Protecting Your Nonprofit From Fraud

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Dana Basney of Mayer Hoffman McCann P.C. presented on "Protecting Your Nonprofit From Fraud" at the AICPA National Not-for-Profit Financial Executive Forum. The conference was held in San Francisco, CA on October 22-24.

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Protecting Your Nonprofit From Fraud

  1. 1.   Not-for-Profit Financial Executive Forum Fraud In Non Profit Entities Dana Basney Session 20Speakers retain the copyright for all of the following materials. Any replication without written consent is unlawful.Comments and opinions expressed by the speaker do not necessarily reflect the positions, opinions or beliefs of the AICPA andshould not be construed or interpreted as such.The materials contained in this presentation should not be considered to be in the public domain. Speeches and presentationmaterials contained here are proprietary works protected by copyright to AICPA and/or to the individual or entity who presentedthe materials at the conference. All rights are reserved. The authorized use of materials on this page is limited to download forpersonal reference by authorized users of the conference materials download area. Reproduction, redistribution, reuse, repostingor resale by any party in any form, format or media without express permission is strictly prohibited. Permissions requests may bedirected to copyright@aicpa.org or to Thomas Robinson, Manager, Rights and Permissions at 919-402-4031.
  2. 2. Protecting YourNonprofit Organization From Fraud Dana BasneyMSBA, CPA, ABV, CVA, CIRA, CFF, CFE Managing Director of CBIZ MHM, LLC and Shareholder of Mayer Hoffman McCann P.C. 1 Dana Basney, MSBA, CPA, ABV, CIRA, CVA, CFF, CFE Dana Basney is a Managing Director of CBIZ MHM, LLC and a Shareholder of Mayer Hoffman McCann P.C. He has practiced public accounting for more than 37 years. He is in charge of CBIZ MHM San Diego’s litigation support, due diligence, and valuation departments. Dana holds a Bachelors Degree in Liberal Arts from Bates College in Lewiston, Maine and received a Masters Degree in Business Administration and Accounting from San Diego State University. Dana is a licensed CPA and a Certified Reorganization and Insolvency Accountant, as well as a Certified Valuation Analyst. He is a member of The American Institute of Certified Public Accountants, The California Society of Certified Public Accountants, The Institute of Managerial Accountants, The Association of Insolvency Accountants, The Institute of Business Appraisers, Inc., and the Bankruptcy Forum. He has served on the Family Law Bars Business Valuation Subcommittee and has previously chaired the San Diego Chapter of the CPA Society’s Ethic2s Committee and the San Diego Litigation Support Interest Group of the CPA Society. Dana has extensive litigation experience and has served as an expert witness in financial and valuation matters on numerous occasions as well as a court appointed mediator and special master. Dana is also an instructor with the UCSD Extension Program teaching Advanced Accounting Topics and CPA Society approved course on Professional Conduct & Ethics for Accountants. Dana may be reached at: dbasney@cbiz.com or 858.795.2018 2 20 - 1
  3. 3. Nonprofits Are A Major Economic Sector At 10.7 million workers as of 2010, nonprofit organizations employ the third largest workforce among U.S. industries, behind only retail trade and manufacturing. The above data was taken from, Holding the Fort: Nonprofit Employment during a Decade of Turmoil, a publication of Johns Hopkins Center for Civil Society Studies. The Center is part of the Johns Hopkins Institute for Policy Studies. 3Nonprofits Are a Significant Part of Our Economy The U.S. nonprofit sector employs 15 times more workers than the nation’s mining industry, nearly 10 times more workers than the agriculture industry, and about twice as many workers as the construction industry. The above data was taken from, Holding the Fort: Nonprofit Employment during a Decade of Turmoil, a publication of Johns Hopkins Center for Civil Society Studies. The Center is part of the Johns Hopkins Institute for Policy Studies. 4 20 - 2
