5 Important Controls to Mitigate Employee Fraud

Transcription

1 5 Important Controls to Mitigate Employee Fraud LMCIT WEBINAR : FEBRUARY 10, 2015 IN PARTNERSHIP WITH EIDE BAILLY Presenter: Jason Olson, MBA, CPA/CFF, CFE, CFI

2 Presentation Disclaimer These seminar materials are intended to provide the seminar participants with guidance in fraud and internal control matters. The materials do not constitute, and should not be treated as professional advice regarding the use of any particular forensic technique or related consequences associated with any forensic technique. Every effort has been made to assure the accuracy of these materials. Eide Bailly LLP and the author do not assume responsibility for any individual's reliance upon the written or oral information provided during the seminar. Seminar participants should independently verify all statements made before applying them to a particular fact situation, and should independently determine the consequences of any particular forensic technique before recommending the technique to a client or implementing it on the client's behalf.

3 Why Discuss Fraud and Internal Controls? 1. Financial loss. 2. Loss of public confidence. 3. Significant disruption of government function due to budget cuts. Source:

4 City of Dixon Fraud Case Opened RSCDA Reserve Fund bank account referred to as in which the Comptroller solely controlled. Transferred monies from other city accounts to the RSCDA Reserve Fund bank account. Used funds from the RSCDA Reserve Fund account for personal use.

5 City of Dixon Fraud Case Concealed the RSCDA Reserve Fund bank account by picking up the City s mail, which included the statements. When the Comptroller was away, other employees would pick up the mail and separate out the mail for her, which included the bank statements. Created 159 fictitious invoices to show the City s auditors that funds being transferred to the account were being used legitimately.

6 City of Dixon Fraud Case The Comptroller took an average of more than $2.5 million per year over 20 years. In one year, the Comptroller took $5.8 million. The Comptroller would participate in budget meetings with city council members and state the City s lack of funds was due to the economy and because the State of Illinois was behind in its tax payments.

7 City of Dixon Fraud Case The Comptroller s annual salary was $80,000 as of The Comptroller used the funds to finance her quarter horse farming business and life of luxury. Proceeds from the liquidation of assets totaled $12.38 million as of Feb

8 City of Dixon Timeline Dec. 18 th, 1990 Comptroller opens a secret bank account Feb Sentenced to 19 years and 7 months for stealing $53.7 million Fall of 2011 Anomalies discovered by another employee while the Comptroller was on vacation

9 City of Dixon Fraud Case Cory B. Nelson, SA with the FBI said it best The law is clear. Those who hold positions of trust must not abuse that trust.

10 Background Eide Bailly LLP Top 25 CPA firm in the Nation 26 service centers in 12 states 44,000 clients Myself Over a decade of forensic accounting experience Certified Public Accountant Certified Fraud Examiner Certified in Financial Forensics Certified Forensic Interviewer MBA in Fraud Management and Economic Crime

11 Background - Forensic Services Fraud prevention Fraud detection Fraud investigation Economic damages Computer forensics

12 If Fraud Was Always this Easy to Spot

13 Agenda Fraud Schemes Internal Controls 5 Easy to Implement Internal Controls Case Examples Questions?

14 Fraud Research Study Association of Certified Fraud Examiners Report to the Nations on Occupational Fraud and Abuse (2014 Global Fraud Study) Based on 1,483 cases of occupational fraud. Analysis of these cases provides valuable lessons about how fraud is committed, how it is detected and how organizations can reduce their risk.

15 Fraud Schemes

16 Fraud Schemes

17 Fraud Schemes

18 Fraud Schemes

19 Fraud Schemes

20 Frequency of Fraud Schemes Gov t. Schemes Frequency Corruption 36.2% Billing 19.1% N on-cash 17.7% Payroll 15.6% Expense Reimbursements 12.8% Cash on Hand 12.1% Skimming 11.3% Cash Larceny 10.6% Register Disbursements 7.0% Check Tampering 5.7% Financial Statement Fraud 5.0% N ote: Certain cases reported more than 1 scheme utilized. Source: 2014 RTTN

21 Detection of Fraud Schemes

22 Anti-Fraud Controls

23 Internal Controls Defined Internal Controls (a/k/a checks and balances) are designed to provide reasonable assurance regarding the achievement of objectives in the following categories: reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations. Should also include Safeguarding Assets.

24 Internal Controls and Fraud Risk All organizations are exposed to a degree of fraud risk in any process where human input is required The degree of risk is measured by: Business/Industry Effectiveness of internal controls to prevent or detect fraud Honesty and integrity of people involved in the process

25 Internal Controls and Fraud Risk No. 1 Opportunity for Fraud: Weak or non-existent internal controls including an ineffective internal audit staff and a lack of external audits.

26 Internal Controls and Fraud Risk

27 Internal Controls and Fraud Risk Probability of fraudulent activity is typically based on the following factors: How easy it is to commit fraud. Organization s fraud history. Motivational factors leading to fraud.

28 Internal Controls and Fraud Risk Basic principle: People rarely commit fraud if they think they will be caught. Perception of detection: Most effective deterrent to fraud.

29 5 Easy to Implement Internal Controls 1. Independent review of bank statements. 2. Independent review of canceled/processed checks. 3. Independent review of cash receipts. 4. Anonymous reporting system (fraud hotline). 5. Surprise examinations.

30 Case Example Case 1 Victim Perpetrator Type of scheme Details Public Utilities Bookkeeper (23 year employee) Theft of customer receipts About the fraud Total losses $243,000 Prevention tool 3 year scheme; Physically handled payments and had the ability to make adjustments Segregate cash handling and recordation functions

31 Public Utilities Commission Timeline October 2008 Auditors asked us to perform haphazard test on cash receipts May 2010 Individual pleads guilty to theft January 2009 Report identifying $244,618 in missing deposits August 2010 Sentenced to 2 years of probation, 10 months home detention and $35,000 in restitution

32 Case Example Case 2 Victim Perpetrator Type of scheme About the fraud Details Fair (Subsidized by local County) Office Manager Cash larceny 5+ year scheme; Deposit tickets were a clue Total losses $647,000 Prevention tool Independent examination of cash reflected on source documents to bank deposits

33 Fair Timeline Feb./Mar County Commissioners asked us to perform an examination of A/P Sentenced to 15 years Feb./Mar May 2009 July 2009 Pled guilty to embezzlement

34 Case Example Case 3 Victim Perpetrator Type of scheme About the fraud Details City City Clerk Unauthorized disbursements (altered payees) 3 + years Total losses $167,500 Prevention tool Examination of cancelled checks

35 City Timeline City requested us to assist with the investigation of unauthorized disbursements Sentenced to 21 months (stayed) Dec March 2013 August 2013 Charged with felony theft by swindle

36 Case Example Case 4 Victim Perpetrator Type of scheme About the fraud Details Municipal Liquor Store Store Manager Cash register theft <2 year scheme Total losses $57,400 Prevention tool Independent review of cash register tapes to bank deposits

37 Municipal Liquor Store Timeline Store Manager promoted Store Manager pled guilty to theft Oct April 2004 April 2005 Asked to assist City in investigation due to purchases/sales concerns

38 Conclusion Segregate duties (ARC) if possible. If segregating duties is not possible, utilize independent checks. Increase perception of detection. Implement an anonymous reporting system. Do NOT overlook suspicious (or unexplainable) activity. Ask questions!

39 Contact Information Jason Olson For a recording of this webinar go to: