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The Detection and Prevention of Fraud ( Or The Company You Save May Be Your Own) Dennis L. Thompson, CPA, CFE
Today’s Agenda <ul><li>Occupation Fraud – Three Major Categories </li></ul><ul><ul><li>Case Studies </li></ul></ul><ul><li...
Occupation Fraud Defined <ul><li>The Use of One’s Occupation </li></ul><ul><li>For Personal Enrichment </li></ul><ul><li>T...
Characteristics of Fraud <ul><li>Material False Statement </li></ul><ul><li>Person who uttered it knows it is False </li><...
Three Fraud Categories <ul><li>Asset Misappropriations </li></ul><ul><li>Corruption </li></ul><ul><li>Fraudulent Financial...
How Occupational Fraud is Committed <ul><li>Occupational Frauds by Category — Frequency </li></ul>
How Occupational Fraud is Committed <ul><li>Occupational Frauds by Category — Median Loss </li></ul>
Fraud Triangle – Donald Cressey <ul><li>Opportunity </li></ul><ul><li>Pressure </li></ul><ul><li>Rationalization </li></ul>
Opportunity <ul><li>Trusted Employee </li></ul><ul><li>Necessary Skills </li></ul><ul><li>Weak Internal Controls </li></ul>
Pressure – Non-sharable Problems <ul><li>Living beyond Means </li></ul><ul><li>Gambling Losses </li></ul><ul><li>Medical E...
Rationalizations <ul><li>Just Borrowing </li></ul><ul><li>Employer is Unfair </li></ul><ul><li>Unique Circumstances </li><...
Asset Misappropriations – Most Common <ul><li>Cash </li></ul><ul><li>Inventory/Other Assets </li></ul>
Cash Receipts <ul><li>On Book </li></ul><ul><ul><li>Larceny </li></ul></ul><ul><li>Off Book </li></ul><ul><ul><li>Skimming...
Fraudulent Cash Disbursements <ul><li>Billing Schemes </li></ul><ul><li>Payroll Schemes </li></ul><ul><li>Expense Reimburs...
Inventory/Other Assets <ul><li>Misuse </li></ul><ul><li>Larceny </li></ul>
Case Study – Fraudulent Disbursements <ul><li>Combination of Expense Reimbursement and Billing By Shell Company </li></ul>...
Corruption <ul><li>Conflicts of Interest </li></ul><ul><li>Bribery </li></ul><ul><li>Illegal Gratuties </li></ul><ul><li>E...
Case Study – Conflict of Interest <ul><li>Purchasing Agent Working As Travel Agent  </li></ul><ul><li>Company Overbilled 1...
Fraudulent Financial Statements <ul><li>Asset/Revenue Overstatements/Understatments </li></ul><ul><ul><li>Timing Differenc...
Case Study –Fraudulent Financial Statements <ul><li>Crazy Eddie’s </li></ul><ul><ul><li>Skimming </li></ul></ul><ul><ul><l...
Detection of Fraud Schemes <ul><li>Initial Detection of Occupational Frauds </li></ul>
Prevention & Detection of Fraud <ul><li>Internal Control </li></ul><ul><li>Reconcile All GL Accounts  </li></ul><ul><li>Ac...
Internal Control <ul><li>Segregation of Duties </li></ul><ul><ul><li>Do Not Allow One Person To Have Recorded Keeping Resp...
Account Reconciliation <ul><li>Bank </li></ul><ul><ul><li>Segregation of Duties </li></ul></ul><ul><ul><li>Timely </li></u...
Accounting (QB) Software Controls <ul><li>Roles and Passwords to Limit Access </li></ul><ul><ul><li>Only Enough Access to ...
Accounting (QB) Software Controls <ul><li>Lock Prior Periods </li></ul><ul><ul><li>Change Closing Date to Match Bank Recon...
Accounting (QB) Software Controls <ul><li>Review Reports </li></ul><ul><ul><li>Voided/Deleted Transactions </li></ul></ul>...
Ratio Analysis <ul><li>Look For Unreasonable Relationships </li></ul><ul><li>Compare to Industry Standards </li></ul><ul><...
Digital Analysis <ul><li>Benford’s Law </li></ul><ul><li>Highest, Next Highest </li></ul><ul><li>Same, Same, Different </l...
Benford’s Law
Benford’s Law
Tip Lines <ul><li>Most Effective </li></ul><ul><li>Confidential </li></ul><ul><li>No Penalty For Good Faith Reporting </li...
Other Considerations <ul><li>Be Suspicious of Employees  </li></ul><ul><ul><li>First to Arrive, Last to Leave </li></ul></...
Other Considerations <ul><li>Expense Reimbursement Policy </li></ul><ul><ul><li>No Company Credit Cards </li></ul></ul><ul...
I Think Someone is Stealing – Now What? <ul><li>Don’t React Emotionally </li></ul><ul><ul><li>Need to Find out if any Acco...
I Think Someone is Stealing- Now What? <ul><li>Do You Have Fraud Policies & Procedures? </li></ul><ul><ul><li>If Yes, Make...
