Small Business Fraud Awareness, Prevention and Detection Hands on Consultation with Tangible Results

Transcription

1 Small Business Fraud Awareness, Prevention and Detection Hands on Consultation with Tangible Results 2012 Fraud & Forensic Accounting Conference Presented by: Robert J. Kollar and Valerie C. Williams

2 Small Business Fraud Awareness, Prevention and Detection Based on results of a grant funded by the Institute for Fraud Prevention (IFP) which was intended to: Help small businesses better understand fraud Build awareness of the types of fraud affecting small businesses Quantify impacts of the potential frauds Provide techniques to prevent, detect and deter fraud Involve students in a service-learning consulting project.

3 Grant Deliverables Results of fraud risk self assessment survey Student consultant reports from companies service learning projects Company follow up reports Presentations at SBDC conferences Presentations via select media outlets

4 Survey Development of questions 20 questions Questions focused on: Organization demographics Fraud awareness Fraud occurrences

5 Sample Survey Questions

6 Survey Distribution of the survey Home page of Duquesne University School of Business web site for one year Duquesne s SBDC and data base contacts >400 companies Survey link at the Western PA Small Manufacturer's Council distribution to University of Pittsburgh s Executive Education Center Chamber of Commerce phone calls Noted on various radio shows SBDC Entrepreneur conferences Distributed at national training seminar for Meals-on-Wheels chapter executives Urban Redevelopment Authority of Pittsburgh 100 companies

7 Survey Consulting Projects Companies which volunteered for fraud risk assessment via the survey were screened Nine companies initially identified Three companies ultimately chosen

8 Survey Results - Demographics 82 responses received: 60% of the responses from organizations with revenues of $250K - $1 mil. 57% had less than 10 employees 51% identified as being in the service industry 24% were in a non-profit organization 74% were the CEO, President or Owner 51% indicated they were a victim of a fraudulent act

9 Survey Results The most common fraud reported was theft of assets (82%) 62% committing the fraud were employees 26% committing the fraud were management 46% indicated that the amount was <$5k 12% indicated that the amount was > $100k 19% - unable to determine the amount 35% indicated that a fellow employee identified the fraud 73% indicated an internal review discovered the fraud

10 Survey Results 54% indicated that they were exposed to fraud; 21% believed it was a possibility Areas with greatest potential for fraud: 53% cash receipts 50% inventory 36% employee expense reimbursement

11 Survey Results Fraud Prevention Techniques 54% indicated that cash/checks were deposited daily 49% secured checks/cash until deposited 40% have physical access (locks, fences) Only 13% reported utilizing surprise audits Only 7% have job rotation Only 13% have mandatory vacation 70% indicated that employees can report fraud without retaliation 77% verify previous employment 60% perform background checks including criminal history 26% perform drug testing

12 Survey Results Interest in attending a training on fraud prevention 27% indicated yes 31% indicated maybe 41% said NO

13 Overall Survey Trends and Observations Further analysis can be conducted based on industry, size of company

14 Company Fraud Risk Assessment Tool ACFE fraud prevention check up publication ACFE small business fraud prevention manual Joseph Wells, Fraud Examination, 3 rd edition Faculty members experience

15 Published ACFE tools

16 Published ACFE tools THE SMALL BUSINESS FRAUD PREVENTION MANUAL

17 Developed a Company Fraud Risk Assessment Tool General Demographics Sales and Cash Receipts Purchasing and Cash Disbursement Payroll Employee expense reimbursement Reporting and Monitoring Miscellaneous

18 Company Fraud Risk Assessment Tool - Sample # Description Initial Interviewer 3.0 Sales and Cash Receipts 3.01 What is the annual dollar amount of sales? What has the sales trend been for the last several years? 3.02 Document the sales and cash processing procedures Does the same person that handles in incoming cash receipts also record transactions? 3.04 Is a cash register used in the business? 3.05 Is a lock box used? 3.06 Are deposits made daily and secured prior to depositing in a safe? 3.07 Are incoming checks restrictively endorsed? 3.08 Is the monthly bank statement received and reviewed by someone other than the person handling the cash and checks? 3.09 Is a monthly bank reconciliation completed by someone other than the person handling the deposits? 3.10 If credit is extended to customers, is there a credit review preformed prior to granting credit? 3.11 Does someone approve credit other than the salespersons? 3.12 Is there a standard price list? Are any discounts or coupons used? 3.13 How are returns, voids and credit memos processed? If so what is the process? 3.14 Where do customer complaints get directed? How are they resolved? Reviewer Work Paper Reference/Answer to Question

