How to Protect Your Organization from Fraud

How to Protect Your Organization from Fraud

Jake Dunton, CPA, [email protected]

Objectives

1. Key Internal Control Concept!2. Key factors that must occur before fraud

Occurs!3. Fraud Prevention Check-up: Simple Test

What is Fraud?• deliberate action by individual or entity to

cheat another, causing damage. • intentional deception resulting in injury to

another. Fraud usually consists of a misrepresentation, concealment, or nondisclosure of a material fact, or at least misleading conduct, devices, or contrivance.

Definition of Fraud (Continued)• Deliberate and improper manipulation of the recording of

sales revenue and/or expenses (with a purpose of making a company’s profit performance look better than it actually is) is qualified as accounting fraud.

• Consumer fraud encompasses a wide range of fraudulent and deceptive practices in the advertising, marketing, sale, or provision of goods or services. Consumer fraud occurs when a product or service does not perform in the manner in which it was advertised or represented to perform.

Definition of Fraud (Continued)

• lar·ce·ny: the wrongful taking and carrying away of the personal goods of another from his or her possession with intent to convert them to the taker's own use.

Key Factors that Occurs for Fraud to Occur

Need

Opportunity

All 3 Factors Required

Justification

Fraud Triangle• Need: The employee is somehow motivated to commit a fraud. Economic factors

such as personal financial distress, substance abuse, gambling, overspending, or other similar addictive behaviors may provide motivation. The current national economic recession may serve to increase the incidence of such financial motivations.

• Opportunity: The employee has sufficient access to assets and information that allows him or her to believe the fraud can be committed and also successfully concealed.

• Justification: The employee finds a way to rationalize the fraud, convincing themselves that their actions are really justified. Such rationalizations can include perceived injustices in compensation or promotions, the idea that they are simply “borrowing” from the company and fully intend to return the assets at a future date, or a belief that the company doesn’t really “need” the assets and won’t even realize they are missing.

Key Concept _ Breaking The Flow and Control

• Posts the receipts

• Makes the Bank Deposit

• Reconciles the Bank Account

• Opens the Mail

Employee A EmployeeA

Employee A

Employee A

Little Changes Make A Difference


• Makes the Bank Deposit


• Opens the Mail

Employee A EmployeeA

Employee B

Employee B

Little Changes Make A Difference



• Reviews Online Bank Transactions

• Opens the Bank Statement

Executive Director

TreasurerEmployee

B

Employee A

The Following is from The Association of Certified Fraud Examiners 2010

Report to the Nation

Fraud Detection :ACFE 2010 Report to the Nation

Tip 40.2%

Management Review 15.4%

Internal Audit 13.9%

By Accident 8.3%

Account Reconciliation 6.1%

Document examination 5.2%

External Audit 4.6%

All others 6.2%

Fraud by DepartmentAccounting 24.3%

Operations 20.7%

Executive/Upper Management 13.9%

Sales 13.1%

Customer service 8.4%

Purchasing 4.3%

All Others (10) 15.3%

Perpetrators of Fraud

• Owners/ Executives losses were over three times those of managers and over nine times that of employee fraud.

• Owners and Executive fraud were the most difficult to detect.

• 85% of fraudsters had never been previously charged or convicted of fraud

Warning signs

• Living beyond their means – 43% of the cases• Experiencing Financial difficulty – 36% • Unwillingness to share duties- 22.6%• Refusal to take vacations – 10.2%• Close assoc. with vendor/customer- 22.1%• Wheeler/Dealer attitude – 18.2%• Divorced/family problems – 17.4%

Median Loss

• Median Loss $160,000• Approximately 25% had losses greater than

1 Millions dollars

Skimming Schemes

Skimming schemes include:• Collecting cash, but not recording the sale• Collecting cash, keeping a portion of the cash, and

underreporting the sale amount• Collecting a customer’s payment, but not

crediting the amount to the customer’s account• Collecting cash and holding it in a personal

interest-bearing account before depositing it into the company account

– Cash Larceny Schemes

Cash larceny schemes include:• Stealing cash at the point of sale or register• Stealing cash receipts posted to sales and

receivable journals• Stealing cash from bank deposits

Check Tampering Schemes• Forged maker schemes involve forging an authorized

signature on a company check. • Forged endorsement schemes consist of forging the

signature endorsement of an intended recipient of a company check.