Summary <ul><li>Fraud Increasing, Especially In This Economy </li></ul><ul><li>Adversely Impacts Company’s Survival & Empl...
 
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Tips for Recognizing Fraud

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Transcript of "Tips for Recognizing Fraud"

  1. 1. The Detection and Prevention of Fraud ( Or The Company You Save May Be Your Own) Dennis L. Thompson, CPA, CFE
  2. 2. Today’s Agenda <ul><li>Occupation Fraud – Three Major Categories </li></ul><ul><ul><li>Case Studies </li></ul></ul><ul><li>Elements of Internal Control </li></ul><ul><li>Use of Accounting Software </li></ul><ul><li>Other Considerations to Deter Fraud </li></ul><ul><li>I Think I am a Victim of Fraud – Now What? </li></ul>
  3. 3. Occupation Fraud Defined <ul><li>The Use of One’s Occupation </li></ul><ul><li>For Personal Enrichment </li></ul><ul><li>Through the Deliberate Misuse or Misapplication </li></ul><ul><li>Of the Employing Organization’s </li></ul><ul><li>Resources or Assets </li></ul>
  4. 4. Characteristics of Fraud <ul><li>Material False Statement </li></ul><ul><li>Person who uttered it knows it is False </li></ul><ul><li>Reliance on False Statement by Others </li></ul><ul><li>Other Person is Damaged Financially </li></ul>
  5. 5. Three Fraud Categories <ul><li>Asset Misappropriations </li></ul><ul><li>Corruption </li></ul><ul><li>Fraudulent Financial Statements </li></ul>
  6. 6. How Occupational Fraud is Committed <ul><li>Occupational Frauds by Category — Frequency </li></ul>
  7. 7. How Occupational Fraud is Committed <ul><li>Occupational Frauds by Category — Median Loss </li></ul>
  8. 8. Fraud Triangle – Donald Cressey <ul><li>Opportunity </li></ul><ul><li>Pressure </li></ul><ul><li>Rationalization </li></ul>
  9. 9. Opportunity <ul><li>Trusted Employee </li></ul><ul><li>Necessary Skills </li></ul><ul><li>Weak Internal Controls </li></ul>
  10. 10. Pressure – Non-sharable Problems <ul><li>Living beyond Means </li></ul><ul><li>Gambling Losses </li></ul><ul><li>Medical Expenses </li></ul>
  11. 11. Rationalizations <ul><li>Just Borrowing </li></ul><ul><li>Employer is Unfair </li></ul><ul><li>Unique Circumstances </li></ul>
  12. 12. Asset Misappropriations – Most Common <ul><li>Cash </li></ul><ul><li>Inventory/Other Assets </li></ul>
  13. 13. Cash Receipts <ul><li>On Book </li></ul><ul><ul><li>Larceny </li></ul></ul><ul><li>Off Book </li></ul><ul><ul><li>Skimming </li></ul></ul>
  14. 14. Fraudulent Cash Disbursements <ul><li>Billing Schemes </li></ul><ul><li>Payroll Schemes </li></ul><ul><li>Expense Reimbursements </li></ul><ul><li>Check Tampering </li></ul><ul><li>Register Disbursements </li></ul>
  15. 15. Inventory/Other Assets <ul><li>Misuse </li></ul><ul><li>Larceny </li></ul>
  16. 16. Case Study – Fraudulent Disbursements <ul><li>Combination of Expense Reimbursement and Billing By Shell Company </li></ul><ul><li>Poor Internal Controls </li></ul><ul><ul><li>Not enforcing Reimbursement Policy </li></ul></ul><ul><ul><li>Not monitoring Vendor Lists </li></ul></ul><ul><ul><li>Employees Picking Up “Vendor Checks” </li></ul></ul>
  17. 17. Corruption <ul><li>Conflicts of Interest </li></ul><ul><li>Bribery </li></ul><ul><li>Illegal Gratuties </li></ul><ul><li>Economic Extortion </li></ul>
  18. 18. Case Study – Conflict of Interest <ul><li>Purchasing Agent Working As Travel Agent </li></ul><ul><li>Company Overbilled 10% - 30% on Travel </li></ul>
  19. 19. Fraudulent Financial Statements <ul><li>Asset/Revenue Overstatements/Understatments </li></ul><ul><ul><li>Timing Differences </li></ul></ul><ul><ul><li>Fictitious Revenue </li></ul></ul><ul><ul><li>Concealed Liabilities & Expenses </li></ul></ul><ul><ul><li>Improper Disclosures </li></ul></ul><ul><ul><li>Improper Asset Valuations </li></ul></ul>
  20. 20. Case Study –Fraudulent Financial Statements <ul><li>Crazy Eddie’s </li></ul><ul><ul><li>Skimming </li></ul></ul><ul><ul><li>Fictitious Revenues </li></ul></ul><ul><ul><li>Inventory Overstatement </li></ul></ul>
