Download pdf - Protecting Your Nonprofit From Fraud

Speakers retain the copyright for all of the following materials. Any replication without written consent is unlawful.

Comments and opinions expressed by the speaker do not necessarily reflect the positions, opinions or beliefs of the AICPA and should not be construed or interpreted as such.

The materials contained in this presentation should not be considered to be in the public domain. Speeches and presentation materials contained here are proprietary works protected by copyright to AICPA and/or to the individual or entity who presented the materials at the conference. All rights are reserved. The authorized use of materials on this page is limited to download for personal reference by authorized users of the conference materials download area. Reproduction, redistribution, reuse, reposting or resale by any party in any form, format or media without express permission is strictly prohibited. Permissions requests may be directed to [email protected] or to Thomas Robinson, Manager, Rights and Permissions at 919-402-4031.

Fraud In Non Profit Entities Dana Basney

Not-for-Profit Financial Executive Forum

Session 20

Protecting Your Nonprofit Organization

From FraudDana Basney

MSBA, CPA, ABV, CVA, CIRA, CFF, CFE

Managing Director ofCBIZ MHM, LLC and

Shareholder of Mayer Hoffman McCann P.C.

1

Dana Basney is a Managing Director of CBIZ MHM, LLC and a Shareholder of Mayer Hoffman McCann P.C. He has practiced public accounting for more than 37 years. He is in charge of CBIZ MHM San Diego’s litigation support, due diligence, and valuation departments.

Dana holds a Bachelor's Degree in Liberal Arts from Bates College in Lewiston, Maine and received a Master's Degree in Business Administration and Accounting from San Diego State University.

Dana is a licensed CPA and a Certified Reorganization and Insolvency Accountant, as well as a Certified Valuation Analyst. He is a member of The American Institute of Certified Public Accountants, The California Society of Certified Public Accountants, The Institute of Managerial Accountants, The Association of Insolvency Accountants, The Institute of Business Appraisers, Inc., and the Bankruptcy Forum. He has served on the Family Law Bar's Business Valuation Subcommittee and has previously chaired the San Diego Chapter of the CPA Society’s Ethic2s Committee and the San Diego Litigation Support Interest Group of the CPA Society.

Dana has extensive litigation experience and has served as an expert witness in financial and valuation matters on numerous occasions as well as a court appointed mediator and special master. Dana is also an instructor with the UCSD Extension Program teaching Advanced Accounting Topics and CPA Society approved course on Professional Conduct & Ethics for Accountants.

Dana may be reached at: [email protected] or 858.795.2018

Dana Basney, MSBA, CPA, ABV, CIRA, CVA, CFF, CFE

2

20 - 1

Nonprofits Are A Major Economic Sector

At 10.7 million workers as of 2010, nonprofit organizations employ the third largest workforce among U.S. industries, behind only retail trade and manufacturing.

3

The above data was taken from, Holding the Fort: Nonprofit Employment during a Decade of Turmoil, a publication of Johns Hopkins Center for Civil Society Studies.

The Center is part of the Johns Hopkins Institute for Policy Studies.

Nonprofits Are a Significant Part of Our Economy

The U.S. nonprofit sector employs 15 times more workers than the nation’s mining industry, nearly 10 times more workers than the agriculture industry, and about twice as many workers as the construction industry.

4



20 - 2


The vast majority of nonprofit jobs are in three service fields - health care (57 percent), education (15 percent), and social assistance (13 percent).

5



Nonprofits Are a Growing Part of Our Economy

During the 2007-2009 recession, nonprofit employment grew in 45 of the 46 states on which state-specific data were available, while for-profit employment declined in 45. Nonprofit employment also grew in all regions of the country from 2000 to 2010, with an average annual growth rate that ranged from 1.5 percent in the East South Central region to 3.4 percent in the Mountain region. During this same time span, for-profit employment registered annual average declines in all but two of the regions, and the growth rate in these two was no more than one-seventh as robust as the nonprofit one.

6



20 - 3


The nonprofit sector has been growing steadily, both in size and financial impact, for more than a decade. Between 1999 and 2011, the number of nonprofits has increased almost 31 percent; from 1,202,573 million to 1,574,674 million today. The growth rate of the nonprofit sector has surpassed the rate of both the business and government sectors.

