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Annual Fraud Update


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Sharon Hamrick presented the Annual Fraud Update for the IMA - Chattanooga chapter.

Published in: Business, Economy & Finance
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Annual Fraud Update

  1. 1. A Global Reach with a Local Perspective www.decosimo.comHOW DID THIS HAPPEN? WE HAVE CONTROLS! Sharon Hamrick – SHARONHAMRICK@DECOSIMO.COM
  2. 2. Fraud - A Hot Topic Everywhere Madoff, Medicare, healthcare, mortgage fraud NPR – May 1st – “The Psychology of Fraud: Why Good People do Bad Things” Yahoo CEO – Fraud on his CV Controller of Dixon, IL, town of 16,000, accused of misappropriating $53 million over 21 years
  3. 3. The use of one’s occupation for personal enrichment The misconduct of employees, managers and executives
  4. 4. Behavioral Red Flags Exhibited 81% of fraudsters exhibited at least one of the listed behavioral red flags:  36% Living beyond their means  27% with financial difficulties  19% with unusually close associations with vendors or customers  18% had excessive control issues with their duties
  5. 5.  41% of perpetrators are employees; 38% of perpetrators are managers Median losses of frauds by employees = $60,000; by managers =$182,000 Frauds lasted a median of 18 months before being detected 49% of victim organizations in the study had not recovered any losses dueto fraud 38% of perpetrators were between the ages of 36 and 45 Median losses by gender: Males $200,000; by female fraudsters $91,000 Executive/upper management caused largest fraud losses
  6. 6. OpportunityIncentive/Pressure Rationalization
  7. 7. Cash Frauds – Case 1 Cash received and deposited at remote locations  Suspect was responsible for making daily deposits  Cash collections were logged and records prepared by front- desk employee who placed all together in the office safe  Perpetrator actually made deposits at the bank, but removed cash from deposit  Deposits made to central checking account  Supporting logs and documentation were forwarded to home office; copies of deposit slips were filed at remote office  Company experiencing significant growth and was delinquent in bank reconciliations
  8. 8. Cash Frauds – Case 1 How was the perpetrator caught?  Another employee noticed a deposit which she had prepared on the perpetrator’s desk with all supporting documentation attached, but no cash attached  She notified the manager of her concerns
  9. 9. Cash Frauds – Case 2 Payroll deposits made for business owner  Bookkeeper took owner’s bi-weekly payroll check to bank for deposit, bringing him back $500 cash  Began to draw $600, $800, $1,000 from his check, while still delivering his $500  Eventually began to cash most of his checks  She also reconciled his personal checking – to cover the lost deposits, she transferred funds from his retirement account  She even generated fake bank statements so she could give him a monthly reconciliation of his account
  10. 10. Cash Frauds – Case 2 How was the perpetrator caught?  Owner’s investment advisor dropped in for an unscheduled visit and asked the owner about putting money in his retirement account for investment and growth
  11. 11. Credit Card Fraud Company credit cards issuance and cancellation  Nationwide sales staff were issued company AmEx card for business and travel expenses  Employees required to submit receipts with expense reports validating charges  Each sales person was emailed a copy of his personal AmEx charges monthly for review  Accounting manager responsible for issuing new cards and cancelling cards of terminated employees
  12. 12. Credit Card Fraud  Accounting manager also responsible for various online payments, including AmEx  She kept a card for a terminated employee and gave it to her husband  He used her employee ID card to fabricate a card for himself with his picture and the terminated employee’s name in case he was asked for ID  Although each employee with a card saw their own charges monthly, no one except the perpetrator saw the entire AmEx statement
  13. 13. Credit Card Fraud How was the perpetrator caught?  Her husband attempted to use the card to purchase a car from a used car dealer who, in the name of caution, decided to call the company before completing the transaction
  14. 14. Check Tampering/Purchasing Fraud Vendor checks signed by business owner converted to bookkeeper’s personal use  Bookkeeper prepared accounts payable checks and gave to owner to sign along with supporting invoices attached for his review  After reviewing and signing, he gave back to her all invoices for filing and checks for mailing  She changed numerous payees to her own name  To keep vendors paid, she would periodically pay from statements, and busy owner did not notice  Recorded some checks as voided in general ledger; used reconciling items on bank reconciliation and made journal entries to dispense check amounts among various expense accounts
  15. 15. Check Tampering/Purchasing Fraud How was the perpetrator caught?  She posted one of the checks to a fixed asset general ledger account, and the plant manager began looking for the invoice and payment while the perpetrator was out for surgery
