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Annual Fraud Update

Annual Fraud Update



Sharon Hamrick presented the Annual Fraud Update for the IMA - Chattanooga chapter.

Sharon Hamrick presented the Annual Fraud Update for the IMA - Chattanooga chapter.



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    Annual Fraud Update Annual Fraud Update Presentation Transcript

    • A Global Reach with a Local Perspective www.decosimo.comHOW DID THIS HAPPEN? WE HAVE CONTROLS! Sharon Hamrick – SHARONHAMRICK@DECOSIMO.COM
    • Fraud - A Hot Topic Everywhere Madoff, Medicare, healthcare, mortgage fraud NPR – May 1st – “The Psychology of Fraud: Why Good People do Bad Things” Yahoo CEO – Fraud on his CV Controller of Dixon, IL, town of 16,000, accused of misappropriating $53 million over 21 years
    • The use of one’s occupation for personal enrichment The misconduct of employees, managers and executives
    • Behavioral Red Flags Exhibited 81% of fraudsters exhibited at least one of the listed behavioral red flags:  36% Living beyond their means  27% with financial difficulties  19% with unusually close associations with vendors or customers  18% had excessive control issues with their duties
    •  41% of perpetrators are employees; 38% of perpetrators are managers Median losses of frauds by employees = $60,000; by managers =$182,000 Frauds lasted a median of 18 months before being detected 49% of victim organizations in the study had not recovered any losses dueto fraud 38% of perpetrators were between the ages of 36 and 45 Median losses by gender: Males $200,000; by female fraudsters $91,000 Executive/upper management caused largest fraud losses
    • OpportunityIncentive/Pressure Rationalization
    • Cash Frauds – Case 1 Cash received and deposited at remote locations  Suspect was responsible for making daily deposits  Cash collections were logged and records prepared by front- desk employee who placed all together in the office safe  Perpetrator actually made deposits at the bank, but removed cash from deposit  Deposits made to central checking account  Supporting logs and documentation were forwarded to home office; copies of deposit slips were filed at remote office  Company experiencing significant growth and was delinquent in bank reconciliations
    • Cash Frauds – Case 1 How was the perpetrator caught?  Another employee noticed a deposit which she had prepared on the perpetrator’s desk with all supporting documentation attached, but no cash attached  She notified the manager of her concerns
    • Cash Frauds – Case 2 Payroll deposits made for business owner  Bookkeeper took owner’s bi-weekly payroll check to bank for deposit, bringing him back $500 cash  Began to draw $600, $800, $1,000 from his check, while still delivering his $500  Eventually began to cash most of his checks  She also reconciled his personal checking – to cover the lost deposits, she transferred funds from his retirement account  She even generated fake bank statements so she could give him a monthly reconciliation of his account
    • Cash Frauds – Case 2 How was the perpetrator caught?  Owner’s investment advisor dropped in for an unscheduled visit and asked the owner about putting money in his retirement account for investment and growth
    • Credit Card Fraud Company credit cards issuance and cancellation  Nationwide sales staff were issued company AmEx card for business and travel expenses  Employees required to submit receipts with expense reports validating charges  Each sales person was emailed a copy of his personal AmEx charges monthly for review  Accounting manager responsible for issuing new cards and cancelling cards of terminated employees
    • Credit Card Fraud  Accounting manager also responsible for various online payments, including AmEx  She kept a card for a terminated employee and gave it to her husband  He used her employee ID card to fabricate a card for himself with his picture and the terminated employee’s name in case he was asked for ID  Although each employee with a card saw their own charges monthly, no one except the perpetrator saw the entire AmEx statement
    • Credit Card Fraud How was the perpetrator caught?  Her husband attempted to use the card to purchase a car from a used car dealer who, in the name of caution, decided to call the company before completing the transaction
    • Check Tampering/Purchasing Fraud Vendor checks signed by business owner converted to bookkeeper’s personal use  Bookkeeper prepared accounts payable checks and gave to owner to sign along with supporting invoices attached for his review  After reviewing and signing, he gave back to her all invoices for filing and checks for mailing  She changed numerous payees to her own name  To keep vendors paid, she would periodically pay from statements, and busy owner did not notice  Recorded some checks as voided in general ledger; used reconciling items on bank reconciliation and made journal entries to dispense check amounts among various expense accounts
    • Check Tampering/Purchasing Fraud How was the perpetrator caught?  She posted one of the checks to a fixed asset general ledger account, and the plant manager began looking for the invoice and payment while the perpetrator was out for surgery