In 2010, nonprofits contributed products and services that added $779 billion to the nation’s gross domestic product; 5.4 percent of GDP. Nonprofits are also a major employer, accounting for 9 percent of the economy’s wages, and over 10 percent of jobs in 2009.

7

Source: The Urban Institute’s Center on Nonprofits and Philanthropy

Wherever there is

money, there is fraud.

8

20 - 4

5% to 7% of the Economy is Being Stolen!

9

Estimates for fraud losses range from

5% to 7% of the U.S. economy.

5% to 7% of the Economy is Being Stolen!

Fraud appears to be a growth industry!

Fraud losses were estimated to have been approximately $994 billion in 2008.

Fraud losses were estimated to have been approximately $652 billion in 2006.

Estimates range from 600 billion to almost a trillion dollars.

10

20 - 5

The Extent of Fraud in Nonprofits

The extent of frauds in nonprofits is subject to debate and not well documented.

There is some evidence that fraud is more prevalent in nonprofits then in for profits

11

A New York Times Report by Stephanie Strom, stated that fraud and embezzlement in the nonprofit sector account for a loss of $40 billion a year, or roughly 13 percent of philanthropic giving. The article is based on a report recently published in the Nonprofit and Voluntary Sector Quarterly in 2008.

12

The Extent of Fraud in Nonprofits

20 - 6

Financial Fraud is Higher in Nonprofit Organizations Than it is in Business or

GovernmentA National Nonprofit Ethics Survey taken in 2007 found that:

Conduct that violates the law or an organization’s standards is on the rise, and in 2007 nonprofit violations have reached levels comparable to business and government organizations.

Financial fraud is higher in nonprofit organizations than it is in business or government.

13

Taken From the Ethic’s Resource Center’s National Non-Profit Ethics Survey of 2007Ethics Resource Center

2345 Crystal Drive, Suite 201Arlington, VA 22202

Fraud by Nonprofits

Nonprofit organizations can and do commit frauds. Fundraising is a particularly sensitive area that can be ripe for fraud. Fraudulent fundraising practices include:

Charging fundraising costs to programs to improve expense ratios scrutinized by donors, potential donors and charity watchdogs.

Misrepresenting the portion of donations that will be used in charitable programs.

Misrepresenting the extent of a charitable contribution deduction to which a contributor is entitled, such as in some car donation programs.

Failing to comply with donor-imposed restrictions pertaining to the use of a gift.

14

20 - 7

Other fraudulent practices by nonprofit organizations include:

Knowingly failing to comply with Internal Revenue Service requirements related to housing.Allowances compensation reporting, knowingly misclassifying employees or using them as volunteers to avoid paying overtime.Using or selling donor data collected under false pretenses.

15

Fraud by Nonprofits

Fraudulent Financial Reporting

Fraudulent financial reporting is intentionally making false assertions relating to financial statements. Examples include:

False statements regarding compliance with specific requirements of funding sources.Charging of unallowable costs to grants and other false statements to government agencies.

Fraudulent financial reporting is most often committed by management and includes such misrepresentations as:

Failing to disclose significant related party transactions.Failing to disclose noncompliance with debt requirements or lack of waiver of noncompliance from lender.Misclassifying restricted donations to mislead donors or charity watchdogs.Holding records open beyond the period end in order to inflate revenues.Misclassifying expenses to mislead donors and others regarding the funds used for programs.

16

20 - 8

Unique Concerns for Nonprofits

If an organization is to qualify for tax exempt status, the organization‘s charter as well the organization must have a legal, charitable purpose, i.e. the organization must be created to support educational, religious, or charitable activities. – A nonprofit corporation must specify that no part of its assets

shall benefit any of persons who are members, directors, officers or agents (its principals).

These elements do not mean that the organization cannot pay employees or contractors for work or services they render to the organization. This limitation means that as long as the organization operates within its exempt purposes and it maintains an endowment or uses any excess revenue to further develop its activities it will not be taxed by the Internal Revenue Service.

17


A surplus - that is, whatever part of its income is left after its operating expenses are paid, which might be considered similar to "profit" - must be spent on the charitable or public purposes for which it was organized, not paid as a dividend or benefit to anyone associated with running or organizing it.The IRS has enacted intermediate sanctions should the members of the organization engage in practices that may excessively benefit any of the organizations members (or officers, directors, etc.) rather than revoking the organization's exempt status the I.R.S. may now levy a penalty on the organization for engaging in a transaction that resulted in a private inurement or private benefit.

