

• Employee: $75,000

• Manager: $130,000

• Owner Executive: $500,000


$0

$100,000

$200,000

$300,000

$400,000

$500,000

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Profile of a FraudsterGender

• Male: 67%

Median Loss by Gender• Male: $185,000

• Female: $83,000


Male Female

$0

$100,000

$200,000

Male Female

Profile of a FraudsterAge

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

Source: ACFE’s 2014 Global Fraud

Study, Report to the nations on

Occupational Fraud and Abuse

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Profile of a FraudsterTenure

• 7% of perpetrators committed fraud during their first year on the job

• 53% had been with their organization for more than 5 years


Cost of Fraud• 5% - Revenues the typical organization loses to fraud

each year

• Median Loss caused by a single case of occupational fraud: $145,000

Source: ACFE’s 2014 Global Fraud Study, Report

to the nations on Occupational Fraud and Abuse

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Cost of FraudMedian Loss by Scheme type

• Asset Misappropriation: $130,000

• Corruption: $200,000

• Financial Statement Fraud: $1,000,000Source: ACFE’s 2014 Global Fraud Study, Report to the nations on Occupational Fraud and Abuse

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

AssetMisappropriation

Corruption FS Fraud

Cost of FraudSmall businesses

• 28% higher median fraud loses for organizations less than 100 employees


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Fraud

Video: PBS report on nonprofit fraud

http://www.pbs.org/newshour/bb/nation-july-dec13-stephens_10-27/

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Fraud: Cases

• Pastor betrays his flock?

• “We didn’t know anything until we got a call from the bank that he had bought a BMW. He drove that car right down Main Street.” - David Prater, Director, First Congregational Church

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Pastor Betrays his Flock

• Pastor Randall Radic

• First Congregational Church, Ripon, CA


• Faked Documents – possession of parsonage to obtain $200,000 loan

• Sale of parsonage: $525,000

• Fled to Denver, CO

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Pastor Betrays his FlockRationalization

• “I got tired of being poor…”

• “I wanted a nice vacation, a BMW, nice clothes, fine wines, good cigars. In effect, I wanted status…”


Downfall

• Bank became suspicious

• Guilt – eventually surrendered to police

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• Warning Signs?

• What controls could have been in place?

Collusion at Northwest Airlines/Delta Airlines

Guilty Parties

• Michael Yedor, an employee with Northwest Airlines since 1979

• Paul Anderson, an employee with Northwest Airlines since 1977

Scheme

• From at least 1999 through 2013, fake invoices were submitted for payment

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• Yedor’s company Airborne Voice & Data would submit invoices to Anderson for goods and services supposedly provided

• Invoices ranged from about $10,000-$200,000 per invoice• Both men knew no goods or services were provided by

Yedor’s company• Anderson had the authority to approve the invoices (which

he did) and also falsely indicated receipt of the goods or services


• Yedor would receive the payment and then split a portion of the proceeds to Anderson

• Scheme resulted in loss of $36 Million for Northwest/Delta

• Both men have been found guilty and sentenced to several years in jail, as well as forfeiting personal assets and both owing restitution of $36 Million to Delta. Yedor also owes an additional $36 Million as a result of a personal money judgment

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• Warning Signs?

• What controls could have been in place?

Hilham Elementary School PTO• PTO president failed to deposit concession cash

collections into PTO bank account

• Occurred after Volleyball and Basketball games

• Instead of depositing the funds, PTO president took the collections to her home and placed them in a “locked” cash box and stored it under her bed

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Hilham Elementary School PTO• When she would go to retrieve the “locked” cash box in

preparation for the next game, the box was empty

• She did not alert anyone to the missing funds

• She continued to oversee concession collections and continued to bring them home instead of depositing them, repeating the same process of putting the funds in a “locked” cash box and then the funds disappeared

Hilham Elementary School PTO• This concession collection process lasted for two years, with

the school hosting at least 30 volleyball and basketball events

• She also wrote checks from the PTO payable to herself or “Cash”

• More than $10,000 was unaccounted for between the two different fraud schemes she committed

• The PTO president and her husband were both indicted by a Grand Jury for 1 count each of theft over $10,000

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Hilham Elementary School PTO

• What controls should have been in place?