  4. 4. Nonprofits Are a Significant Part of Our EconomyThe vast majority of nonprofit jobsare in three service fields - healthcare (57 percent), education (15percent), and social assistance (13percent). The above data was taken from, Holding the Fort: Nonprofit Employment during a Decade of Turmoil, a publication of Johns Hopkins Center for Civil Society Studies. The Center is part of the Johns Hopkins Institute for Policy Studies. 5 Nonprofits Are a Growing Part of Our EconomyDuring the 2007-2009 recession, nonprofitemployment grew in 45 of the 46 states on whichstate-specific data were available, while for-profitemployment declined in 45.Nonprofit employment also grew in all regions of thecountry from 2000 to 2010, with an average annualgrowth rate that ranged from 1.5 percent in the EastSouth Central region to 3.4 percent in the Mountainregion. During this same time span, for-profitemployment registered annual average declines inall but two of the regions, and the growth rate inthese two was no more than one-seventh as robustas the nonprofit one. The above data was taken from, Holding the Fort: Nonprofit Employment during a Decade of Turmoil, a publication of Johns Hopkins Center for Civil Society Studies. The Center is part of the Johns Hopkins Institute for Policy Studies. 6 20 - 3
  5. 5. Nonprofits Are a Significant Part of Our EconomyThe nonprofit sector has been growing steadily, both insize and financial impact, for more than adecade. Between 1999 and 2011, the number ofnonprofits has increased almost 31 percent; from1,202,573 million to 1,574,674 million today. The growthrate of the nonprofit sector has surpassed the rate ofboth the business and government sectors.In 2010, nonprofits contributed products and servicesthat added $779 billion to the nation’s gross domesticproduct; 5.4 percent of GDP. Nonprofits are also a majoremployer, accounting for 9 percent of the economy’swages, and over 10 percent of jobs in 2009. Source: The Urban Institute’s Center on Nonprofits and Philanthropy 7 Wherever there is money, there is fraud. 8 20 - 4
  6. 6. 5% to 7% of the Economy is Being Stolen! Estimates for fraud losses range from 5% to 7% of the U.S. economy. 9 5% to 7% of the Economy is Being Stolen!Fraud appears to be a growthindustry! Fraud losses were estimated to have been approximately $994 billion in 2008. Fraud losses were estimated to have been approximately $652 billion in 2006. Estimates range from 600 billion to almost a trillion dollars. 10 20 - 5
  7. 7. The Extent of Fraud in Nonprofits The extent of frauds in nonprofits is subject to debate and not well documented. There is some evidence that fraud is more prevalent in nonprofits then in for profits 11 The Extent of Fraud in NonprofitsA New York Times Report by StephanieStrom, stated that fraud and embezzlementin the nonprofit sector account for a loss of$40 billion a year, or roughly 13 percent ofphilanthropic giving. The article is based ona report recently published in the Nonprofitand Voluntary Sector Quarterly in 2008. 12 20 - 6
  8. 8. Financial Fraud is Higher in Nonprofit Organizations Than it is in Business or GovernmentA National Nonprofit Ethics Survey taken in 2007found that: Conduct that violates the law or an organization’s standards is on the rise, and in 2007 nonprofit violations have reached levels comparable to business and government organizations. Financial fraud is higher in nonprofit organizations than it is in business or government. Taken From the Ethic’s Resource Center’s National Non-Profit Ethics Survey of 2007 Ethics Resource Center 2345 Crystal Drive, Suite 201 Arlington, VA 22202 13 Fraud by NonprofitsNonprofit organizations can and do commit frauds.Fundraising is a particularly sensitive area that can beripe for fraud. Fraudulent fundraising practices include: Charging fundraising costs to programs to improve expense ratios scrutinized by donors, potential donors and charity watchdogs. Misrepresenting the portion of donations that will be used in charitable programs. Misrepresenting the extent of a charitable contribution deduction to which a contributor is entitled, such as in some car donation programs. Failing to comply with donor-imposed restrictions pertaining to the use of a gift. 14 20 - 7