18

20 - 9


Not only must the organization meet the requirements of the state where it organizes sets for nonprofits, but it must also meet complex I.R.S. regulations. – These regulations are used not only to determine if the

organization is exempt from tax under the organization's activities as a nonprofit organization.

– If the organization purpose is one of those described in §501(c)(3) of the Internal Revenue Code, it may apply for a ruling that donations to it are tax deductible to the persons or business entities who make them.

– The organization itself will be exempt from taxation as long as it does not engage in unrelated business activities.

19

Issues for Nonprofits

Nonprofits are far less likely to be able to recover from frauds due to: − limited capital

− lack of employee theft insurance

Nonprofits depend on “trusted individuals” rather than systems of internal controls.

Small organizations tend to have disproportionately large losses from asset misappropriation.

20

20 - 10

Frauds of Misappropriating Assets

Nonprofits often deal in cash, which is the most likely asset to be misappropriated.

Bank confirmations and reconciliations do not sufficiently cover the high risk area of cash assets.

Balance Sheet Audits do not effectively test cash transactions.

21

The person responsible for collecting and disbursing funds is also the individual who provides the financial reports.

Many small organizations raise much of their funds in cash. Cash is more easily misappropriated than checks.

Small nonprofits are run by trusting and committed individuals. Sadly these individuals tend to be too trusting.

22

Small Nonprofits Have Major Control Problems

20 - 11

Common Nonprofit Frauds

Skimming donations

Unauthorized fraudulent disbursements

Payment of personal expenses with the organizations funds

Creating fraudulent tax losses through refunding donations

Overstating program expenses

Overstating Gifts in kind

23

Examples of Unrealistic Gifts in Kind

In 2010 the Canadian Revenue Agency revoked the charitable registration of The Orion Foundation, a bogus AIDS charity purporting to help Africans. It bought medicine for 30 cents per unit and valued it at $11.50 per unit, making enough purchases to issue $91 million dollars in donor receipts. The auditors could not tell if the medicine was actually received, used, or distributed in Africa.

MAP International in 2009 reported that it was distributing donated drugs from Operation Blessing to the African nation of Ivory Coast. The GIK consisted of two shipments each of 7.5 million deworming pills worth nearly $80 million each. In other words they were claiming that a pill that can readily be bought from multiple sources for as little as 2 cents is worth $10.66. This valuation is absurd on its face because, according to WHO (World Health Organization), it would represent over 60% of total Ivory Coast government spending on health in 2009.

AmeriCares in its 2009 audit counts as program services expense $42 million dollars worth of GIK that it never distributed. Accounting rules allow charities to write-off expired or unusable GIK and count it as a program expense.

24

The above material was published in the August 2011 issue of the Charity Rating Guide & Watchdog Report

20 - 12

AWP = “Ain’t What's Paid”

Charities have been using pharmaceutical pricing guides that determine average wholesale prices (AWP) based on an honor system of unconfirmed reports on prevailing prices. People in the field joke that AWP really stands for "ain't what's paid." Some pharmaceutical companies have been sued for fraud for reporting AWP prices to the government to obtain inflated Medicare and Medicaid reimbursements for pharmacies and doctors. A partner at a major accounting firm told 2010 AICPA conference attendees that the drug pricing guide nicknamed the "red book," which has been frequently used by charities, valued deworming pills at $12 to $16 each even though she could go online and buy the same pills for ten cents. She said that some prices in the red book may be fine but that it is the responsibility of the charity's accountant to determine if the book's listed prices are reasonable.

25

The above material was published in the August 2011 issue of the Charity Rating Guide & Watchdog Report

Many small nonprofits have one person handle all the finances – a classic mistake! If an organization has a treasurer who collects and disburses funds from a checking and/or savings account, the monthly bank statements should be sent directly to some other officer of the organization before it is passed on to the treasurer. The recipient of the bank statements should examine the canceled checks to see that disbursements have been made to only appropriate persons or vendors in reasonable amounts. Using this control would prevent the treasurer from writing checks to himself.