One City, Two Fraudsters, & Three Schemes

• Occurred in New Market, TN

• City Recorder operated two different schemes

• Public Works employee also was committing fraud

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City Recorder’s First Scheme:• Withdrew $25,009 from a city certificate of deposit and

converted those into two cashiers checks payable to her husband

• She created fabricated invoices to falsely show that her husband had performed repair work on city vehicles

• She also altered the meeting minutes of the mayor and board of alderman to give the appearance that the checks were approved


City Recorder’s Second Scheme• Over a 2 year span, she issued herself at least 25 unauthorized

payrolls totaling $13,793

• The pay periods on those checks were for work days which she had been paid

• She was solely responsible for calculating and preparing payroll checks

• Concealed the scheme by deleting most of these improper payroll payments from the computer records

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Public Works Employee’s Scheme

• Used his city-issued fuel card to charge fuel purchases for both his personal vehicle and the personal vehicle of a friend

• This was discovered and the employee was allowed to repay the city without any initial charges being filed.


• The mayor, police chief, and city recorder all failed notify the Comptroller of the Treasury of Public Works employee’s fraud, which resulted in a finding from the state during the investigation

• After the investigation by the Comptroller’s office, charges were subsequently filed against the Public Works employee

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Findings by the Comptroller’s Office

• Failure to adequately segregate financial duties

• Lack of oversight of city fueling system

• Failure to notify the Comptroller of the Treasury of possible unlawful conduct

• Failure to develop and adopt a comprehensive written purchasing policy


• What other controls could have been in place?

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Breaking the Fraud Triangle

• Create Ethical Environment

• Reduce opportunities

• Monitor pressures on employees to commit fraud & develop appropriate responses

Create Ethical Environment

• Background checks

• Drug testing

• Ethics Policy

• Bonding of employees

• Hotline

• Prosecuting perpetrators

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Ethics Policy• Conflict of Interest

• Confidentiality

• Gifts and Entertainment

• Using organization assets for personal activities

• How to report fraud or unethical behavior

Reducing Employee Opportunities

• Periodic job rotation and mandatory vacations

• Preparing monthly financial statements in a timely manner

• Timely reconciling of accounts

• Whistleblower program

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Tone at the Top

• Honesty and ethical behavior best reinforced when practiced by top management.

• Lead by Example

Other Control Considerations

Independent Checks

• Timely review and signoff by another

• Employee Vacation/Rotation of Jobs

• Internal Audit

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Other Control Considerations• Separation of Duties

• Access and Authorization Controls• Passwords

• Authorization limits on P.O.’s, check signing

• Physical Security (vault, locked areas)

• Credit Cards/Debit Cards

• Online Banking

• Where are the holes?

• What can be done?

Other Control Considerations

• If you identify a weakness or risk…

• Do something

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Profile of a fraudster????• Certified Public Accountant?

• Certified Fraud Examiner?

• Managing Partner of a CPA Firm?

• Lives and works in Paradise?

• And…

Hawaii Five-O

Video clip

http://www.kitv.com/news/man-charged-with-stealing-500k-from-accounting-firm/32225628

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Aloha Prison?• Patrick Oki, CPA, CFE, Managing Partner of Honolulu

CPA Firm

• Charged (April 2015)

• Theft in the first degree

• Money Laundering

• Use of a computer in the commission of a separate crime

• Forgery in the second degree

Hawaii Five-O

• Allegedly perpetrated 4 separate and distinct fraudulent reimbursement schemes against his CPA firm

• Losses of more than $500,000

• Year long investigation by HPD’s Financial Crimes Detail

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Hawaii Five-OAllegations

• False invoices/claims of expenses/services to clients

• Created fictitious persons, companies, contracts, IRS forms, invoices, websites, email addresses…

• False entries in the firm’s books

• Forged signatures

Hawaii Five-O

• Other firm partners became increasingly concerned and reported the matter to law enforcement

• If convicted of the computer charge---up to 20 years in prison with no possibility of probation

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Resources

Association of Certified Fraud Examiners (ACFE) publication:

• Fraud’s Hidden Cost to You and Your Organization

• ACFE Fraud Prevention Check-up

• http://www.acfe.com

Q & A

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Contact Information

• Kevin Peters: [email protected]

• Erik Stewart: [email protected]