  9. 9. Fraud by Nonprofits Other fraudulent practices by nonprofit organizations include: Knowingly failing to comply with Internal Revenue Service requirements related to housing. Allowances compensation reporting, knowingly misclassifying employees or using them as volunteers to avoid paying overtime. Using or selling donor data collected under false pretenses. 15 Fraudulent Financial ReportingFraudulent financial reporting is intentionally making falseassertions relating to financial statements. Examples include: False statements regarding compliance with specific requirements of funding sources. Charging of unallowable costs to grants and other false statements to government agencies.Fraudulent financial reporting is most often committed bymanagement and includes such misrepresentations as: Failing to disclose significant related party transactions. Failing to disclose noncompliance with debt requirements or lack of waiver of noncompliance from lender. Misclassifying restricted donations to mislead donors or charity watchdogs. Holding records open beyond the period end in order to inflate revenues. Misclassifying expenses to mislead donors and others regarding the funds used for programs. 16 20 - 8
  10. 10. Unique Concerns for NonprofitsIf an organization is to qualify for tax exempt status, theorganization‘s charter as well the organization musthave a legal, charitable purpose, i.e. the organizationmust be created to support educational, religious, orcharitable activities.– A nonprofit corporation must specify that no part of its assets shall benefit any of persons who are members, directors, officers or agents (its principals).These elements do not mean that the organizationcannot pay employees or contractors for work orservices they render to the organization. This limitationmeans that as long as the organization operates withinits exempt purposes and it maintains an endowment oruses any excess revenue to further develop its activitiesit will not be taxed by the Internal Revenue Service. 17 Unique Concerns for NonprofitsA surplus - that is, whatever part of its income is leftafter its operating expenses are paid, which might beconsidered similar to "profit" - must be spent on thecharitable or public purposes for which it wasorganized, not paid as a dividend or benefit to anyoneassociated with running or organizing it.The IRS has enacted intermediate sanctions shouldthe members of the organization engage in practicesthat may excessively benefit any of the organizationsmembers (or officers, directors, etc.) rather thanrevoking the organizations exempt status the I.R.S.may now levy a penalty on the organization forengaging in a transaction that resulted in a privateinurement or private benefit. 18 20 - 9
  11. 11. Unique Concerns for NonprofitsNot only must the organization meet the requirementsof the state where it organizes sets for nonprofits, butit must also meet complex I.R.S. regulations.– These regulations are used not only to determine if the organization is exempt from tax under the organizations activities as a nonprofit organization.– If the organization purpose is one of those described in §501(c)(3) of the Internal Revenue Code, it may apply for a ruling that donations to it are tax deductible to the persons or business entities who make them.– The organization itself will be exempt from taxation as long as it does not engage in unrelated business activities. 19 Issues for NonprofitsNonprofits are far less likely to be able torecover from frauds due to:− limited capital− lack of employee theft insuranceNonprofits depend on “trusted individuals”rather than systems of internal controls.Small organizations tend to havedisproportionately large losses from assetmisappropriation. 20 20 - 10
  12. 12. Frauds of Misappropriating Assets Nonprofits often deal in cash, which is the most likely asset to be misappropriated. Bank confirmations and reconciliations do not sufficiently cover the high risk area of cash assets. Balance Sheet Audits do not effectively test cash transactions. 21 Small Nonprofits Have Major Control ProblemsThe person responsible for collecting anddisbursing funds is also the individual whoprovides the financial reports.Many small organizations raise much oftheir funds in cash. Cash is more easilymisappropriated than checks.Small nonprofits are run by trusting andcommitted individuals. Sadly theseindividuals tend to be too trusting. 22 20 - 11
