Watch Your Back: Protecting Your Business Against Back-Office Fraud Steve Schottenfeld TraceTech Solutions, LLC.
<ul><li><p>Watch Your Back:Protecting Your Business Against Back-Office FraudSteve SchottenfeldTraceTech Solutions, LLC</p></li><li><p>In January, 2010, a Michigan man was sentenced to one year in prison after he and his wife (a bookkeeper for a McDonalds franchise owner) admitted to stealing $441,672.75 from the business.Over a nine-month period she wrote 42 unauthorized checks to herself and her husband </p></li><li><p>In June, 2008, a payroll and benefits coordinator for Cavicchio Greenhouses, Inc. in Sudbury, MA pleaded guilty to stealing more that $290,000 from the firmShe had created and paid two ghost employeesThe scheme went undetected for four years </p></li><li><p>In May, 2008, a bookkeeper at Maines Winslow Aluminum, Inc. pleaded guilty to stealing $900,000 from the companyThe bookkeeper was the company presidents daughter </p></li><li><p>A Florida magazine publishers CFO was recently found guilty of setting up bogus accounts that only he had access to, and depositing forged checks into those accountsAfter four years he had stolen $1,500,000 from the company </p></li><li><p>In August, 2009 a former bookkeeper for several Planet Fitness clubs in Texas and Oklahoma was sentenced to 41 months in prison and ordered to pay restitution 0f $600,000.Over a 30-month period she made out checks payable to cash, to herself, and to her then-husband </p></li><li><p>In May, 2009, an accounts payable clerk at Drytac, Corp., a small Virginia manufacturer, pleaded guilty to embezzling $151,000 from the firmShe had been with the firm for ten yearsThe theft was discovered only when she left a counterfeit check on the copier before she went on vacation </p></li><li><p>A bookkeeper for a California orchard grower recently pleaded guilty to writing additional payroll checks to herselfBefore the scheme was uncovered she had stolen $470,000 from the company over a five-year period </p></li><li><p>Youll Lear n About the risks of employing a dishonest person</p><p>low-cost ways to mitigate that risk</p><p>how to deal with fraud after its been detected</p></li><li><p>AgendaThe human aspect of fraud</p><p>The statistics</p><p>Combating back-office fraud</p><p>Responding to fraud</p></li><li><p>The PerpetratorsTrusted employees</p><p>Financial responsibilities:bookkeepers, accountants, A/P clerks, A/R clerks, payroll managers, CFOs</p><p>Familiar with the business financial controls</p></li><li><p>The PerpetratorsTypically female</p><p>Age: 40-49</p><p>Frequently living beyond their means or experiencing financial difficulties</p><p>First-time offender</p></li><li><p>The Fraud RecipePRESSURERATIONALIZATIONOPPORTUNITY$THEFT</p></li><li><p>Statistics(period from 2006 to 2007)Average fraud loss:7% of annual revenues*$200,000 over 2 years</p><p>Average fraud scheme duration: over 2 years*</p><p>*** Based on the 2008 Report to the Nation on Occupational Fraud and Abuse, Association of Certified Fraud Examiners</p></li><li><p>Fraud RiskLess-effective or non-existent fraud prevention and detection controls</p><p>Unwarranted reliance on external auditors to detect fraudSmall businesses are high fraud risks</p></li><li><p>Red FlagsFinancials do not adhere to norms</p><p>Employees living beyond expectations</p><p>Employees who refuse vacations</p><p>Lack of complete and timely reconciliation of assets</p></li><li><p>Mitigating Small Business Fraud RiskEnvironmentalEstablish a culture of honesty and ethicsExtend behavioral expectations to vendors, contractors, customers, volunteers, interns and others</p><p>SpecificPolicies, procedures, controls to counter common schemes</p></li><li><p>Common Small Business Fraud SchemesCheck TamperingFraudulent BillingPayroll Fraud</p><p> many others</p></li><li><p>Check TamperingIntercepting, forging or altering a check drawn on one of the organizations bank accounts</p></li><li><p>Mitigating the RiskKeep checkbooks under lock and key (if practical)</p><p>Sign all checks, and only with proper documentation</p><p>Segregate check-writing and bank reconciliation duties (if practical)</p><p>Examine disbursements (check images and electronic transfer descriptions) in bank statements to determine actual payees</p></li><li><p>Fraudulent BillingAny scheme in which a person causesan employer to issue a payment bysubmitting invoices for fictitious goods orservices, inflated invoices or invoices forpersonal purchases</p></li><li><p>Mitigating the RiskVet every new vendorSegregate responsibilities of initiating and vetting new vendors (if practical)</p><p>Examine a vendor report from the accounting system annuallyPay special attention to unfamiliar service providers</p><p>Examine credit card statements monthlyLook for unauthorized, personal purchases</p></li><li><p>Payroll FraudAny scheme in which an employee causes his/her employer to issue a payment by making false claims for compensation</p></li><li><p>Mitigating the RiskRegularly examine payroll reports. Look for:</p><p>Unexpectedly high salaries, wages commissions and bonuses</p><p>Ghost employees</p><p>Employees with few or no deductions</p></li><li><p>Establishing Financial ControlsAccountants can provide excellent, independent advice on strengthening your business financial controls.