Note: this ounce of prevention will not work unless the person receiving the statement actually opens the statement and examines the canceled checks. If the person receiving the statements just passes them along without opening the envelope, this sends absolutely the wrong message to the treasurer.

26

Proper Control of Bank Statements

20 - 13

Require that every check have two signatures. Barring collusion, this would prevent someone writing checks out to himself. The requirement of having two signers on a check definitely can slow things down and prove cumbersome. But loss of efficiency and convenience is a reasonable price to pay for protecting an organization’s scarce resources.

Two Signature Check Policy

27

Every organization should have an annual budget. The idea is to have a reasonable expectation of revenues and expenses. With a budget actual results can be compared with expected results. If actual expenses are greater than expected this could be an indication that inappropriate expenditures are being made. Similarly, if proceeds (particularly cash) are being deposited at less than expected levels this might indicate that skimming is taking place.

If the organization has cash fundraisers such as dinners, car washes, bingos and so on there ought to be budgets for each event. In the case of fundraisers such as car washes, bingo games and the like it is fairly easy to test for cash theft. Some person, other than the person responsible for handling and depositing the cash, ought to perform a count of the cars washed, bingo cards sold and apply this number to the unit price to compute the expected amount of cash raised.

Every Nonprofit Should Have Budgets

28

20 - 14

Check Out a Charity Before Donating

If the donation is to be given to an unfamiliar charity, the donor can make sure the charity is recognized as an approved charity. − The “Search Now” function at:

http://www.irs.gov/charities/article/0,,id=96136,00.html can be accessed to determine if a charity is listed in Publication 78 as an approved charity.

− A donor also can confirm an organization’s status by calling the IRS at 1-877-829-5500.

29

Check Out a Charity Before Donating

Charity Watch (Formerly the American Institute of Philanthropy)P.O. Box 578460, Chicago, IL 60657TEL: 773-529-2300 Internet: www.charitywatch.org

Charity Navigator1200 MacArthur Boulevard Mahwah, NJ 07430TEL: 201.818.1288Internet: www.charitynavigator.org

GuideStar4802 Courthouse StreetSuite 220Williamsburg, VA 23188TEL: 757.229.4631Internet: www.guidestar.org

30

20 - 15

People tend to trust people who purport to work for charitable causes this

makes it easier for these people to steal!

3131

Ministers Will Steal!!!

An ex-pastor convicted of embezzling more than $1 million from his former church was sentenced to five years in prison on Wednesday.A judge found David Thompson guilty in September on several charges, including theft, money laundering and tampering with records.He faced a possible sentence of up to 90 years in prison.After he is released from prison, Thompson will serve an additional five years on community control. He was also ordered to pay $733,000 in restitution.Thompson was convicted of embezzling from The World of Pentecost Church, located at 3431 East Main Street, between 1998 and 2007.Prosecutors said Thompson spent church funds on luxury cars, a pool, a boat and hair treatments.

32

20 - 16

One angry church member told Thompson it would have hurt less if he held a gun to his head."David, a senior citizen named Esther gave from her fixed income so you could drive a Hummer," said church member "You, David, are a wolf. You did not spare the flock. Instead, you fleeced it."Thompson insisted he never illegally spent church money but admitted he gave false financial reports to church members.During his trial, Thompson said he had the authority to use the funds."I felt as the pastor and as the overseer I was mandated first and foremost from God and also from the bylaws that I was to take care of the welfare of the church, and I put more emphasis on the people versus a building," Thompson said in September.

33


Nuns Will Steal!!!

Sister Marie Thornton charged with embezzling $850,000 from Iona College for gambling purposes.

As Chief Financial Officer at Iona College in New Rochelle, N.Y. from 1999 to 2009, Sister Marie Thornton, 62, bet her six-figure income and school money away during frequent trips to Atlantic City, federal prosecutors said.

Thornton was arrested Thursday and pleaded not guilty in federal court in Manhattan. She was released without posting bail.

Sources confirmed to MyFoxNY that a former Iona basketball coach has said that Sister Marie definitely had a gambling problem.

34

Nun Accused of Embezzling $850,000 From College, Then Gambling It Away in Atlantic City

Published December 11, 2010 - | FoxNews.com

20 - 17

Nuns Will Steal!!!

Nun Accused of Embezzling, continuedThe indictment charges she turned in fake bills and used her college credit card to steal money.