  13. 13. Common Nonprofit FraudsSkimming donationsUnauthorized fraudulent disbursementsPayment of personal expenses with theorganizations fundsCreating fraudulent tax losses through refundingdonationsOverstating program expensesOverstating Gifts in kind 23 Examples of Unrealistic Gifts in KindIn 2010 the Canadian Revenue Agency revoked the charitable registration ofThe Orion Foundation, a bogus AIDS charity purporting to help Africans. Itbought medicine for 30 cents per unit and valued it at $11.50 per unit, makingenough purchases to issue $91 million dollars in donor receipts. The auditorscould not tell if the medicine was actually received, used, or distributed inAfrica.MAP International in 2009 reported that it was distributing donated drugs fromOperation Blessing to the African nation of Ivory Coast. The GIK consisted oftwo shipments each of 7.5 million deworming pills worth nearly $80 millioneach. In other words they were claiming that a pill that can readily be boughtfrom multiple sources for as little as 2 cents is worth $10.66. This valuation isabsurd on its face because, according to WHO (World Health Organization), itwould represent over 60% of total Ivory Coast government spending on healthin 2009.AmeriCares in its 2009 audit counts as program services expense $42 milliondollars worth of GIK that it never distributed. Accounting rules allow charitiesto write-off expired or unusable GIK and count it as a program expense. The above material was published in the August 2011 issue of the Charity Rating Guide & Watchdog Report 24 20 - 12
  14. 14. AWP = “Ain’t Whats Paid” Charities have been using pharmaceutical pricing guides that determine average wholesale prices (AWP) based on an honor system of unconfirmed reports on prevailing prices. People in the field joke that AWP really stands for "aint whats paid." Some pharmaceutical companies have been sued for fraud for reporting AWP prices to the government to obtain inflated Medicare and Medicaid reimbursements for pharmacies and doctors. A partner at a major accounting firm told 2010 AICPA conference attendees that the drug pricing guide nicknamed the "red book," which has been frequently used by charities, valued deworming pills at $12 to $16 each even though she could go online and buy the same pills for ten cents. She said that some prices in the red book may be fine but that it is the responsibility of the charitys accountant to determine if the books listed prices are reasonable. The above material was published in the August 2011 issue of the Charity Rating Guide & Watchdog Report 25 Proper Control of Bank StatementsMany small nonprofits have one person handle all the finances – aclassic mistake! If an organization has a treasurer who collectsand disburses funds from a checking and/or savings account, themonthly bank statements should be sent directly to some otherofficer of the organization before it is passed on to the treasurer.The recipient of the bank statements should examine thecanceled checks to see that disbursements have been made toonly appropriate persons or vendors in reasonable amounts.Using this control would prevent the treasurer from writingchecks to himself.Note: this ounce of prevention will not work unless the personreceiving the statement actually opens the statement andexamines the canceled checks. If the person receiving thestatements just passes them along without opening the envelope,this sends absolutely the wrong message to the treasurer. 26 20 - 13
  15. 15. Two Signature Check Policy Require that every check have two signatures. Barring collusion, this would prevent someone writing checks out to himself. The requirement of having two signers on a check definitely can slow things down and prove cumbersome. But loss of efficiency and convenience is a reasonable price to pay for protecting an organization’s scarce resources. 27 Every Nonprofit Should Have BudgetsEvery organization should have an annual budget. The idea is to have areasonable expectation of revenues and expenses. With a budgetactual results can be compared with expected results. If actualexpenses are greater than expected this could be an indication thatinappropriate expenditures are being made. Similarly, if proceeds(particularly cash) are being deposited at less than expected levels thismight indicate that skimming is taking place.If the organization has cash fundraisers such as dinners, car washes,bingos and so on there ought to be budgets for each event. In the caseof fundraisers such as car washes, bingo games and the like it is fairlyeasy to test for cash theft. Some person, other than the personresponsible for handling and depositing the cash, ought to perform acount of the cars washed, bingo cards sold and apply this number tothe unit price to compute the expected amount of cash raised. 28 20 - 14
