Presented by:<br />Andrew Kramer, CPA<br />Fraud; A New Age of Risk for Contractors<br />
Forensic Accounting and Investigative Services<br />Fraud prevention<br />Internal control review<br />Fraud awareness tra...
Trends in Fraud<br />Economy and fraud have an indirect relationship.<br />Increase in fraud occurrences since economic cr...
Trends in Fraud<br />Most frauds are uncovered by:<br />Tips (40.2%)<br />Management review (15.4%)<br />Internal audit (1...
Fraud Trends in the Construction Industry<br />Median fraud loss is $200,000<br />Out of the construction cases polled:<br...
Fraud Trends in the Construction Industry<br />Skimming (15.6%)<br />Employee steals Cash from an organization before it i...
Four Elements of Fraud<br />Hidden (concealed)<br />Intentional; violates the employee’s fiduciary duty to the company<br ...
The Fraud Triangle<br />Opportunity<br />Rationalization<br />Financial Pressure <br />
The Fraud Triangle; Pressure<br />Causes an employee to commit fraud<br />High amounts of debt<br />Family medical costs<b...
The Fraud Triangle; Rationalization<br />Means of justifying the fraudulent act.<br />Low employee morale can result in a ...
The Fraud Triangle; Opportunity<br />Ability for an employee to commit a fraud.<br />Employee exploits job duties and resp...
Fraud Prevention<br />Eliminate Opportunity<br />Increase the perception of detection<br />People rarely commit fraud if t...
Increasing Perception of Detection<br />“Tone at the Top”<br />Managers need to communicate that they are serious about fr...
Increasing Perception of Detection<br />Proactive policies<br />Surveillance<br />Fraud assessment questioning<br />Mandat...
Internal controls<br />Segregation of duties:<br />Authorization<br />Recording (Record keeping)<br />Custody of assets<br...
Internal controls<br />Develop policies and procedures<br />Demand compliance by employees<br />Enforce punishment for vio...
Case Study 1<br />Perpetrator<br />Project Manager<br />Victim Company<br />Construction Company<br />Fraud Scheme:<br />F...
Case Study 2<br />Perpetrator<br />Bookkeeper<br />Victim Company<br />Construction Company<br />Fraud Scheme:<br />Fraudu...
Case Example 3<br />Perpetrator<br />Divisional Merchandising Manager<br />Victim Company<br />Home Improvement Retailer<b...
What can you do NOW?<br />Improve perception of detection:<br />Implement a fraud policy.<br />Decide what fraud is and th...
What can you do NOW?<br />Implement internal controls:<br />Segregation of duties: Cash receipts<br />Separate cash handli...
What can you do NOW?<br />Implement internal controls:<br />Segregation of duties: Payroll<br />Separate inputting informa...
Contact Information<br />Andrew Kramer<br />1850 North Central Ave, Suite 400.<br />Phoenix, AZ 85004<br />602-264-8604<br...
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New age of risk for contractors slide presentation

  1. 1. Presented by:<br />Andrew Kramer, CPA<br />Fraud; A New Age of Risk for Contractors<br />
  2. 2. Forensic Accounting and Investigative Services<br />Fraud prevention<br />Internal control review<br />Fraud awareness training<br />Pre-employment background checks<br />Fraud detection<br />Fraud scheme detection<br />Interviews and interrogation<br />Fraud investigation<br />Asset theft investigation<br />Partnership malfeasance investigations<br />Documentation of fraud occurrence<br />Litigation support<br />
  3. 3. Trends in Fraud<br />Economy and fraud have an indirect relationship.<br />Increase in fraud occurrences since economic crisis began in 2008.<br />Scheme with the greatest increase in occurrence:<br />Theft of company property.<br />Embezzlement and expense account fraud<br />More fraud occurrences due to the economy will be found at a later date.<br />Median duration of all fraud schemes is 18 months.<br />Institute of Internal Auditors, “Knowledge Alert; Emerging Trends in Fraud Risks, 2010”<br />
  4. 4. Trends in Fraud<br />Most frauds are uncovered by:<br />Tips (40.2%)<br />Management review (15.4%)<br />Internal audit (13.9%)<br />Small organizations (>100 employees):<br />Suffer the greatest percentage of frauds.<br />Median fraud scheme loss of $155,000.<br />Most common schemes: <br />Billing<br />Check tampering<br />Corruption<br />Skimming<br />Association of Certified Fraud Examiners, “Report to the Nation, 2010”<br />
  5. 5. Fraud Trends in the Construction Industry<br />Median fraud loss is $200,000<br />Out of the construction cases polled:<br />Corruption (45.5%)<br />Use of influence that violates duty of due care to employer.<br />Billing (29.9%)<br />Payments are issued for fraudulent invoices of goods or services, invoices with inflated prices, personal expenses.<br />Check tampering (18.2%)<br />Checks are intercepted, forged, or altered.<br />Association of Certified Fraud Examiners, “Report to the Nation, 2010”<br />
  6. 6. Fraud Trends in the Construction Industry<br />Skimming (15.6%)<br />Employee steals Cash from an organization before it is recorded in the accounting system.<br />Non-cash Theft (15.6%)<br />Employee steals or misuses non-cash assets of the organization.<br />Expense Reimbursements (13.0%)<br />Employee requests reimbursement for personal, fictitious, or inflated business expenses. <br />Association of Certified Fraud Examiners, “Report to the Nation, 2010”<br />
