Is There Anyway to Prevent Fraud? Bill Gady, CGA CPA Partner

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1 Is There Anyway to Prevent Fraud? Bill Gady, CGA CPA Partner

2 Learning Objectives: Understand how fraud can occur Learn procedures you can implement to prevent fraud Learn how to detect fraud

3 Common Situations Is this Your Organization? But Judy is the only person handling cash. It s very efficient that way I sign every check so there can t be any fraud I only trust Joe with that task Suzie would never do that to me. John has access to change pay rates, but he never would

4 The Fraud Problem: How big is Fraud? Globally, organizations lose an estimated 5% of annual revenues Applied to 2009 Gross World Product: $2.9 Trillion potential total fraud loss Source: Association of Certified Fraud Examiners 2010 Report to the Nation on Occupational Fraud & Abuse

5 How Harmful Can Fraud Be? Loss of assets Cost of investigation is very high Ability to prosecute can be very low Loss of integrity Once the media reports it, possible Loss of students Loss of vendors, or at least restrictions Loss of employees Loss of focus on operations

6 Why Fraud Occurs Incentive/ Pressure The Fraud Triangle Opportunity Rationalize/ Attitude

7 The Triangle Incentive/Pressure Individual has a reason to commit fraud Opportunity Ineffective controls, absence of controls or the ability to override controls enable individual to commit fraud Attitude/Rationalization Individual is able to justify the acceptability of committing fraud

8 Fraud Statistics Association of Certified Fraud Examiners The 2010 ACFE Report to the Nation Based on global investigation of 1,843 cases (1,021 in U.S.) of occupational fraud between January 2008 and December 2009 Best source to research organizational exposure by industry and firm size, available on-line free at:

9 Fraud Quiz The most common type of fraud is: a. Fraudulent financial reporting b. Misappropriation of assets c. Corruption (conflict of interest) d. Petty theft e. Identity theft

10 Fraud Quiz The most common type of fraud is: a. Fraudulent financial reporting b. Misappropriation of assets c. Corruption (conflict of interest) d. Petty theft e. Identity theft

11 Fraud Quiz The average amount of time from inception to detection of fraud schemes is: a. 1-5 months b months c months d months e. Greater than 5 years

12 Fraud Quiz The average amount of time from inception to detection of fraud schemes is: a. 1-5 months b months c months d months e. Greater than 5 years

13 Fraud Quiz Median Duration of Fraud Based on Scheme Type Finacial Statement Fraud 27 Check Tampering Expense Reimbursements Payroll Corruption Skimming/Larceny Non-Cash 15 Check Disbursements Median Months to Detection

14 Fraud Quiz Which measures are the most helpful in preventing fraud: a. Ethics training for employees b. Fraud audits c. Strong internal controls d. Background checks on new employees e. Willingness to prosecute

15 Fraud Quiz Which measures are the most helpful in preventing fraud: a. Ethics training for employees b. Fraud audits c. Strong internal controls d. Background checks on new employees e. Willingness to prosecute

16 Real Life Example #1 Executive Vice President of an entity in Arizona Lived a lavish lifestyle Created seven false vendors which he used to bill the entity for personal items Occurred over a seven-year period Employee was writing a book on how to embezzle funds from your employer! Theft of $11 million

17 Fraud Triangle Opportunity Incentives/Pressures Rationalization/Attitude

18 Real Life Example #2 Employee was the secretary of a business Handled financial records including check writing Ability to transfer from the line of credit to the checking account to handle overdrafts Had access to business credit/debit cards Embezzlement was more than $200,000 over a three-year period Other staff noticed funds were missing from the business bank account Husband had lost job early on

19 Fraud Triangle Opportunity Incentives/Pressures Rationalization/Attitude

20 Fraud Quiz The age group that is most likely to commit fraud is: a. Less than 40 years old b years old c years old d years old e. greater than 60 years old

21 Fraud Quiz The age group that is most likely to commit fraud is: a. Less than 40 years old b years old c years old d years old e. greater than 60 years old

22 Fraud Quiz The education level of people who commit fraud is more likely to be those with: a. Post graduate degree b. Bachelors degree c. High school education d. Less than high school education e. Education level does not appear to be relevant

23 Fraud Quiz The education level of people who commit fraud is more likely to be those with: a. Post graduate degree b. Bachelors degree c. High school education d. Less than high school education e. Education level does not appear to be relevant

24 Fraud Quiz Frauds are generally detected by: a. Internal audit b. Tip from a vendor c. External audit d. Tip from a customer e. Tip from an employee

25 Fraud Quiz Frauds are generally detected by: a. Internal audit b. Tip from a vendor c. External audit d. Tip from a customer e. Tip from an employee

