Fraud Prevention, Detection and Investigation in the Payday Advance Industry


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Fraud Prevention, Detection and Investigation in the Payday Advance Industry

  1. 1. Fraud Prevention, Detection andInvestigation in the Payday Advance Industry D. Michael Costello, CPA•ABV, CFE 2008 CFSA Annual Meeting and Conference Las Vegas, Nevada March 6, 2008
  2. 2. Overview What are fraud and embezzlement? How do fraud and embezzlement happen in the payday advance industry? What steps can be taken to prevent fraud and embezzlement in our business? How is fraud detected? How do we investigate fraud?
  3. 3. Who is committing fraud?Other EmployeesOutsiders <$100,000Managers <1 Year $100,000–$1 millionManagers 1+ Years >$1 million
  4. 4. Fraud Prevention Policies at Major Companies2004 Yes No2002 0% 20% 40% 60% 80% 100%
  5. 5. Fraud and Embezzlement Defined Fraud: a misrepresentation or false statement knowingly made to a victim who relies on it and incurs detriment or harm as its result to the benefit of the perpetrator Embezzlement: ―the fraudulent appropriation of property by one lawfully entrusted with its possession‖ (Black’s Law Dictionary)
  6. 6. The Nature of Fraud Schemes are always hidden or concealed— absence of fraud can never be absolutely proven Courts (juries) are the final arbiter of whether or not a fraud has occurred Certified Fraud Examiners can only conclude that there is an appearance of fraud
  7. 7. Categories Means of concealment – Lack of documents– Creation of fake documents Basic classes of fraud – Internal – External Relation to accounting – On-book – Off-book
  8. 8. External Fraud Committed by people outside the business, or by the business itself against a third party – Bank fraud – Investor/securities fraud – Health care fraud – Defense contracting fraud – Bankruptcy fraud
  9. 9. Internal Fraud Committed against an entity by its own employees, officers, or directors – Embezzlement – Theft of petty cash – Misappropriation of inventory – Payroll fraud – Expense account schemes
  10. 10. On-book Fraud Money is diverted from regular accounts, or the books are manipulated The books and records provide evidence
  11. 11. Off-book Fraud Diverted money or assets never reach the financial statements Very hard to discover/prove When evidence does turn up, intent is convincingly established
  12. 12. Fraud in the Payday Industry— Case Study A remote location of a chain had a lack of oversight and of internal controls Manager’s authority: – sign checks – make computer entries – make deposits – keep customer records – prepare and sign payroll checks – receive and reconcile bank statements What’s wrong with this picture?
  13. 13. Concentration of Duties When one person has certain combinations of responsibilities, he can cover his own tracks The manager had been there several years— ownership, to its cost, trusted him Manager pocketed cash while entering the payments as being made Thus, bank and customer records differed—but no one reconciled them
  14. 14. Other Lapses of Oversight Bookkeeper never questioned checks being cashed instead of deposited, commission advances not being repaid, bad checks from the manager not followed up on—was too busy dealing with many locations Management dismissed the branch’s poor performance as ―to be expected for a small town‖
  15. 15. Endgame New bookkeeper quickly noticed something was wrong But by the time management had it checked out, all the records had been destroyed
  16. 16. Other ―War Stories‖ Employee ―Hotline‖ used to detect fraud Performance of ―Fraud Risk Assessment‖ procedures Investigation of ―trusted‖ bookkeeper
  17. 17. Fraud Prevention  TEEAM – Timely – Effective – Efficient – Accurate – Mobile
  18. 18. Timely Especially in a cash-intensive business like check advance, timely data is critical Be ahead of the situation—err on the side of overprotection Analyze data daily to find anomalies, and act on them immediately – Problems are caught quickly – The tone discourages illegal activity
  19. 19. Effective and Efficient Use information that is relevant and correlated with the problem – Daily deposit totals are a critical variable – Count of checks held v. internal or industry norms can be useful If data’s not relevant, don’t bother with it— you’ll just waste time you could use on something more important
  20. 20. Accurate The data used must properly reflect what it appears to Test the accuracy of counts regularly (e. g. by physically counting held checks)
  21. 21. Mobile Managers should visit stores regularly Each should have just a few stores, and should know and closely observe those stores