A statement on the Iona College website clarifies that Iona College was not indicted, but rather a former employee.

The statement also says that Iona College has gotten the most of the money back, though sources say insurance repaid the money, not sister Marie, who bet all her money on black.

When Iona fired Sister Marie last year, it publicly said she left for medical reasons. The college also never asked law enforcement to investigate. It only came out after Iona filed losses in its income tax return.

Sources say Sister Marie is cloistered at the Sisters for St. Joseph Order, near Philadelphia. Part of its mission statement is "to raise consciousness about all forms of poverty.“

Sister Marie faces 10 years in prison if convicted, but her lawyer said he expects a resolution fair to all parties.

35


Pastor Convicted of Embezzlement – Sells Church to Buy a BMW

MANTECA, CA - A church pastor pleaded guilty to charges of embezzlement and is now awaiting sentencing. Randall Radic, 53, reportedly sold the church that he preached at for almost ten years so that he could purchase a BMW.

The church was sold for $525,000 dollars. Pastor Randall Radic, was also accused of forging ownership documents to obtain loans on his home, which is owned by the church. Prosecutors agreed to drop nine additional charges in exchange for Radic's guilty plea.

Radic now faces up to 18 months in prison and is scheduled for sentencing on March 16th.

36

20 - 18

Rabbis Will Steal!!!

Rabbi Who Claimed to Rescue Holocaust Torahs Arrested on Fraud Charges Wednesday, August 24, 2011FROM WTA.ORG –

A rabbi who claimed that he rescued Torah scrolls lost during the Holocaust was arrested on fraud charges.

Rabbi Menachem Youlus, founder of Save a Torah, was arrested on Wednesday, charged with one count of mail fraud and one count of wire fraud. Federal prosecutors accused Youlus of embezzling money from his charity for personal use and fabricating stories of rescuing lost Torahs.

"Menachem Youlus called himself the 'Jewish Indiana Jones,' but his alleged exploits were no more real than those of the movie character he claimed to resemble," said Preet Bharara, the U.S. attorney for the Southern District of New York, in a statement.

37

Rabbis Will Steal!!!

Rabbi, continuedThe U.S. Attorney's office stated that Torah scrolls that Younus claimed to have rescued had simply been purchased from local dealers and lacked any connection to the Holocaust. The office further stated that during many of the years Youlus claimed to be personally rescuing Torahs overseas, he had not even traveled internationally.

The statement said that Save a Torah had raised $1.2 million in contributions from 2004 to 2010.

Youlus gained public notoriety after a January 2010 Washington Post article raised doubts about the veracity of his claims.

"Menachem Youlus' indictment is welcome news to all who are concerned with the integrity of Holocaust memory," said Menachem Rosensaft, Vice President of the American Gathering of Jewish Holocaust Survivors and Their Descendants, in a statement.

38

20 - 19

Priests Will Steal!!!

CHICAGO TRIBUNE - December 15, 2005BUFFALO GROVE, IL - Over five years, the business manager of a Roman Catholic parish in Buffalo Grove stole more than $600,000 in collections and other church funds to feed a gambling habit that cost at least $1.8 million, authorities said Wednesday.

This was at least the sixth time in the last two years that authorities have filed criminal charges against Chicago-area church personnel over the theft of funds.

CHICAGO TRIBUNE - July 28, 2005CHICAGO -- The former leader of a Southwest Side Roman Catholic parish was sentenced to serve four years in prison Wednesday after pleading guilty to laundering more than $1 million in pilfered collections.

Providing a factual basis for the guilty plea, Assistant State's Attorney William Delaney said [name withheld] skimmed an average of $2,500 to $3,000 each week while serving as pastor of St. Bede between 1999 and last July. He initially would stash the stolen funds in his bedroom safe, without entering the donations in the church books, Delaney said.

39

Point to Ponder

If pastors, nuns, priests and rabbi’s steal – can you

trust anybody?

Answer: NO!!!!

40

20 - 20

Reporting Nonprofit Fraud

The attorneys and auditors of the State Charitable Trusts Section of the California Attorney Generals Office investigate and bring legal actions against charities that misuse charitable assets.

– If you have a complaint against a charity, they have a complaint form on their website.