26 Fraud Quiz Initial Detection of Occupational Frauds Employee Tip Management Review Internal Audit Accident Account Reconciliation Document Examination External Audit Surveilance Confession Percent of Cases

27 Real Life Example #3 Representative of Bursar Office handled CPE and night classes Payment was required to be done by credit card Accounting reconciled credit card deposits to Bursar records (prepared by representative) Person was highly trusted Person was 45 Lived a very high level life style

28 Real Life Examples #3 (Continued) The student would pay for classes using their credit card The Bursar would take one of their personal credit cards and make a refund for the exact payment The student got a receipt and a payment showed on their credit card and the class records were manipulated by the Representative One credit card company caught the patter Theft Loss: $125,000 over one year

29 Fraud Triangle Opportunity Incentives/Pressures Rationalization/Attitude

30 Real Life Examples #4 Organization s 2 nd fraud identified in 5 years (did not prosecute the previous thief) Receptionist received payments on behalf of donors Receptionist had been with the Organization for over 20 years Receptionist sent out thank you letters with Executive Director s electronic signature All donors received a thank you letter

31 Real Life Examples #4 (Continued) Held a BA degree in English Liked to go to the Casino! Employee deposited the checks made out to the entity into their account using ATMs All theft was of checks written to the entity of less than $100 Employee tipped the entity Loss to Entity: $1.5 million over 5 years

32 Fraud Triangle Opportunity Incentives/Pressures Rationalization/Attitude

33 The Bank Accepted the Following Checks: Bill Clinton John Elway Mickey Mouse

34 Real Life Examples #5 Grandmother, children and grandchildren involved Family members enrolled and applied for aid at multiple online schools Financial Aid Director noticed a number of students using the same addresses and telephone numbers Theft Loss: Nearly $1 million

35 Fraud Controls - Cost / Benefit In general, as control and security increases: performance decreases 35

36 Fraud Controls - Prevention Preventative Controls -designed to prevent fraud before it has occurred. Examples: Multiple people or lock boxes for checks Timely account balancing and reconciling Passwords and physical safeguards Authorization and limits Segregation of duties

37 Fraud Controls - Detection Detective Controls -designed to detect fraud after it has occurred. Examples: Exception reports Systems maintenance reports Documentation reviews Internal Audit/Periodic Sampling

38 Fraud Awareness Types of Controls Automated Controls -controls that automatically occur. Examples: Computer passwords are implemented to automatically control the access to the systems. Manual Controls -controls that must be manually completed. Examples: Account reconciliations must be manually completed using the account statement and the general ledger history.

39 Key Control Questions The following are questions that every organization should ask themselves when evaluating key internal control areas:

40 Accounts Payable and Disbursements Does your organization use purchase orders? Who creates new vendors? Does someone else approve new vendors? Can the same person create a vendor and enter an invoice for payment? Can the same person enter an invoice and cut a check? Do checks print without a signature on them? Who signs the checks? Is the check stock blank? Is it kept secured?

41 Payroll Are timesheets processed prior to being approved? Can those processing payroll change pay rates? If the reviewer changes pay rate or hours after review, would it be caught? Can those in accounting access the payroll system?

42 Cash Receipts Who receives cash in your organization? Are two employees present when counting cash? Does your organization use duplicate receipts and/or a cash control log? Does the person receiving cash have access to record receipts in the I/T system? Does someone outside of the accounting department receive bank statements? Who prepares the bank deposit? How often?

43 How to Identify Embezzlement in Your Employees Significant lifestyle changes Living beyond their means Rarely takes vacation Reluctant to provide information to management Tireless worker, seems indispensable Co-workers are intimidated by them Typically, a repeat offender

44 Signs that Embezzlement is Occurring Increasing Accounts Payable or Receivable Expenses unusually high or large increases Unexplained adjustments to G/L accounts Decreasing collection rates Increased adjustments on bank reconciliation Discrepancies between bank deposits and posting No cash in deposits Unusual payroll increases

45 Fraud Prevention Checklist 1. Is ongoing anti-fraud training provided to all employees? 2. Is an effective fraud reporting mechanism in place? 3. Does management make it clear that fraud will not be tolerated? 4. Are fraud risk assessments performed to identify and mitigate vulnerabilities to fraud? 5. Are strong anti-fraud controls in place and operating effectively?

46 Fraud Prevention Checklist (Continued) 6. Can the internal audit department operate without undue influence from senior management? 7. Does the hiring process include background checks, drug screening, etc.? 8. Are employee support programs in place? 9. Does the culture promote an open-door policy, where employees can speak freely about pressures? 10. Are surveys done to assess employee morale?

47 Questions

48 Thank you! Bill Gady, Partner 617/

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