    • Payroll Fraud Terminated employees not removed timely from payroll  Large manufacturing company with several hundred plant employees  Payroll clerk had the responsibility to remove terminated employees from payroll system  Payroll clerk also printed payroll checks and put checks in the mail or gave to supervisor for distribution  Rather than removing employees as of their termination date, he would process one additional check, feeling sure the employees would not realize their W-2 had a few extra days or 1 extra week
    • Payroll Fraud How was the perpetrator caught?  Had several paychecks in his coat pocket and another employee accidentally knocked over his coat rack. The checks fell from his pocket
    • Receivables Fraud Lapping scheme perpetrated by a/r clerk  Customer payments were diverted to clerk’s personal use  To cover diversion, she posted another customer’s payment to that customer’s account and continued to roll or lap payments  As she diverted additional checks, the scheme became more and more complicated to maintain and more and more important for her to be there every day to keep scheme rolling
    • Receivables Fraud How was the perpetrator caught?  Employee was in a serious automobile accident and had to miss an extended period of work  Another employee had to step in and perform her duties  As soon as another person tried to post payments, the scheme unraveled and was revealed
    • Inventory Fraud/Misappropriation Employee stealing inventory for resale  Plant manager responsible for ordering inventory and scheduling shift employees  Plant manager scheduled after-regular hours pick up of empty containers for resale  Plant staff for 2nd shift consisted of only a few employees who regularly worked that shift  Used containers were refilled with inventory, loaded on a truck from the container purchaser, and the proceeds of reselling inventory were split among employees and truck driver
    • Inventory Fraud/Misappropriation How was the perpetrator caught?  Volume of inventory being taken grew to such a level that assuming differences were due to waste became unacceptable  New controller with a strong manufacturing background was hired  Spending patterns of plant manager grew to a level that they were not consistent with income of him and his wife
    •  Trust – especially in long-term employees Rapid growth of company, while increase in staffand adjustments of duties lagged behind Lack of segregation of duties Lack of independent checks, especially arisingfrom becoming lax about performing these checksregularly and thoroughly Lack of authorization and no negativeconsequences Overriding of existing controls Inadequacy of the accounting system No requirement for employees to take vacation
    • EMPLOYEE RED FLAGS COMMON IN THESE CASES Employee lifestyle changes Significant personal debt and credit problems Behavioral changes Very protective of files, work productivity Refusal to take vacation or sick leave Lack of segregation of duties in high-risk area
    • OTHER RED FLAGS• Reluctance to provide information • Unexpected overdrafts or declines to auditors or outside accounting in cash balances, inventory, service provider receivables• Photocopied or missing • Unexplained variations in expense documents accounts• Decisions dominated by an • Accounting personnel are lax or individual or small group inexperienced• Excessive number of year-end • High employee turnover rate transactions • Compensation is out of proportion• Complaints by customers or • Decentralization without adequate vendors monitoring• Weak internal control environment
    • So What Would Have Helped? Monitoring of controls and segregation of duties in place Owner receipt of unopened bank statements or regular monitoring of account activity on line Monitoring of customer questions and complaints Required monitoring and verification of customer account writeoffs and adjustments Regular review of general journal entries by appropriate level of management Timely investigation of unusual variances in accounts Timely reconciliation of bank accounts by appropriate personnel
    • So What Would Have Helped? Review of bank reconciliations by appropriate personnel Use of location checking accounts with funds transferred to main checking by accounting department Don’t return signed vendor checks to the individual who prepared them and/or records them Review of payroll registers and approval of changes in the employee master file Comparison of number of employees to number of payroll checks processed Spending limits on credit cards Requiring employees to use their own credit card, submit receipts and reimbursing them for all business expenses
    • CONTACT INFO Sharon P. Hamrick, CPA•CFF, CFE Senior Manager, Decosimo Advisory Services sharonhamrick@decosimo.com www.linkedin.com/in/sharonhamrick 423-756-7100 The contents and opinions contained in this article are for informational purposes only. The information is not intended to be a substitute for professional accounting counsel. Always seek the advice of your accountant or other financial planner with any questions you may have regarding your financial goals.
    • A Global Reach with a Local Perspective www.decosimo.comQuestions?