  21. 21. Detection of Fraud Schemes <ul><li>Initial Detection of Occupational Frauds </li></ul>
  22. 22. Prevention & Detection of Fraud <ul><li>Internal Control </li></ul><ul><li>Reconcile All GL Accounts </li></ul><ul><li>Accounting Software Controls </li></ul><ul><li>Ratio Analysis </li></ul><ul><li>Digital Analysis </li></ul><ul><li>Tip Lines </li></ul><ul><li>Other Considerations </li></ul>
  23. 23. Internal Control <ul><li>Segregation of Duties </li></ul><ul><ul><li>Do Not Allow One Person To Have Recorded Keeping Responsibility And Physical Custody of Asset </li></ul></ul><ul><li>Have Procedures Documented </li></ul><ul><ul><li>Reveals Potential Weakness </li></ul></ul>
  24. 24. Account Reconciliation <ul><li>Bank </li></ul><ul><ul><li>Segregation of Duties </li></ul></ul><ul><ul><li>Timely </li></ul></ul><ul><ul><li>Bank Statement Mailed to Owner </li></ul></ul><ul><ul><li>Review Canceled Checks for Signatures, Payees & Endorsements </li></ul></ul><ul><li>Credit Card </li></ul><ul><ul><li>Review for Charges </li></ul></ul><ul><ul><li>Statement to Owner </li></ul></ul>
  25. 25. Accounting (QB) Software Controls <ul><li>Roles and Passwords to Limit Access </li></ul><ul><ul><li>Only Enough Access to do Job </li></ul></ul><ul><li>Review Audit Log </li></ul><ul><ul><li>Look for Deletions </li></ul></ul>
  26. 26. Accounting (QB) Software Controls <ul><li>Lock Prior Periods </li></ul><ul><ul><li>Change Closing Date to Match Bank Reconcilation </li></ul></ul><ul><ul><li>Password Protect Closing Date </li></ul></ul><ul><ul><li>Only Admin Can Change Date </li></ul></ul><ul><li>Budgets </li></ul><ul><ul><li>Facilitates Analytical Procedures </li></ul></ul>
  27. 27. Accounting (QB) Software Controls <ul><li>Review Reports </li></ul><ul><ul><li>Voided/Deleted Transactions </li></ul></ul><ul><ul><li>Closing Date Exception Report </li></ul></ul><ul><ul><li>A/R and A/P Aging Analysis </li></ul></ul><ul><ul><li>Bank Reconciliation Discrepancy </li></ul></ul><ul><ul><li>Budget Vs Actual </li></ul></ul><ul><ul><li>Missing Checks </li></ul></ul>
  28. 28. Ratio Analysis <ul><li>Look For Unreasonable Relationships </li></ul><ul><li>Compare to Industry Standards </li></ul><ul><li>Compare to Previous Periods </li></ul>
  29. 29. Digital Analysis <ul><li>Benford’s Law </li></ul><ul><li>Highest, Next Highest </li></ul><ul><li>Same, Same, Different </li></ul>
  30. 30. Benford’s Law
  31. 31. Benford’s Law
  32. 32. Tip Lines <ul><li>Most Effective </li></ul><ul><li>Confidential </li></ul><ul><li>No Penalty For Good Faith Reporting </li></ul>
  33. 33. Other Considerations <ul><li>Be Suspicious of Employees </li></ul><ul><ul><li>First to Arrive, Last to Leave </li></ul></ul><ul><ul><li>Never Want to Take a Vacation </li></ul></ul><ul><ul><li>Changes in Lifestyle Not Supported by Salary </li></ul></ul>
  34. 34. Other Considerations <ul><li>Expense Reimbursement Policy </li></ul><ul><ul><li>No Company Credit Cards </li></ul></ul><ul><ul><li>Employees Use Their Cards & Get Reimbursed </li></ul></ul><ul><li>Background Checks on New Hires </li></ul><ul><li>Backup Data </li></ul>
  35. 35. I Think Someone is Stealing – Now What? <ul><li>Don’t React Emotionally </li></ul><ul><ul><li>Need to Find out if any Accomplices </li></ul></ul><ul><li>Call Your Attorney </li></ul><ul><ul><li>Possible Legal Problems </li></ul></ul><ul><ul><ul><li>Invasion of Privacy </li></ul></ul></ul><ul><ul><ul><li>Slander & Libel </li></ul></ul></ul><ul><ul><ul><li>False Imprisonment </li></ul></ul></ul>
  36. 36. I Think Someone is Stealing- Now What? <ul><li>Do You Have Fraud Policies & Procedures? </li></ul><ul><ul><li>If Yes, Make Sure You Follow Them </li></ul></ul><ul><ul><li>If No, Create Them for Future Fraud </li></ul></ul><ul><li>Contact Certified Fraud Examiner </li></ul>
  37. 37. Summary <ul><li>Fraud Increasing, Especially In This Economy </li></ul><ul><li>Adversely Impacts Company’s Survival & Employee Jobs </li></ul><ul><li>No Stereotypical Fraudster – Sometimes Someone You Would Never Suspect </li></ul>
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