The Attorney General regulates charities and the professional fundraisers who solicit on their behalf.

– The purpose of this oversight is to protect charitable assets for their intended use and ensure that the charitable donations contributed by Californians are not misapplied and squandered through fraud or other means.

Contact the Internal Revenue Service with your suspicions. – www.irs.gov, Form 3949-A. Print it out and mail it to:

- Internal Revenue Service, Fresno, California 93888– Supply specific examples, documentation (i.e.: copies of files, financial reports,

transcripts, etc.) showing inconsistencies will bolster your credibility. If the IRS feels that you have provided adequate evidence of fraud, it will investigate.

41

Reporting Nonprofit Fraud

Report fraud suspicions to the U.S. Postal Inspection Service. If a nonprofit organization has been sending out letters requesting contributions that have not been used as promised, this constitutes mail fraud. You can fill out a complaint form at:− www.postalinspectors.uspis.gov/forms/MailFraudComplaint.aspx

Go to the media. If you believe that a nonprofit organization has committed fraud, get in touch with a local newspaper or television news station. − Be prepared to provide as much information as you can (documentation,

financial reports and witnesses) to back up your claims. If they feel your suspicions are merited, they may do an investigative report that exposes the fraud.

Lodge a complaint with the Better Business Bureau (BBB). − If, for example, you have been a contributor to a nonprofit organization and

believe monies have been misused, go directly to BBB's website and file a complaint:− www.bbb.org/us/Charity-File-Complaint/

− Be aware that the BBB gives the charity or nonprofit a chance to deny or resolve the issue.

42

20 - 21

Data Mining – The Devil is in the Details!

43

YOU HAVE TO LOOK

FOR FISHY STUFF TO FIND IT!

Data Mining

44

Vendor NameVendor Class

Invoice Number

Invoice Amount

Invoice Date

AARONSEN GROUP MIS 479 55,329.40 4/1/2004AARONSEN GROUP MIS 491 55,156.39 4/4/2004AARONSEN GROUP MIS 480 58,216.64 5/6/2004AARONSEN GROUP MIS 481 58,597.60 6/1/2004AARONSEN GROUP MIS 482 61,719.88 7/8/2004AARONSEN GROUP MIS 484 63,497.32 9/2/2004AARONSEN GROUP MIS 485 79,862.72 10/2/2004AARONSEN GROUP MIS 486 76,299.80 11/2/2004AARONSEN GROUP MIS 487 72,158.24 12/2/2004AARONSEN GROUP MIS 488 78,833.20 1/3/2005AARONSEN GROUP MIS 489 63,739.48 2/10/2005AARONSEN GROUP MIS 490 61,465.08 3/3/2005AARONSEN GROUP MIS 492 55,161.34 5/4/2005AARONSEN GROUP MIS 493 52,159.59 6/1/2005AARONSEN GROUP MIS 494 55,590.49 7/5/2005AARONSEN GROUP MIS 495 56,752.46 8/1/2005

Look for sequential invoices.

20 - 22

Data Mining

45

Look for vendors and employees that share an address.

Vendor Name Vendor Address 1Employee

NameEmployee Address 1

Employee City

Invoice Amount

SOUTH EDUCATORS 709 MALL BLVD X, Lynn 709 Mall Boulevard Savannah 1,917,034.00$

GREEN VAUGHN LLC 709 MALL BOULEVARD X, Lynn 709 Mall Boulevard Savannah 746,688.96

HOLIDAY INN NEWTON 399 GROVE STREET X, Brian 399 Grove St. New ton 305,620.00

THE INCENTIVE SHOP 706 DUNCAN AVENUE X, Phyllis 706 Duncan Ave. Pittsburgh 190,838.00

ALBERT GREENSTONE 750 PARK AVENUE, NE X, Ophelia 750 Park Ave Atlanta 52,174.23

R KEITH & LIZ SWICK RT 1 BOX 775 X, Elizabeth Route 1 Box 775 Clarksburg 24,874.06

TESTA CONSULTING SERVICES INC 40 24TH STREET X, Vincent 40 24th St Pittsburgh 20,538.24

CULINARY THOUGHTS 2927 AVENUE D. X, Michael 2927 Avenue D Katy 12,272.30

DAY'S LAWN CARE, INC 2343 NOTTINGHAM NW X, Toni 2343 Nottingham NW Massillon 11,523.60

LOIS NENES 2927 AVENUE D X, Michael 2927 Avenue D Katy 11,000.00

Be Observant – Look Around!!!