  22. 22. Operating Procedures Communicate to employees by way of a manual Routine ―surprise‖ audits of centers Weekly management audits of center results Monthly full audits – Review held checks – Sample-test petty cash – Verify that appropriate reports are being used – Report to audit committee, senior managers, and (for serious issues) to the full board of directors – Follow up immediately Twice/year collections audits Employee ―Hotlines‖
  23. 23. Internal Control Main Categories – Financial Reporting – Safeguarding of Assets Five Components – Control Environment – Risk Assessment – Information/Communication – Control Activities – Monitoring
  24. 24. Control Environment ―Tone at the top‖ Integrity/ethics Commitment to competence Role of board and audit committee Philosophy and operating style Organization structure Assigning authority and responsibility HR policies and procedures
  25. 25. Risk Assessment Operating environment Information systems Growth of products/customers/employees New technology New accounting pronouncements
  26. 26. Information and Communication Refers to all of the operations performed on transactions and conditions to maintain accountability for assets, liabilities, and equity
  27. 27. Control Activities Performance reviews Independent checks Segregation of duties Access and authorization controls
  28. 28. Monitoring Assessment of the quality of internal control over time May be ongoing activities, discrete evaluations, or a mix
  29. 29. Opportunity to Commit Fraud Assets susceptible to misappropriation Lack of internal control
  30. 30. Symptoms of Misappropriation Accounting—Suspicious  Analytical—Unusual items in the records relationships/events – Manipulated source – Odd time or place documents – Participants who wouldn’t – Journal entries that are normally be involved somehow not normal – Odd policies/procedures/ – Disagreement between practices records and physical – Excessive (or deficient) counts (or other records) frequency
  31. 31. Fraud Detection Interviews Conduct with all employees—not a sign of a specific suspicion of a person Establish rapport and get basic facts first Then move on to the fraud-related questions
  32. 32. Questions to ask: Do you understand the purpose of this interview? – Again, note this is not an accusation Do you think fraud is a problem for business in general? Do you think this company has a problem with fraud? If employees or managers are stealing from the company, why do you think they would do it?
  33. 33. More Questions If you knew another employee was stealing from the company, what would you do? Do you know anyone that might be stealing or taking unfair advantage of the company? Suppose someone who worked at the company decided to steal or commit fraud. How could he or she do it and get away with it?
  34. 34. Even More Questions In your opinion, who is beyond suspicion when it comes to committing fraud at this company? Did you ever think about stealing from the company even though you didn’t go through with it? Is there any information you wish to furnish regarding possible fraud in this company?
  35. 35. Investigation of Probable Fraud Undercover police work Physical/electronic surveillance Informants Lab analysis Interviews Public records checks – County recorder’s office – Subscription database Checks of other databases Analytical procedures
  36. 36. The Forensic Accountant (CFE) After a hypothesis or allegation has been made, the forensic accountant seeks to support or refute it Goals: – Independent confirmation – Presentation of conclusive evidence – Determine motive, co-conspirators – Trace funds to their final location
  37. 37. Methods of Investigation Documents and Records of the Victim – How the scheme was devised – What areas were compromised/corrupted Witness Interviews – How it was carried out – Why it was done Public and Business Sources – Can provide a variety of data
  38. 38. Financial Analysis for Fraud Detection Horizontal analysis—trends in like items over time Vertical analysis—relations between items of the same set financial statements Actual v. Budget Compare to competitors or trade-group data Double-entry analysis Review G/L, journal entries Review contracts, agreements
  39. 39. ―To Do‖ List Implement a ―Fraud Risk Management‖ program covering Prevention, Detection and Response  Where are you at risk for fraud?  Consider internal and external opportunities  Develop a written Plan of Ethics and Code of Business Conduct that is communicated ―from the top‖
  40. 40. ―To Do‖ List Basic things to implement – – Segregate financial and accounting duties – Duplicate sensitive tasks, such as requiring two signatures on checks over a certain amount – Require employees to take annual vacations – Reconcile all bank accounts
  41. 41. ―To Do‖ List Basic things to implement – – Use passwords and IDs on computer files – Restrict unauthorized access to offices and computer – Train supervisors and managers to spot fraud, and – Perform internal and external audits that include fraud prevention measures