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Preventing a Fraud meltdown in your company
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Preventing a Fraud meltdown in your company


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Presentation shows the various redflags to prevent and detect internal fraud in a company

Presentation shows the various redflags to prevent and detect internal fraud in a company

Published in: Economy & Finance, Business
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  • I want to educate your so that you can see what may be happening, or about to happened, in your own company. And yes, I want to scare you, because most companies who experience this have become complacent in their bad practices. As Andy Grove, chairman of Intel once said, only the paranoid survive, I want you to be sufficiently paranoid that good practices don’t become corrupted by shortcuts. And for those of you who question your current practices – to provide some of the recognized “best practices” in dealing with fraud and its causes.
  • First, we need to understand what fraud is.(read slide)And Fraud can be one of Omission – leaving out important facts that, if know, would have made you act differently had you known them.
  • There are some common myths regarding fraud – the persistence of those myths confirms that “Denial” isn’t just a river in Egypt.
  • Opportunity - Generally provided through – the only thing that the company can changeweaknesses in the internal controls. Someexamples include inadequate or no:Supervision and reviewSeparation of dutiesManagement approvalSystem controlsPressure - Can be imposed due to:Personal financial problemsPersonal vices such as gambling, drugs, extensive debt, etc.Unrealistic deadlines and performance goalsProblems come and go. A good employee can be subjected to pressure due to events which occur after the employee is hiredRationalization - Occurs when the individual develops a justification for their fraudulentactivities. The rationalization varies by case and individual. Some examples include: “I really need this money and I’ll put it back when I get my paycheck”“I’d rather have the company on my back than the IRS”“I just can’t afford to lose everything – my home, car, everything”One of the most powerful rationalizations occurs when owners and managers fail to follow their own rules, setting the example that employees come to expect as being the NORM.
  • Management Attitude - Do Nothing- Not my problem- It’s too embarrassing for the department, institution, etc…Who wants the bad press of an investigationScreening - Culture Index - By identifying the capabilities of every employee and prospective employee, Culture Index can prevent hiring mistakes, solve turnover problems, communication problems and morale problems.Credit Checks People need to sign off on credit check Spend more than earningNo written policies or procedures- low priority for the establishment of internal controls- no separation of duties- inadequate cash controls - documents- inadequate physical security for assets and records- no independent inventory of assets - recording and review of overages and shortages
  • They can be purchasing agents, salesmen, accountants, shipping clerks, VP of Operations – almost anyone in the organization can commit fraud against the organizatio
  • Occupational fraudsters are generally first time offenders. Only 7% had prior convictions and only 12% had been previously terminated by an employer for fraud-related conduct.Resume inconsistencies Open spaces in resumes Few frauds are prosecuted Rarely do a criminal background Most aren’t prosecuted 83% never terminated or punished Out of court settlements
  • Koss – external audit 4%. They are required to have a mind set of the potential for fraud “material mis-statements”.Tip or accident is 65%.
  • Transcript

    • 1. Preventing a Koss Meltdown at your Company: How to Prevent and Detect Fraud: Implementing Internal Controls
    • 2. 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
    • 3. Goal  To Educate You on What is Happening  To Scare You to Death  To Make You Paranoid  To Provide Best Practices 3
    • 4. 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
    • 5. 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
    • 6. 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
    • 7. Fraud Schemes  Three categories of fraud schemes according to the Association of Certified Fraud Examiners: A. fraudulent statements B. corruption C. asset misappropriation 7
    • 8. 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
    • 9. 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
    • 10. 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
    • 11. 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
    • 12. 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
    • 13. 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
    • 14. 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
    • 15. 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
    • 16. 16
    • 17. 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
    • 18. 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
    • 19. 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
    • 20. 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
    • 21. 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.
    • 22. 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
    • 23. 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
    • 24. 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
    • 25. 25 ©2008 by the Association of Certified Fraud Examiners, Inc.
    • 26. 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.
    • 27. 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
    • 28. 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
    • 29. 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
    • 30. 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
    • 31. 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
    • 32. 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
    • 33. 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
    • 34. 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
    • 35. Reduce Risk of Fraud: Tools of Protection  Segregation of Duties  Environment  Internal Control Procedures 35
    • 36. 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
    • 37. 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
    • 38. 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
    • 39. 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
    • 40. Controls - Part Time CFO  Physical security  Segregation of duties  Employee monitoring  Surprise audits  Job rotation  Examination of Documentation 40
    • 41. 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
    • 42. 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?
    • 43. 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
    • 44. 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
    • 45. Contact Information David Buslee Partner B2BCFO LLC (262) 271-2522 Paul Rodrigues Principal Chortek and Gottschalk (262) 522-8227 45