</p></li><li><p>When Fraud Is SuspectedSuspected is different than Proven</p><p>The extent of the fraud may be unknown</p><p>The highest priority is protecting the innocent</p><p>Seek helpAccountingLegalHuman Resources</p></li><li><p>Parting ThoughtsSmall business, back-office fraud is a problem that can significantly impact cash flow, profit and employee relations</p><p>Small business, back-office frauds are perpetrated by the least-suspected employees</p><p>Good preventive and deterrent controls dont negate the need for vigilance. Trust but Verify. </p><p>Every two years, the Association of Certified Fraud Examiners conducts a survey of its membership and compiles a Report to the Nation detailing fraud activity investigated during the period under study. </p><p>The 2008 study results are based on data from 959 cases of occupational fraud that were investigated by Certified Fraud Examiners between January 2006 and February 2008.</p><p>The median loss suffered by small businesses was higher than the median loss in any other category, including the largest organizations.</p><p>Such losses, if not detected, could affect both balance sheet valuation and any future cash flow assumptions.Check Tampering The most common type of check tampering scheme occurs when an employee steals company checks and issue them to the individuals of their choice (these employees may in fact be authorized signors of company checks, or they may forge signatures in order to pass the checks).</p><p>Keep checks in a secure location. Use checks sequentially and keep a log of all checks used, canceled, or voided. Review log before and after each check run. Some banks offer a service whereby they only pay checks that appear on a confirmed check log that is submitted by the company.Dual signature controls over checks above a certain thresholdRegular bank account reconciliations and sweep accountsRegular review of check disbursement logs</p><p>Employees may also steal checks that have been made out to the company by a customer or checks that have been made out to a vendor by the company, and alter the payee information to reflect the employees own information. Frauds such as this can be detected by regularly reviewing both AR and AP aging reports.</p><p>Deposit Theft/Other Skimming Regular bank account reconciliations by individuals other than those making the depositsPeriodic job rotation</p><p>Fraudulent Billing Most commonly, employees create a shell company and bill organization for goods/services not received/performed. Alternatively, employees can bill employers for services that were performed legitimately, but on behalf of the employee, rather than on behalf of the business. Finally, employees can collude with vendors to over-pay vendors and receive kickbacks or some other form of enrichment.</p><p>Establish appropriate segregation of duties over procurement and payment processes.Maintain an approved vendor list with controls over who has authority to access/update said list.Require that all vendors, including individual contractors, supply appropriate tax forms (i.e.: W-9)Larger organizations may wish to develop bidding procedures required for all purchases in excess of a certain dollar threshold.Periodically review the approved vendor list to remove inactive vendors.Periodically compare vendor contact information (name/address/phone/etc) to employee contact information.</p><p>Payroll Fraud Ghost employees (talk about NYC Staffing Firm)Periodically review employee listings to ensure that non-employees are not included in the payroll registersPeriodically review registers for suspicious employees (employees with zero payroll deductions, no tax information, etc)Establish review and approval controls over all employee status changes (hiring/pay changes/terminations)</p><p>Payroll Fraud Time and Expense (talk about software firm)Inflated hoursFictitious Receipts/Duplicate Receipts/Split Receipts/Miscategorized Expenses</p><p>Create an expense reimbursement policy listing permitted expenses and require approval for all expenses above a certain dollar threshold. Policies that reimburse (rather than direct bill) generally pose less risk to the organization.Periodically review hour and expense data for outliers</p></li></ul>