19 Self-assessment Fraud Tool Find your Fraud Score # Description Score* (If not applicable, score is 0) 1 Human Resource Functions 1.01 Are employment background checks performed: - Past employment and eligible for rehire - Criminal background - Drug testing - Education and licensing - References 1.02 Are employees required to take vacations? 1.03 Are employees who are handling cash bonded? 1.04 Do employees job share or rotate positions? 1.05 Is the hiring process separate from the processing of payroll? 1.06 Are employee hours worked verified? For every yes, add one point for this question (maximum of five points). If yes, add 1 point If no, subtract 1 point If yes, add 1 point If no, subtract 1 point If yes, add 2 points If no, subtract 1 point If yes, add 1 point If no, subtract 1 point If yes, add 2 points If no, subtract 1 point 1.07 Is payroll processed internally? If yes, subtract two points 1.08 Are any employees paid on commission? If yes subtract two points Yes/No Score

20 Scoring of Self-Assessment Tool Total score > 50 points The company has strong controls. Score between 49 and 10 Controls can be improved and there is fraud risk. Score < 9 or negative Fraud risk is high. Inventory and cash could be at risk for theft. Financial statements could be misstated.

21 Fraud Awareness Media Outlets Radio Show Interviewed twice on The American Entrepreneur show Interviewed twice by JoAnn Forrester, Empress of Biz Talkcast host; podcast posted at SBDC seminars Booth promoting survey and business owner s questions Duquesne University issued a press release Contacted local Chambers of Commerce

22 Student Consulting Projects Organizations Profiles One $5 million privately held manufacturer of soaps and lotions One $3.5 million non-profit organization providing rental units to families One $2.0 million privately held recreation and sports training complex

23 Consulting Projects Process Faculty led training session on use of the assessment tool Coordination of schedules Initial visit to organizations locations Meeting with management Tour of facilities Observation of processes Review of policies Review of financial statements (1 out of 3) Interviews

24 Consulting Projects Process Student teams analyzed initial findings and developed follow up questions Follow up visit First draft of findings and recommendations

25 Expanded Phase One Company Due to red flags identified Poor cash flow Employee termination Personal information known by terminated employee Lack of reconciliations Control of deposits by terminated employee $6K loan to the company by the terminated employee Expanded procedures performed by graduate students in the Advanced Forensic Techniques course

26 Steps Performed Expanded Phase Review of journal entries impacting bad debt and revenue Reconciliation of incoming cash receipts to bank deposits Comparison of credit card payments to accounts payable payments reviewing for duplicate payments Review for duplicate A/P payments Search for additional bank accounts

27 Results Approximately $100K of revenue was reversed through debits to revenue accounts An additional bank account was detected Additional UCC filing under the company s name but with different officers other than the owners No duplicate disbursements were detected

28 Expended Hours 90 student hours 110 faculty hours

29 General Conclusions/Lessons Learned Difficulty obtaining companies to volunteer for the project Restaurant industry Service - Heating and Air Conditioning Training & Education Defense Contractor Distributor of trailers Business owners awareness of fraud risk just have to trust the employees. Respondents that expressed interest in fraud training was 27% The survey results indicated 51% had experienced fraud; 17% said they were unsure; 53% indicated that they were exposed to a fraud risk; 21% said they were possibly exposed to a fraud risk

30 General Conclusions/Lessons Learned Student comments Enjoyed the site visits and was good application of concepts Graduate students appreciated the ability to utilize academic classroom techniques in the field Difficulty in schedule coordination with students, faculty and businesses Difficulty coordinating academic semester deadlines with the workflow of the assessments and investigations

31 Contact information Bob Kollar, MBA, CPA, CGMA Director, Master of Accountancy Program Palumbo-Donahue School of Business Duquesne University 600 Forbes Avenue Pittsburgh, PA or OR Val Williams, MBA, CPA, CIA, CHFP, CFE, CFF Assistant Professor of Accounting Palumbo-Donahue School of Business Duquesne University 600 Forbes Avenue Pittsburgh, PA or