Combating Fraud. Pam Miller Education Director & Editor :: IOFM

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1 Combating Fraud Pam Miller Education Director & Editor :: IOFM Fraud It s a Multi-Billion Dollar Business ACFE (Association of Certified Fraud Examiners) publishes global fraud studies every other year They say that US organizations lose $65 billion a year or about 5% of revenues Fraud may spring from internal or external sources Asset misappropriation is most common but least costly median loss of $130,000 Financial statement fraud is least common but most costly median loss of $1 million In between both in terms of frequency and losses corruption schemes with a median loss of $200,000 1

2 More from the ACFE Tips are by far the most common means of uncovering frauds 40% of frauds discovered are discovered via tips A tip hotline is the key to discovering frauds more quickly and losing less Anonymous if possible and yes there will be some false positives Risk is higher for smaller organizations The higher the fraudster s position within the organization, the more costly the fraud Collusion enables higher losses and helps fraudsters evade detection the more employees involved the higher the losses And Even More Fraud is most common in 7 departments: Accounting Operations Sales Executive/upper management Customer service Purchasing Finance 2

3 High Risk Areas Vendor file and vendor maintenance Company credit cards T&E reporting And lack of segregation of duties or poorly segregated duties contribute to many successful frauds Fraud Prevention Basics Policies & procedures that are documented, tested, and enforced Know thy vendor ( research all new vendors to try to uncover fictitious ones) Credit cards Require implementation of strong controls Transaction reports must be reviewed Customize reports so they provide information, not just data And schedule them push not pull Everyone needs to know that a high level of scrutiny will befall all card transactions Just not the specifics of how and what we look for 3

4 Fraud Prevention Basics, continued Fraud awareness training What fraud is How it might occur How fraud negatively impacts the organization What to do if something appears to be wrong Encourage folks to question things that don t look or feel right Provide a politically safe means to do so steps to take Beware the rubber signature stamp.. FRAUD HOTLINE anonymous SEGREGATION OF DUTIES including systems LET S LOOK AT A FEW CASES IN THE NEWS (AND REALLY, THIS IS JUST A FEW ) 4

5 Two Embezzled $500K from Jewish Center The San Diego Union-Tribune Guilty pleas show former CFO and clerk both embezzling, separately, at the same! CFO snagged $412,289.64; AP clerk snagged $154, Both were employed by the organization more than 20 years CFO s fraud occurred across 6 years Both used the organization s credit cards to make charges then paying credit card statement with organization funds Not caught by internal controls, or annual independent audit And the icing on the cake the CFO insisted the center cut, cut, cut budgets because of funding shortfalls Prevention? When the CFO is a fraudster, prevention and discovery are difficult But there were red flags The CFO was going on lavish vacations and wearing designer clothing And the AP clerk was wearing designer clothing as well AP fraud likely not discovered because CFO was so busy perpetrating her own fraud Note that this fraud involved the organization s credit card 5

6 Four Men Accused of Stealing $5.7 Million from Large University New York Post 56 computer transferred payments made within two months Two AP staffers within the university Funds diverted into co-conspirator s bank account set up in the name of a non-existent company Accomplished by altering an accounts payable routing code Prevention? Collusion difficult to detect and losses high Considered a cyber crime because the funds were transferred electronically Think ACH is the solution to payment fraud? You are still vulnerable controls need to be put in place Review ACH accounts on a daily basis Prohibit ACH debits or control with blocks and/or filters Note the use of a fictitious vendor know thy vendor 6

7 Accounts Payable Clerk Pilfers over $200,000 from Minnesota Public School - Accounts payable clerk made out checks to herself but indicated that payments were made to vendors Also withdrew cash from company credit card Took place over a period of 5 to 10 years Also skimmed from sports gate revenue Prevention? Credit cards again Fraudster had the ability to alter payment records or vendor file Who is responsible for creating, approving, posting journal entries? Handled cash on her own? Long term fraud were there never any audits? Would a vendor statement audit process have caught this? 7

8 Patent Lawyer s Bogus Bills Swindled $5M from Manufacturing Firm The Denver Post House counsel submitted and approved bogus invoices over a period of 14 years Set up shell company which billed for services that would be reasonable as part of attorney s work for the company Used false fax number Invoices submitted bypassed computer system which audited invoices Steadily increased the amount requested Employee within company (not in AP) questioned the exorbitant charges As a division head, fraudster defended expenses as legitimate Prevention? High level person committing the fraud losses high Deliberately circumventing systems on a regular basis should have been a red flag Use of a shell company again know they vendor Another long term fraud what about audits? 8

9 In Million-Dollar Theft Case, Church Worker with a Secret Past The New York Times AP staffer for eight years Issued 468 checks to the fraudulent vendor then altered records to indicate it had been paid to legitimate vendor Amounts less than $2, under the amount that required approval from a supervisor Annual audit raised red flags Previously she had been convicted of grand larceny As a payroll manager issued duplicate checks to some employees and cashed them using check cashing cards she issued to herself under different names Still on probation when hired by the church! And had plead guilty to a misdemeanor in a separate case Prevention Reference checks should be part of the hiring process Fraudster had the ability to alter payment records or vendor file Who is responsible for creating, approving, posting journal entries? Use of a shell company again know they vendor Under the radar look how much can be stolen in small increments Would a vendor statement audit process also have caught this? Score one for the auditors 9

10 Clerk Charged with $1M Fraud -- StarTribune AP supervisor set up a phony vendor account in the name of her daughter Made checks payable to that vendor for a period of 5 years Checks sent to supervisor s home address she then forged daughter s signature Diversion of funds caused company to misstate its financial position according to the prosecutors although the company denies that a misrepresentation of their financial situation occurred Prevention? Use of a shell company again know they vendor Another long term fraud what about audits? A simple comparison of the vendor file to the employee file might have turned up the duplicate address 10

11 Can We Stop a Dedicated Fraudster within Our Midst? Maybe not but we can learn from other s mistakes and make them work harder to succeed And catch them! Review our policies and procedures Look for repetitive use of work-arounds Make use of spot checking periodically review small expenditures Review reports customize them if they don t help as currently written Look for red flags pay attention! Can We, continued Let it be known that reviews are part of the process but don t advertise the nuts and bolts of the process Place emphasis on high risk areas, but not exclusively Segregation of duties Know thy vendor Periodically compare vendor files to employee files Consider a mandatory vacation policy Fraud hotline or at least provide a means for employees to question suspicious transactions 11

12 Questions? Contact Information: Pam Miller 12