  16. 16. Payroll Fraud Terminated employees not removed timely from payroll  Large manufacturing company with several hundred plant employees  Payroll clerk had the responsibility to remove terminated employees from payroll system  Payroll clerk also printed payroll checks and put checks in the mail or gave to supervisor for distribution  Rather than removing employees as of their termination date, he would process one additional check, feeling sure the employees would not realize their W-2 had a few extra days or 1 extra week
  17. 17. Payroll Fraud How was the perpetrator caught?  Had several paychecks in his coat pocket and another employee accidentally knocked over his coat rack. The checks fell from his pocket
  18. 18. Receivables Fraud Lapping scheme perpetrated by a/r clerk  Customer payments were diverted to clerk’s personal use  To cover diversion, she posted another customer’s payment to that customer’s account and continued to roll or lap payments  As she diverted additional checks, the scheme became more and more complicated to maintain and more and more important for her to be there every day to keep scheme rolling
  19. 19. Receivables Fraud How was the perpetrator caught?  Employee was in a serious automobile accident and had to miss an extended period of work  Another employee had to step in and perform her duties  As soon as another person tried to post payments, the scheme unraveled and was revealed
  20. 20. Inventory Fraud/Misappropriation Employee stealing inventory for resale  Plant manager responsible for ordering inventory and scheduling shift employees  Plant manager scheduled after-regular hours pick up of empty containers for resale  Plant staff for 2nd shift consisted of only a few employees who regularly worked that shift  Used containers were refilled with inventory, loaded on a truck from the container purchaser, and the proceeds of reselling inventory were split among employees and truck driver
  21. 21. Inventory Fraud/Misappropriation How was the perpetrator caught?  Volume of inventory being taken grew to such a level that assuming differences were due to waste became unacceptable  New controller with a strong manufacturing background was hired  Spending patterns of plant manager grew to a level that they were not consistent with income of him and his wife
  22. 22.  Trust – especially in long-term employees Rapid growth of company, while increase in staffand adjustments of duties lagged behind Lack of segregation of duties Lack of independent checks, especially arisingfrom becoming lax about performing these checksregularly and thoroughly Lack of authorization and no negativeconsequences Overriding of existing controls Inadequacy of the accounting system No requirement for employees to take vacation
  23. 23. EMPLOYEE RED FLAGS COMMON IN THESE CASES Employee lifestyle changes Significant personal debt and credit problems Behavioral changes Very protective of files, work productivity Refusal to take vacation or sick leave Lack of segregation of duties in high-risk area
  24. 24. OTHER RED FLAGS• Reluctance to provide information • Unexpected overdrafts or declines to auditors or outside accounting in cash balances, inventory, service provider receivables• Photocopied or missing • Unexplained variations in expense documents accounts• Decisions dominated by an • Accounting personnel are lax or individual or small group inexperienced• Excessive number of year-end • High employee turnover rate transactions • Compensation is out of proportion• Complaints by customers or • Decentralization without adequate vendors monitoring• Weak internal control environment
  25. 25. So What Would Have Helped? Monitoring of controls and segregation of duties in place Owner receipt of unopened bank statements or regular monitoring of account activity on line Monitoring of customer questions and complaints Required monitoring and verification of customer account writeoffs and adjustments Regular review of general journal entries by appropriate level of management Timely investigation of unusual variances in accounts Timely reconciliation of bank accounts by appropriate personnel
  26. 26. So What Would Have Helped? Review of bank reconciliations by appropriate personnel Use of location checking accounts with funds transferred to main checking by accounting department Don’t return signed vendor checks to the individual who prepared them and/or records them Review of payroll registers and approval of changes in the employee master file Comparison of number of employees to number of payroll checks processed Spending limits on credit cards Requiring employees to use their own credit card, submit receipts and reimbursing them for all business expenses
  27. 27. CONTACT INFO Sharon P. Hamrick, CPA•CFF, CFE Senior Manager, Decosimo Advisory Services 423-756-7100 The contents and opinions contained in this article are for informational purposes only. The information is not intended to be a substitute for professional accounting counsel. Always seek the advice of your accountant or other financial planner with any questions you may have regarding your financial goals.
  28. 28. A Global Reach with a Local Perspective www.decosimo.comQuestions?