  16. 16. Check Out a Charity Before DonatingIf the donation is to be given to an unfamiliarcharity, the donor can make sure the charityis recognized as an approved charity.− The “Search Now” function at: http://www.irs.gov/charities/article/0,,id=96136,00.html can be accessed to determine if a charity is listed in Publication 78 as an approved charity.− A donor also can confirm an organization’s status by calling the IRS at 1-877-829-5500. 29Check Out a Charity Before DonatingCharity Watch (Formerly the American Institute ofPhilanthropy)P.O. Box 578460, Chicago, IL 60657TEL: 773-529-2300Internet: www.charitywatch.orgCharity Navigator1200 MacArthur BoulevardMahwah, NJ 07430TEL: 201.818.1288Internet: www.charitynavigator.orgGuideStar4802 Courthouse StreetSuite 220Williamsburg, VA 23188TEL: 757.229.4631Internet: www.guidestar.org 30 20 - 15
  17. 17. People tend to trust people who purport to work for charitable causes this makes it easier for these people to steal! 31 31 Ministers Will Steal!!!An ex-pastor convicted of embezzling more than $1 million fromhis former church was sentenced to five years in prison onWednesday.A judge found David Thompson guilty in September on severalcharges, including theft, money laundering and tampering withrecords.He faced a possible sentence of up to 90 years in prison.After he is released from prison, Thompson will serve anadditional five years on community control. He was also orderedto pay $733,000 in restitution.Thompson was convicted of embezzling from The World ofPentecost Church, located at 3431 East Main Street, between1998 and 2007.Prosecutors said Thompson spent church funds on luxury cars,a pool, a boat and hair treatments. 32 20 - 16
  18. 18. Ministers Will Steal!!! One angry church member told Thompson it would have hurt less if he held a gun to his head. "David, a senior citizen named Esther gave from her fixed income so you could drive a Hummer," said church member "You, David, are a wolf. You did not spare the flock. Instead, you fleeced it." Thompson insisted he never illegally spent church money but admitted he gave false financial reports to church members. During his trial, Thompson said he had the authority to use the funds. "I felt as the pastor and as the overseer I was mandated first and foremost from God and also from the bylaws that I was to take care of the welfare of the church, and I put more emphasis on the people versus a building," Thompson said in September. 33 Nuns Will Steal!!!Nun Accused of Embezzling$850,000 From College, ThenGambling It Away in Atlantic CityPublished December 11, 2010 - | FoxNews.comSister Marie Thornton charged with embezzling $850,000 from IonaCollege for gambling purposes.As Chief Financial Officer at Iona College in New Rochelle, N.Y. from 1999to 2009, Sister Marie Thornton, 62, bet her six-figure income and schoolmoney away during frequent trips to Atlantic City, federal prosecutorssaid.Thornton was arrested Thursday and pleaded not guilty in federal courtin Manhattan. She was released without posting bail.Sources confirmed to MyFoxNY that a former Iona basketball coach hassaid that Sister Marie definitely had a gambling problem. 34 20 - 17
  19. 19. Nuns Will Steal!!!Nun Accused of Embezzling, continuedThe indictment charges she turned in fake bills and used her college creditcard to steal money.A statement on the Iona College website clarifies that Iona College was notindicted, but rather a former employee.The statement also says that Iona College has gotten the most of the moneyback, though sources say insurance repaid the money, not sister Marie, whobet all her money on black.When Iona fired Sister Marie last year, it publicly said she left for medicalreasons. The college also never asked law enforcement to investigate. It onlycame out after Iona filed losses in its income tax return.Sources say Sister Marie is cloistered at the Sisters for St. Joseph Order,near Philadelphia. Part of its mission statement is "to raise consciousnessabout all forms of poverty.“Sister Marie faces 10 years in prison if convicted, but her lawyer said heexpects a resolution fair to all parties. 35 Ministers Will Steal!!!Pastor Convicted of Embezzlement – Sells Church to Buy aBMWMANTECA, CA - A church pastor pleaded guilty to charges ofembezzlement and is now awaiting sentencing. Randall Radic, 53,reportedly sold the church that he preached at for almost ten yearsso that he could purchase a BMW.The church was sold for $525,000 dollars. Pastor Randall Radic, wasalso accused of forging ownership documents to obtain loans on hishome, which is owned by the church. Prosecutors agreed to dropnine additional charges in exchange for Radics guilty plea.Radic now faces up to 18 months in prison and is scheduled forsentencing on March 16th. 36 20 - 18