46

20 - 23

Always Take the Staff Out to Lunch

47

Victim Organizations

48

The above graph was reprinted with permission from the Association of Certified Fraud Examiners and is taken from their 2012 Report to the Nation, page 25.

20 - 24

The Perpetrators

49

The Fraud Triangle

50

Dr. Donald Cressey (1919-1987)His research showed that there are three elements that must be present for occupational fraud.

Opportunity

Pressure Rationalization

The Fraud Triangle

20 - 25

Perpetrators

51



52

Perpetrators

52

20 - 26


Perpetrators

53

The Perpetrator: Education

54


20 - 27

The Perpetrator: Age

55


Indications of Fraud

56

Management is Dishonest

Some companies will purposefully have poor accounting records because it causes difficulty for tax auditors, however their sloppy records will make it easier for employees to steal from the company.

Dishonesty by management fosters dishonesty by employees.

20 - 28


57


58

The Super Nice Employee

If you don’t trust someone they can’t steal from you!

20 - 29

It’s Hard For Us To Comprehend That Some Of These Nice People Belong In Jail!

59

Embezzlers Do Not Fit Criminal Stereotypes

20 - 30


The Super Conscientious Employee

Thieves often appear to be the hardest working individuals in the office.

As conscientious employees they earn more responsibilities.

The more responsibilities they have, the more opportunities they have to steal.

61


Living beyond one’s means (not reasonable based on known sources of income)

Expensive cars

Vacations

Boats

Expensive art work or collections

Move into more expensive homes

Home remodeling

Expensive jewelry or clothing

62

Source: Fraud Examination & Prevention. Albrecht & Albrecht. Page 98.

20 - 31


63

Embezzlers usually try to ingratiate themselves to management and their co-workers. The embezzler is typically the nicest, most caring and best liked person in the office.

Everybody Loves Pandas And Embezzlers

20 - 32

Fraud Prevention

In thirty years of public accounting experience, this CPA has developed a fool proof methodology to prevent embezzlement.

Every embezzlement I have ever seen could be prevented by following this simple rule…..

65

Fraud Prevention

Only hire mean, grouchy, miserable people as employees.

Hire people who you do not like, and therefore would never trust!

66

20 - 33

The Ideal Employee!

67

Fraud Prevention

Review the company’s computer security.

20 - 34

Fraud Prevention

Do background checks to insure the purity of your employees.

69


Fraud Prevention

70

20 - 35

Create an environment of honesty and

integrity.

There is something to be said for the old adage:

“It’s hard to cheat an honest man.”

Fraud Prevention

71

Fraud Prevention

Organizational Ethics Policy

72

20 - 36

The Culture of Corruption

Writing for the American Sociological Review in 1940, Edwin Sutherland was the first to argue that the culture of an organization and of its industry contribute to white-collar crime. He outlined a theory of differential association, in which illegal behavior “is learned in direct or indirect association with those who already practice the behavior.”

73

In the 2012 Report to the Nation on Occupational Fraud and Abuse, the percentage of fraud detected by outside auditors was only 3.3%, which is down from the 2010 report at 4.6%. The

survey showed the initial detection of fraud was found to be as follows:


Fraud Detection

74

20 - 37

Employee Hotline


Fraud Prevention

75

Fraud Detection

76


20 - 38

Fraud Prevention

Employee and Vendor ValidationsRemember billing fraud is the most common source of fraudulent disbursements

77

Fraud Prevention

Do periodic reviews of the internal controls and surprise audits. Let them know somebody is watching.

78

20 - 39

Surprise Audits

Fraud Prevention

79


Fraud Prevention

80

20 - 40

Cross train employees to cover vacation time.

Fraud Prevention

81

Fraud PreventionJob Rotation / Mandatory Vacation

82


20 - 41

Perform a certified audit.

Fraud Prevention

83

External Audits

Fraud Prevention

84


20 - 42

The Best Audit Program

THINK!85

Fraud Losses and Recoveries

Get adequate theft insurance for peace of mind.

86

20 - 43

Questions?

87

???????

?? ??

20 - 44