Preventing a Fraud meltdown in your company

Preventing a Koss Meltdown at your Company: How to Prevent and Detect Fraud: Implementing Internal Controls

Presenters  David Buslee – MBA UC Irvine – Certified Managerial Accountant – Certified Financial Manager – Partner – B2BCFO  Paul Rodrigues – Certified Public Account – Masters in Tax – Certified Fraud Examiner – Certified in Financial Forensics – Principal at Chortek and Gottschalk

Goal  To Educate You on What is Happening  To Scare You to Death  To Make You Paranoid  To Provide Best Practices 3

What is Fraud The elements of fraud are: – A representation about a material fact – Which is false – And made intentionally, knowingly, or recklessly – Which is believed – And acted upon by the victim – To the victim’s damage 4

Common Myths About Fraud  It can’t happen on MY watch  No one would do that here...  We have an excellent accounting system  My accounting clerk is my best employee  We don’t handle cash - What’s to steal  Problem Employees are likely suspects  I wouldn’t know where to start looking 5

The Fraud Triangle Opportunity - Generally provided through weaknesses in the internal controls. Pressure - Can be imposed due to problems or vices Rationalization - Occurs when the individual develops a justification for their fraudulent activities. 6

Fraud Schemes  Three categories of fraud schemes according to the Association of Certified Fraud Examiners: A. fraudulent statements B. corruption C. asset misappropriation 7

A. Fraudulent Statements  Misstating the financial statements to make the copy appear better than it is  Usually occurs as management fraud  May be tied to focus on short-term financial measures for success  May also be related to management bonus packages being tied to financial statements 8

B. Corruption  Examples: – bribery – illegal gratuities – conflicts of interest – economic extortion – Kickbacks  Foreign Corrupt Practice Act of 1977: – indicative of extent of corruption in business world – impacted accounting by requiring accurate records and internal controls 9

C. Asset Misappropriation  Most common type of fraud and often occurs as employee fraud.  Examples: – making charges to expense accounts to cover theft of asset (especially cash) – lapping: using checks from one account to cover theft from a different account – transaction fraud: deleting, altering, or adding false transactions to steal assets 10

How Management Encourages Fraud  Management Attitude - Do Nothing  Little or poor Applicant screening  No written policies or procedures  Inadequate training - classroom or OJT  Responsibility, accountability, and authority not established or documented  Goals and objectives neither established nor monitored for success  Weak Enforcement Policy  Break accounting and policy rules - “Too Much Bureaucracy”  Inconsistent application of policies or procedures - may result in unfair treatment of employees - favoritism - low morale  Not listening to employees - treatment of whistleblowers  We’ll get them to resign - the problem will go away 11

Employee Fraud  Committed by non-management personnel  Usually consists of: an employee taking cash or other assets for personal gain by circumventing a company’s system of internal controls 12

Management Fraud  It is perpetrated at levels of management above the one to which internal control structure relates.  It frequently involves using the financial statements to create an illusion that an entity is more healthy and prosperous than it actually is.  If it involves misappropriation of assets, it frequently is shrouded in a maze of complex business transactions. 13

Who Commits Fraud ? Almost anyone, rationalize they are just in borrowing, believe they deserve what they take, plan to repay - never do. Will continue to commit fraud until caught. – Has an addictive need - alcohol, drugs, gambling, sex, shopping – Is intelligent – Has a position of trust and responsibility – Understands and skillfully uses technology – Is well respected in the community – Is married, 2 children, owns home 14

Perpetrator’s History Perpetrator's Employment Perpetrator's Criminal History History Never Never charged or Punished or 6% 7% convicted Terminated 5% 12% Charged but Previously not 83% Punished 87% convicted Prior Previously Convictions Terminated 15

Victim Organizations Organization Type of Victim - Median Loss Not-for-Profit Type of Victim Organization Government 2008 2006 Public Companies Private Companies $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 Median Loss 17

Victim Organizations Size of Victim Organization - Frequency <100 Number of Employees 100 - 999 2006 2008 1,000 - 9,999 10,000+ 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% Percent of Cases 18

Victim Organizations Primary Internal Control Weakness Observed by CFE Lack of Reporting Mechanism Lack of Employee Fraud Education Most Important Contributing Factor Lack of Clear Lines of Authority Lack o f Independent Audits Lack of Competent Oversight Poor Tone from the Top Override of Existing Controls Lack of Management Review Lack of Internal Controls 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% Percent of Cases 19

What is a RED FLAG of Fraud?  A red flag is a set of circumstances that are unusual in nature or vary from normal activity. It is a signal that something is out of the ordinary and may need to be investigated further. These are warning signs.  Some Red Flags are easily discerned, while others may be more subdued and/or concealed. 20

Initial Detection Method by Organization Type8 Detection of Fraud Schemes 21 8The sum of percentages in this chart exceeds 100 percent because in some cases respondents identified more than one detection method. ©2008 by the Association of Certified Fraud Examiners, Inc.

How Costly is Fraud  The direct amount that is misappropriated is oftentimes only a small portion of the cost to an organization.  Intangible Costs – Distraction of organization – Employee morale – Embarrassment – Loss of customer confidence 22

Red Flags  Knowing how to spot and investigate Red Flags is imperative in a proactive fraud deterrence program.  Learn to spot the behavioral and data red flags.  When red flags are present, investigate and document.  Data mining is an effective tool for identifying red flags in the company data files 23

Behavioral Red Flags  Fraudsters oftentimes demonstrate behaviors that may serve as warning signs  Some perpetrators may act irritable, may spend lavishly or become secretive.  The presence of these signs do not, in and of itself, indicate fraud is occurring  Management and anti fraud professionals should be trained to identify potential warning signs so that they may be investigated. 24

Behavioral Red Flags Present During Fraud Scheme24 24The sum of percentages for each scheme type exceeds 100 percent because in several cases the perpetrator exhibited more than one behavioral red flag. 26 ©2008 by the Association of Certified Fraud Examiners, Inc.