  20. 20. Rabbis Will Steal!!!Rabbi Who Claimed to Rescue Holocaust Torahs Arrestedon Fraud ChargesWednesday, August 24, 2011FROM WTA.ORG –A rabbi who claimed that he rescued Torah scrolls lost during theHolocaust was arrested on fraud charges.Rabbi Menachem Youlus, founder of Save a Torah, was arrested onWednesday, charged with one count of mail fraud and one count of wirefraud. Federal prosecutors accused Youlus of embezzling money fromhis charity for personal use and fabricating stories of rescuing lostTorahs."Menachem Youlus called himself the Jewish Indiana Jones, but hisalleged exploits were no more real than those of the movie character heclaimed to resemble," said Preet Bharara, the U.S. attorney for theSouthern District of New York, in a statement. 37 Rabbis Will Steal!!!Rabbi, continuedThe U.S. Attorneys office stated that Torah scrolls that Younus claimedto have rescued had simply been purchased from local dealers andlacked any connection to the Holocaust. The office further stated thatduring many of the years Youlus claimed to be personally rescuingTorahs overseas, he had not even traveled internationally.The statement said that Save a Torah had raised $1.2 million incontributions from 2004 to 2010.Youlus gained public notoriety after a January 2010 Washington Postarticle raised doubts about the veracity of his claims."Menachem Youlus indictment is welcome news to all who areconcerned with the integrity of Holocaust memory," said MenachemRosensaft, Vice President of the American Gathering of JewishHolocaust Survivors and Their Descendants, in a statement. 38 20 - 19
  21. 21. Priests Will Steal!!!CHICAGO TRIBUNE - December 15, 2005BUFFALO GROVE, IL - Over five years, the business manager of a RomanCatholic parish in Buffalo Grove stole more than $600,000 in collections andother church funds to feed a gambling habit that cost at least $1.8 million,authorities said Wednesday.This was at least the sixth time in the last two years that authorities have filedcriminal charges against Chicago-area church personnel over the theft of funds.CHICAGO TRIBUNE - July 28, 2005CHICAGO -- The former leader of a Southwest Side Roman Catholic parish wassentenced to serve four years in prison Wednesday after pleading guilty tolaundering more than $1 million in pilfered collections.Providing a factual basis for the guilty plea, Assistant States Attorney WilliamDelaney said [name withheld] skimmed an average of $2,500 to $3,000 eachweek while serving as pastor of St. Bede between 1999 and last July. He initiallywould stash the stolen funds in his bedroom safe, without entering thedonations in the church books, Delaney said. 39 Point to Ponder If pastors, nuns, priests and rabbi’s steal – can you trust anybody? Answer: NO!!!! 40 20 - 20
  22. 22. Reporting Nonprofit FraudThe attorneys and auditors of the State Charitable Trusts Section of theCalifornia Attorney Generals Office investigate and bring legal actions againstcharities that misuse charitable assets. – If you have a complaint against a charity, they have a complaint form on their website.The Attorney General regulates charities and the professional fundraisers whosolicit on their behalf. – The purpose of this oversight is to protect charitable assets for their intended use and ensure that the charitable donations contributed by Californians are not misapplied and squandered through fraud or other means.Contact the Internal Revenue Service with your suspicions. – www.irs.gov, Form 3949-A. Print it out and mail it to: - Internal Revenue Service, Fresno, California 93888 – Supply specific examples, documentation (i.e.: copies of files, financial reports, transcripts, etc.) showing inconsistencies will bolster your credibility. If the IRS feels that you have provided adequate evidence of fraud, it will investigate. 