Fraud Awareness for Managers by Ralph Summerford, Forensic/Strategic Solutions

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Fraud Awareness for Managers by Ralph Summerford, Forensic/Strategic Solutions

  1. 1. Fraud Prevention Awareness For Managers State of MontanaRalph Q. Summerford, CPA, ABV, CFF, CFE, CIRA Forensic/Strategic Solutions, PC Birmingham, Al www.forensicstrategic.com
  2. 2. Profile of theWhite Collar Criminal 2
  3. 3. Congratulations Montana!International Fraud Awareness Week, November6-12, 2011A Week Dedicated to Fraud Awareness,Detection and PreventionFraud Prevention Awareness for Managers ofthe State of Montana 3
  4. 4. Interesting Fraud FactsInvolves confidence Distinguishes fraud from other crimes Best vendor/best employee/best friendInvolves all ways to gain advantageIncludes surprise, trick, cunning, deceivingor any method to cheat another 4
  5. 5. Four Elements to FraudCause1. Material misstatement (a lie)2. RelianceEffect3. Knowledge of misstatement4. Damages suffered 5
  6. 6. Interesting Fraud FactsFraud is limited Greed TimePerpetrators never saveNo dead bodies – only symptomsAll frauds start small 6
  7. 7. Interesting Fraud FactsNo small fraud$700+ BillionLevels of honesty decreasingAlways show up in numbersUsually show up in behaviorSurveys on fraud 7
  8. 8. Why Is Fraud Committed? •Need Situational Pressures Opportunity to commit fraud Belief -- Won’t get caught•Opportunity •Rationalization 8
  9. 9. How Fraud is DiscoveredTips and complaints (40%)Accident (12%)Audit (15%/5%) “Where were the accountants?” “Not my responsibility”Who is responsible? 9
  10. 10. 10
  11. 11. How Do You Know It’s Fraud & What Do You Report?FraudWasteAbuse 11
  12. 12. Footprints of the Beast
  13. 13. 13
  14. 14. Behavioral Red Flags PercentLiving beyond means 43Financial difficulties 36Control issues (share duties) 23Close with vendor 22Wheeler dealer attitude 19Divorce/family issues 18Irritability, suspiciousness,defensiveness 14Addiction 12 14
  15. 15. Behavioral Red Flags PercentRefusal to take vacations 10Past employment problems 9Complaints - inadequate pay 8Excessive pressure 8Legal problems 6Instability in life circumstances 6Peer/family pressure 5Complaints - lack authority 5Source: ACFE 2010 Report to the Nations 15
  16. 16. Montana Fraud Hotline 800-222-4446The Legislative Auditor administersEnables state employees and public to report Illegal acts Misuse or abuse of state property or time Gross misconduct, incompetence or inefficiency 16
  17. 17. SCHEMES Bribery Illegal Gratuities Economic Extortion Conflicts of Interest 17
  18. 18. BRIBERY Giving or receiving (or offering or soliciting) Any “thing of value” To influence An official act 18
  19. 19. Title 18, USC Section 201Prohibits a government employee from directly or indirectly receiving or soliciting anything of value in exchange for being influenced in the performance or non-performance of any official act, including giving testimony, or in exchange for committing fraud. 19
  20. 20. COMMERCIAL BRIBERYGiving or receivingAny thing of valueTo influenceA business decisionWithout the employer’sknowledge and consent 20
  21. 21. Illegal GratuityGiving or receivingAny “thing ofvalue”For or because ofAn official act 21
  22. 22. CORRUPTIONEconomic Extortion Conflict of Interest & Demand of Kickbacks payment An agent taking an interest in a transaction To refrain from Which is actually or discrimination potentially adverse to against the principal A business decision Without disclosure to the principal 22
  23. 23. METHODS OF MAKING ILLEGAL PAYMENTS Gifts, travel and entertainment Wine and liquor Clothes and jewelry Sexual favors Lavish entertainment Paid vacations Free transportation Free use of resort facilities Gifts of briber’s inventory and services 23
  24. 24. METHODS OF MAKING ILLEGAL PAYMENTS Cash payments Checks Hidden interest Other methods w Loans w Payment of credit cards w Transfer at other than fair market w Favorable treatment 24
  25. 25. Fraudulent DisbursementsBilling SchemesShell companiesOverbilling involving existing vendorsPersonal purchasesMotive good or bad Budgeted funds Budget cuts 25
  26. 26. Fraudulent DisbursementsExpense Reimbursement Mischaracterized Overstated Fictitious Multiple 26