  7. 7. Four Elements of Fraud<br />Hidden (concealed)<br />Intentional; violates the employee’s fiduciary duty to the company<br />The perpetrator receives a benefit<br />Costs the employing organization assets, revenue, etc.<br />
  8. 8. The Fraud Triangle<br />Opportunity<br />Rationalization<br />Financial Pressure <br />
  9. 9. The Fraud Triangle; Pressure<br />Causes an employee to commit fraud<br />High amounts of debt<br />Family medical costs<br />Housing market pressures<br />Bad investment decisions<br />Addiction Problems<br />Drugs, alcohol, gambling<br />Lavish lifestyle<br />Poor economy = greater pressure on employees<br />Pressure<br />Fraud <br />Occurrence<br />Economy<br />
  10. 10. The Fraud Triangle; Rationalization<br />Means of justifying the fraudulent act.<br />Low employee morale can result in a rationalization to commit fraud.<br />Low employee morale is often linked to theft more often than low pay is linked to theft.<br />“The boss can afford it.”<br />“I’m not hurting anyone.”<br />“I’ll pay this back.”<br />“They owe me.”<br />“No one will notice if this is gone.”<br />
  11. 11. The Fraud Triangle; Opportunity<br />Ability for an employee to commit a fraud.<br />Employee exploits job duties and responsibilities.<br />Weak internal controls<br />Poor oversight<br />Abuse of decision making authority<br />Opportunity is the factor most able to be changed by the organization.<br />
  12. 12. Fraud Prevention<br />Eliminate Opportunity<br />Increase the perception of detection<br />People rarely commit fraud if they think they will be caught.<br />Implement strong internal controls<br />
  13. 13. Increasing Perception of Detection<br />“Tone at the Top”<br />Managers need to communicate that they are serious about fraud detection and prevention<br />Employee Education<br />Internal controls for monitoring employees<br />Company fraud (ethics) policy<br />
  14. 14. Increasing Perception of Detection<br />Proactive policies<br />Surveillance<br />Fraud assessment questioning<br />Mandatory vacations<br />Surprise audits<br />Vigorously pursue dishonest acts<br />Implement fraud hotline<br />With hotline:<br />Median Loss: $100,000<br />Duration of fraud: 13 months<br />Without hotline:<br />Median Loss: $245,000<br />Duration of fraud: 20 months<br />
  15. 15. Internal controls<br />Segregation of duties:<br />Authorization<br />Recording (Record keeping)<br />Custody of assets<br />Proper procedures for authorization<br />Adequate documents and records<br />Physical control over assets and records<br />Independent checks on performance<br />
  16. 16. Internal controls<br />Develop policies and procedures<br />Demand compliance by employees<br />Enforce punishment for violations<br />Complete pre-employment background investigations of employees<br />Safeguard company assets<br />Utilize employee dishonesty insurance<br />
  17. 17. Case Study 1<br />Perpetrator<br />Project Manager<br />Victim Company<br />Construction Company<br />Fraud Scheme:<br />False Invoices/Check Interception<br />Facilitation<br />A. Spescia and “A.J. Splescian”<br />Loss: $2.8 Million<br />
  18. 18. Case Study 2<br />Perpetrator<br />Bookkeeper<br />Victim Company<br />Construction Company<br />Fraud Scheme:<br />Fraudulent Disbursements<br />Loss: $333,103.30<br />
  19. 19. Case Example 3<br />Perpetrator<br />Divisional Merchandising Manager<br />Victim Company<br />Home Improvement Retailer<br />Fraud Scheme<br />Acceptance of Bribes<br />Facilitation<br />No quote/bid requirements<br />Loss: $2.5 Million<br />
  20. 20. What can you do NOW?<br />Improve perception of detection:<br />Implement a fraud policy.<br />Decide what fraud is and the consequences of committing fraud.<br />Communicate policy to employees.<br />Employ a fraud hotline or anonymous reporting system. <br />Check if insurance policy covers acts of employee dishonesty.<br />If not, look into the cost/benefit of adding coverage.<br />
  21. 21. What can you do NOW?<br />Implement internal controls:<br />Segregation of duties: Cash receipts<br />Separate cash handling and record keeping.<br />Deposit receipts ASAP.<br />Reconcile deposit slips to deposit receipts.<br />Segregation of duties: Cash payments<br />Separate authorization, custody, record keeping.<br />Require a check to invoice review when manually signing checks.<br />Review cancelled checks during bank reconciliation.<br />
  22. 22. What can you do NOW?<br />Implement internal controls:<br />Segregation of duties: Payroll<br />Separate inputting information into system and running payroll.<br />Periodic review of employee listing.<br />Compare addresses to vendor listing.<br />Look for non-current employees.<br />
  23. 23. Contact Information<br />Andrew Kramer<br />1850 North Central Ave, Suite 400.<br />Phoenix, AZ 85004<br />602-264-8604<br />akramer@eidebailly.com<br />
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