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    New age of risk for contractors slide presentation New age of risk for contractors slide presentation Presentation Transcript

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