  27. 27. Fraudulent DisbursementsPayroll Ghost employees Falsified hours and salary Commission schemes 27
  28. 28. What Risk Managers Tell You to Watch For & WHYSegregation of duties 28
  29. 29. Man Who BroughtDown BaringsBankNick Leeson madeunauthorizedtrades in financialcurrencies thatresulted in $1.3billion losses andthe collapse of oneof the world’slargest banks. 29
  30. 30. Rogue TraderHits FirmUBS AG said a rogue traderracked up as much as $2billion in losses using thefirms own money, a dramaticadmission that raised newquestions about the ability ofone of the world‘s largestbanks to manage risk andglobal regulators ability tomonitor it.The losses stemmed fromunauthorized derivatives- Kweku Adobolitrading bets.Wall Street Journal Blog 9/15/2011 30
  31. 31. What Risk Managers Tell You to Watch For & WHYRotate job responsibilitiesLifestyle Symptoms When people steal, they spendPhysical safeguardsIndependent checksReview authorizations 31
  32. 32. What Risk Managers Tell You to Watch For & WHYOverride of controlsInadequate accounting system 32
  33. 33. Detection – Red FlagsComplaints from employees or othervendorsAfter bids are rejected as too high, the samebidders re-bid in the same bid rank.Bid prices drop when a new bidder submits abid.Qualified contractors refrain from bidding.Certain contractors always bid against eachother or never bid against each other 33
  34. 34. Detection – Red FlagsSuccessful bidder subcontracts to losingbiddersGeographical or rotational pattern to winningbiddersDifferent bidders make same mathematical orspelling errors 34
  35. 35. Detection – Red FlagsBidders frequently change prices bycomparable amounts at about same timeCompetitors regularly socialize, holdmeetings, visit each others’ offices, traveltogetherStatements acknowledging territories, suchas, “we do not bid in ‘X’ county” 35
  36. 36. Detection – Red FlagsWinning vendor always last to bidNew vendors receive disproportionatenumber of winning bidsUnusual or “one time” extra chargesExpenses increased considerably for noapparent reason 36
  37. 37. Detection – Red FlagsUnusual number of invoices submitted on same dayWake County Public Schools – North Carolina 37
  38. 38. Table of Invoices From Barnes Motor and Parts Where Over 50 Invoices Were Submitted On One Day No. Invoices Total of Submitted This Date On Invoices Invoices Date 5/8/2002 $226,945.69 113 1/9/2003 146,667.97 76 5/26/2003 53,108.59 50 6/2/2003 144,766.59 74 6/4/2003 550,262.68 282 6/5/2003 173,395.40 91 6/6/2003 701,979.40 348 6/9/2003 479,341.09 236 6/10/2003 909,266.47 466 6/11/2003 122,277.30 68 2/9/2004 75,330.12 65 2/12/2004 191,411.84 104 2/19/2004 76,509.21 60 38 3/1/2004 71,614.04 64 4/6/2004 76,312.23 53
  39. 39. Table of Invoices From Barnes Motor and PartsWhere Over 50 Invoices Were Submitted On One Day No. Invoices SubmittedDate On Invoices Total of Invoices This Date 4/6/2004 76,312.23 53 5/14/2004 69,931.86 53 5/18/2004 108,385.68 80 5/19/2004 135,584.65 103 5/20/2004 125,868.41 87 5/24/2004 267,257.65 150 5/26/2004 168,728.63 124 6/9/2004 619,387.29 397 6/10/2004 406,594.44 198 6/11/2004 267,317.66 304 39
  40. 40. Detection – Red FlagsInvoice numbers in unbroken consecutive sequenceWake County Public Schools 40
  41. 41. Barnes Motor and Parts Number Invoice Total of of % Date Invoices Invoices Consecutive 6/4/2003 550,262.68 282 99% 6/6/2003 701,979.40 348 97% 6/9/2003 479,341.09 236 96%6/10/2003 909,266.47 466 98%5/24/2004 267,257.65 150 89%5/26/2004 168,728.63 124 90% 6/9/2004 619,387.29 397 93%6/10/2004 406,594.44 198 91%6/11/2004 267,317.66 304 98% 41
  42. 42. Positioning to Turn – into +“Wake school system receivespositive audit”“Wake Auditors say the schoolsystem already has a program tocheck against fraud” 42
  43. 43. Detection – Red FlagsShortagesInvoices from vendor consistently just underthe threshold for higher review and approvalVendor salespersons make frequentunexplained visits to purchasing employeesQuality of goods declines 43
  44. 44. 44
  45. 45. Final Quote for the Day“ I trust everybody – but I always want to cut the cards!” Mark Twain 45
  46. 46. Let’s Go to the Beach 46

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