41 Reporting Nonprofit FraudReport fraud suspicions to the U.S. Postal Inspection Service. If anonprofit organization has been sending out letters requestingcontributions that have not been used as promised, this constitutesmail fraud. You can fill out a complaint form at: − www.postalinspectors.uspis.gov/forms/MailFraudComplaint.aspxGo to the media. If you believe that a nonprofit organization hascommitted fraud, get in touch with a local newspaper or televisionnews station. − Be prepared to provide as much information as you can (documentation, financial reports and witnesses) to back up your claims. If they feel your suspicions are merited, they may do an investigative report that exposes the fraud.Lodge a complaint with the Better Business Bureau (BBB). − If, for example, you have been a contributor to a nonprofit organization and believe monies have been misused, go directly to BBBs website and file a complaint: − www.bbb.org/us/Charity-File-Complaint/ − Be aware that the BBB gives the charity or nonprofit a chance to deny or resolve the issue. 42 20 - 21
  23. 23. Data Mining – The Devil is in the Details! YOU HAVE TO LOOK FOR FISHY STUFF TO FIND IT! 43 Data Mining Look for sequential invoices. Vendor Invoice Invoice Vendor Name Invoice Date Class Number AmountAARONSEN GROUP MIS 479 55,329.40 4/1/2004AARONSEN GROUP MIS 491 55,156.39 4/4/2004AARONSEN GROUP MIS 480 58,216.64 5/6/2004AARONSEN GROUP MIS 481 58,597.60 6/1/2004AARONSEN GROUP MIS 482 61,719.88 7/8/2004AARONSEN GROUP MIS 484 63,497.32 9/2/2004AARONSEN GROUP MIS 485 79,862.72 10/2/2004AARONSEN GROUP MIS 486 76,299.80 11/2/2004AARONSEN GROUP MIS 487 72,158.24 12/2/2004AARONSEN GROUP MIS 488 78,833.20 1/3/2005AARONSEN GROUP MIS 489 63,739.48 2/10/2005AARONSEN GROUP MIS 490 61,465.08 3/3/2005AARONSEN GROUP MIS 492 55,161.34 5/4/2005AARONSEN GROUP MIS 493 52,159.59 6/1/2005AARONSEN GROUP MIS 494 55,590.49 7/5/2005AARONSEN GROUP MIS 495 56,752.46 8/1/2005 44 20 - 22
  24. 24. Data MiningLook for vendors and employees that share an address. Em ployee Em ployee Em ployee Invoice Vendor Nam e Vendor Address 1 Nam e Address 1 City Am ountSOUTH EDUCATORS 709 MALL BLVD X, Lynn 709 Mall Boulevard Savannah $ 1,917,034.00GREEN VAUGHN LLC 709 MALL BOULEVARD X, Lynn 709 Mall Boulevard Savannah 746,688.96HOLIDAY INN NEWTON 399 GROVE STREET X, Brian 399 Grove St. New ton 305,620.00THE INCENTIVE SHOP 706 DUNCAN AVENUE X, Phyllis 706 Duncan Ave. Pittsburgh 190,838.00ALBERT GREENSTONE 750 PARK AVENUE, NE X, Ophelia 750 Park Ave Atlanta 52,174.23R KEITH & LIZ SWICK RT 1 BOX 775 X, Elizabeth Route 1 Box 775 Clarksburg 24,874.06TESTA CONSULTING SERVICES INC 40 24TH STREET X, Vincent 40 24th St Pittsburgh 20,538.24CULINARY THOUGHTS 2927 AVENUE D. X, Michael 2927 Avenue D Katy 12,272.30DAYS LAWN CARE, INC 2343 NOTTINGHAM NW X, Toni 2343 Nottingham NW Massillon 11,523.60LOIS NENES 2927 AVENUE D X, Michael 2927 Avenue D Katy 11,000.00 45 Be Observant – Look Around!!! 46 20 - 23
  25. 25. Always Take the Staff Out to Lunch 47 Victim Organizations The above graph was reprinted with permission from the Association of Certified Fraud Examiners and is taken from their 2012 Report to the Nation, page 25. 48 20 - 24
  26. 26. The Perpetrators 49 The Fraud TriangleDr. Donald Cressey (1919-1987)His research showed that there are three elements that must be present foroccupational fraud. Opportunity The Fraud     Triangle Pressure Rationalization 50 20 - 25
  27. 27. PerpetratorsThe above graph was reprinted with permission from the Association of Certified Fraud Examiners and is taken from their 2012 Report to the Nation, page 40. 51 PerpetratorsThe above graph was reprinted with permission from the Association of Certified Fraud Examiners and is taken from their 2012 Report to the Nation, page 39. 52 52 20 - 26
  28. 28. PerpetratorsThe above graph was reprinted with permission from the Association of Certified Fraud Examiners and is taken from their 2012 Report to the Nation, page 56. 53The Perpetrator: EducationThe above graph was reprinted with permission from the Association of Certified Fraud Examiners and is taken from their 2012 Report to the Nation, page 51. 54 20 - 27
  29. 29. The Perpetrator: Age The above graph was reprinted with permission from the Association of Certified Fraud Examiners and is taken from their 2012 Report to the Nation, page 48. 55 Indications of FraudManagement is Dishonest Some companies will purposefully have poor accounting records because it causes difficulty for tax auditors, however their sloppy records will make it easier for employees to steal from the company. Dishonesty by management fosters dishonesty by employees. 56 20 - 28
  30. 30. Indications of Fraud 57 Indications of FraudThe Super Nice EmployeeIf you don’t trust someone they can’t steal from you! 58 20 - 29