• Altered payee schemes involve changing the payee designation on the check to the perpetrator or an accomplice.

• Authorized maker schemes occur when employees with signature authority write fraudulent checks for their own benefit.

Payroll Schemes

• Ghost employee schemes occur when a person not employed by the company is on the payroll.

• Overpayment schemes occur when a company pays an employee based on falsified hours or rates.

• Commission schemes occur when the amount of sales made or the rate of commission is fraudulently inflated.

Module 2- Management/Key Employee Assessment

Yes No

Not Applica

bleIs the board of directors composed of mainly officers of the company or related individuals?

Comments:Is there and independent audit committee?

Comments:Has there been high turnover of managers and members of the board of directors?

Comments:Have an unusually high number of key employees left the company recently?

Comments:Is the company involved in any litigation?

Comments:Does the company have offshore activities or bank accounts?

Comments:Do any of the senior managers have offshore bank accounts or business interests?

Comments:Are any key employees experiencing financial pressures, such as debts, gambling, medical bills, or divorce?

Comments:


Yes No

Not Applica

bleDo any key employees appear to be living beyond their means?

Comments:Do any key employees have civil judgments or bankruptcies on record?

Comments:Do any key employees have a criminal conviction?

Comments:Do one or two key employees appear to dominate the company?

Comments:Do any key employees have friends or relatives reporting directly to them?

Comments:Do any of the key employees appear to have a close association with a vendor?

Comments:Do any key employees have outside business interests that might conflict with their duties at the company?

Comments:Do any key employees own a portion of any company that does business with this company?

Comments:


Yes No

Not Applicab

leHas any key employee failed to take vacation?

Comments:Do any key employees have a significant amount of their net worth invested in the company?

Comments:Does the company have unusually high debts?

Comments:Is key employee compensation primarily based on company performance?

Comments:Is there an incentive to use inappropriate means to minimize earnings for tax reasons?

Comments:Is there excessive pressure to increase the company’s stock price?

Comments:Has the company recently experienced large operating or investment losses?

Comments:Does the organization have sufficient working capital?

Comments:


Yes No

Not Applica

bleDoes the organization have sufficient credit?

Comments:Is the organization under pressure to report favorable earnings?

Comments:Does the company depend heavily on only a limited number of products or customers?

Comments:Has the company experienced difficulty in collecting receivables?

Comments:Has the company recently expanded rapidly into new business or product lines?

Comments:Has the company experienced a reduction in sales volume?

Comments:Does the company have strong competitors that are outperforming?

Comments:Is the company under pressure to sell or merge with another company?

Comments:


Yes No

Not Applica

bleDoes the company change auditors often?

Comments:Does the company delay or avoid supplying auditors with the information necessary to complete the audits?

Comments:Does the company have problems with regulatory agencies?

Comments:Does the company have poor accounting records?

Comments:Does the accounting department appear to be inadequately staffed?

Comments:Does the organization fail to disclose questionable or unusual accounting practices?

Comments:Does the company have a number of large year-end or unusual transactions?

Comments:Does the organization lack an adequate internal audit staff?

Comments:


Yes No

Not Applicab

leDoes the organization lack an internal control system or does it fail to enforce the existing internal controls?Comments:

Anti-Fraud Controls

Create a perception - employee may be caught• External audit• Code of Conduct – tone at the top• Management review• Fraud training• Job rotation/mandatory vacation• Separation of duties• The most trusted employee

Summary1. Minimize control of any employee –

Key concept2. Fraud Triangle – do not provide the

opportunity, cannot control the employee’s need or justification

3. Board of Directors and Management set the tone for fraud prevention

Association of Certified Fraud Examiners

QuestionsJake Dunton, CPA, CFE

Indianapolis, IN [email protected]

317-842-6325

mailto:[email protected]

Thank you!

Documents

How to Protect Your Organization from Fraud