Cash Fraud Red Flags  Discrepancies between cash count and account balance  Mutilated/destroyed cash register receipts  Employee working from open cash drawer  Unexplained inventory adjustments  Unexplained increase in the use of petty cash  Personal checks included in cash funds  Unusual journal entries affecting cash accounts  Differences between daily receipts and bank deposits  “Less Cash” line on deposit tickets indicates cash taken 27

Accounts Receivable Fraud Red Flags  Customer complaints regarding amounts owed  Discrepancies between deposit tickets and customer records  Different dates between deposits and customer payments  Unusual discounts or credits  Increase in delinquent accounts  Increase in the amount of write-offs  Receivables with unusual characteristics  Customers with unusual name, address or phone number 28

Inventory Fraud Red Flags  Unexplained inventory shrinkage  Excessive inventory adjustments  Decrease in gross margins  Unusual journal entries to inventory  Unusual trash removal practices  Increase in credit memos  Temporary workers with access to inventory 29

Fixed Asset Fraud Red Flags  Unusual or unexpected asset purchases  Missing assets  Unusual increases in repairs and maintenance on assets that could be subject to personal use  Unusual fluctuations in depreciation accounts 30

Accounts Payable/Vendor Fraud Red Flags  Higher-than-usual costs or expenses  Vendor complaints  Altered or modified vendor invoices  Unexplained fluctuations in payables  Unusual vendor names and addresses  Unusual payees on checks  Discrepancy between payees on checks and check register  Unusual increase in purchases from vendor(s)  Copies of vendor invoices instead of originals  Missing cancelled checks 31

Payroll Fraud Red Flags  Unusual fluctuations in payroll expense or hours  Checks to employees with minimal personnel records  Missing payroll checks  Number of paychecks do not match the number of employees  Employee complaints regarding W-2 amounts  Employees who pick up paychecks for other employees  Highly compensated employees who elect no withholdings  Dual endorsements on cancelled payroll checks 32

Expense Reporting Fraud Red Flags  Improper or inadequate receipts underlying expenses  Information on expense report differs from receipts  Photocopies of expense receipts submitted instead of originals  Repeated entertainment expenses with customer with no associated business  Failure to utilize company credit cards when available  Expenses submitted not in line with other employees 33

The Perpetrators Fraud Schemes By Accounting Personnel Register Disbursements Payroll Cash Larceny Fraudulent Statements Type of Scheme All Cases Cash on Hand Accounting Expense Reimbursement Check Tampering Non-Cash Skimming Billing Corruption 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 Percent of Cases 34

Reduce Risk of Fraud: Tools of Protection  Segregation of Duties  Environment  Internal Control Procedures 35

Segregation of Duties • No employee should be in a position to commit fraud and then conceal it • Example: Person collecting/receipting cash should not: • Post cash receipts to the general ledger system • Process cash disbursements • Prepare billings • Make bank deposits, wire transfers 36

Environment  The same rules apply to all  Don’t belittle internal control procedures  Don’t allow management to override procedures  Be alert to employee’s outside interests 37

Internal Controls – Who?  As the owner, you are pulled in a variety of directions  Need to focus on the overall business  No experience in creating controls  As the “Finder” you can’t be constantly involved in “Minder” activities 38

Controls - Part-time CFO  Experienced partner to CEO  Knowledgeable in creating controls and enforcing controls  Enables the “Finder” to concentrate on building the business  Cost effective alternative – can help build sales and gross margins 39

Controls - Part Time CFO  Physical security  Segregation of duties  Employee monitoring  Surprise audits  Job rotation  Examination of Documentation 40

Your Bank – Account Control  Specify what, if any, ACH debits can hit your accounts  Require 2 signatures for any outbound wire  Make sure they don’t give cash back on business deposits  Make sure they only deposit to business accounts  Use a “token” for all account inquiries  Only signors should access accounts  Positive Pay and Reverse Positive Pay 41

Suspected Fraud ? •Seek out a Fraud Practitioner… – Type of fraud: – Employee fraud - dismissal or prosecution of employees? – Vendor fraud? – Any misconduct involving a high-level officers, executives or managers – Financial reporting fraud? – Complaints involving the Foreign Corrupt Practices Act (FCPA) – Certain industry practices •Who should be in the know before any action is taken? •How was the (potential) fraud detected? •Involvement of authorities?

Legal Considerations of Fraud  Intentionally false representation – Not an error – Lying or concealing actions – Pattern of unethical behavior  Personal material benefit  Organizational or victim loss 43

Summary  Anyone can be a Fraudster – they tend to be the most trusted employee  Fraud Prevention Checkup  Most Frauds are discovered by accident or tips  Be vigilant for Red Flags  Part Time CFO will create and enforce internal and external controls  Your Bank has many tools to prevent fraud  Have a game plan for when fraud is suspected 44

Contact Information David Buslee Partner B2BCFO LLC (262) 271-2522 dbuslee@b2bcfo.com Paul Rodrigues Principal Chortek and Gottschalk (262) 522-8227 PRodrigues@c-gcpa.com 45

Preventing a Fraud meltdown in your company

by David Buslee on Feb 02, 2010

Accessibility

Categories

Upload Details

Usage Rights

2 Embeds 19

Statistics

Preventing a Fraud meltdown in your company Presentation Transcript

http://www.slideshare.net	18
https://bb9.tamucc.edu	1