  31. 31. It’s Hard For Us To Comprehend That Some Of These Nice People Belong In Jail! 59 Embezzlers Do Not Fit Criminal Stereotypes 20 - 30
  32. 32. Indications of FraudThe Super Conscientious Employee Thieves often appear to be the hardest working individuals in the office. As conscientious employees they earn more responsibilities. The more responsibilities they have, the more opportunities they have to steal. 61 Indications of Fraud Living beyond one’s means(not reasonable based on known sources of income)  Expensive cars  Vacations  Boats  Expensive art work or collections  Move into more expensive homes  Home remodeling  Expensive jewelry or clothing Source: Fraud Examination & Prevention. Albrecht & Albrecht. Page 98. 62 20 - 31
  33. 33. Indications of Fraud Embezzlers usually try to ingratiate themselves to management and their co- workers. The embezzler is typically the nicest, most caring and best liked person in the office. 63Everybody Loves Pandas And Embezzlers 20 - 32
  34. 34. Fraud PreventionIn thirty years of public accountingexperience, this CPA has developed a foolproof methodology to preventembezzlement.Every embezzlement I have ever seen couldbe prevented by following this simplerule….. 65 Fraud Prevention Only hire mean, grouchy, miserable people as employees. Hire people who you do not like, and therefore would never trust! 66 20 - 33
  35. 35. The Ideal Employee! 67 Fraud PreventionReview the company’s computer security. 20 - 34
  36. 36. Fraud PreventionDo background checks to insure the purity of your employees. 69 Fraud Prevention The above graph was reprinted with permission from the Association of Certified Fraud Examiners and is taken from their 2012 Report to the Nation, page 56. 70 20 - 35
  37. 37. Fraud Prevention Create an environment of honesty and integrity. There is something to be said for the old adage: “It’s hard to cheat an honest man.” 71 Fraud PreventionOrganizational Ethics Policy 72 20 - 36
  38. 38. The Culture of Corruption Writing for the American Sociological Review in 1940, Edwin Sutherland was the first to argue that the culture of an organization and of its industry contribute to white-collar crime. He outlined a theory of differential association, in which illegal behavior “is learned in direct or indirect association with those who already practice the behavior.” 73 Fraud Detection In the 2012 Report to the Nation on Occupational Fraud and Abuse, the percentage of frauddetected by outside auditors was only 3.3%, which is down from the 2010 report at 4.6%. The survey showed the initial detection of fraud was found to be as follows: The above graph was reprinted with permission from the Association of Certified Fraud Examiners and is taken from their 2012 Report to the Nation, page 14. 74 20 - 37
  39. 39. Fraud Prevention Employee HotlineThe above graph was reprinted with permission from the Association of Certified Fraud Examiners and is taken from their 2012 Report to the Nation, page 37. 75 Fraud DetectionThe above graph was reprinted with permission from the Association of Certified Fraud Examiners and is taken from their 2012 Report to the Nation, page 16. 76 20 - 38
  40. 40. Fraud PreventionEmployee and Vendor ValidationsRemember billing fraud is the mostcommon source of fraudulentdisbursements 77 Fraud PreventionDo periodic reviews of the internal controlsand surprise audits. Let them knowsomebody is watching. 78 20 - 39
  41. 41. Fraud Prevention Surprise AuditsThe above graph was reprinted with permission from the Association of Certified Fraud Examiners and is taken from their 2012 Report to the Nation, page 37. 79 Fraud Prevention 80 20 - 40
  42. 42. Fraud PreventionCross train employees to cover vacation time. 81 Fraud Prevention Job Rotation / Mandatory Vacation The above graph was reprinted with permission from the Association of Certified Fraud Examiners and is taken from their 2012 Report to the Nation, page 37. 82 20 - 41
  43. 43. Fraud Prevention Perform a certified audit. 83 Fraud Prevention External AuditsThe above graph was reprinted with permission from the Association of Certified Fraud Examiners and is taken from their 2012 Report to the Nation, page 37. 84 20 - 42
  44. 44. The Best Audit ProgramTHINK! 85 Fraud Losses and RecoveriesGet adequate theft insurance for peace of mind. 86 20 - 43
  45. 45. Questions?? ? ??????? 87 20 - 44

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