Occupational Fraud The Facts and How to Protect Your Organization Webinar_FINAL (002)
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Occupational Fraud The Facts and How to Protect Your Organization Webinar_FINAL (002)
- 1. a The Facts and How to Protect Your Organization Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 2. Agenda for Today's Webinar Audience Footprint of Today's Webinar Technology Features in Today's Webinar Recap Today's Learning Objectives Presentation by Ron P. Steinkamp Wrap Up and Conclusion Question and Answer End of Webinar Evaluation Survey Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 3. Technology Features in Today’s Webinar Asking Questions During the Webinar Polling Questions During the Webinar Articles and Handouts Evaluation Survey (end of webinar) Post Event Email Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 4. Occupational Fraud Defined ACFE Fraud Study Results & Recommendations Occupational Fraud Categories & Schemes Red Flags of Fraud Keys to Prevention & Detection Learning Objectives in Today’s Learning Program 1 2 3 4 5 Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 5. Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 6. Occupational Fraud The use of one’s occupation for personal enrichment through the deliberate misuse or application of the employing organization’s resources or assets. Source: Association of Certified Fraud Examiners Definition Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 7. Three General Categories: Asset Misappropriation - Employee steals or misuses an organization’s resources. Corruption - Employee’s use of influence in business transactions in a way that violates duty to the employer for the purpose of obtaining benefit for self or someone else. Financial Statement Fraud - Intentional misstatement or omission of material information in the organization’s financial reports. Categories of Occupational Fraud Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 8. Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 9. • Estimated organizations lose 5% of annual revenue to fraud. • Median loss in the study was $150,000. • Fraud lasted a median of 18 months. • Asset misappropriation schemes were the most common form of fraud, representing 83% of the cases and least costly at a median loss of $125,000. • Financial statement fraud schemes were the least common form fraud, representing less than 10% of the cases and most costly at a median loss at $975,000. • Corruption schemes fell in the middle, comprising just over 35% of cases and causing a median loss of $200,000 Summary of Findings Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 10. • Occupational frauds are most likely to be detected by tips (40%). • Small organizations are disproportionately victimized by occupational fraud. • Most commonly victimized industries: • Banking/financial services • Manufacturing • Government/public administration • Anti-fraud controls appear to help reduce the cost and duration of occupational fraud schemes. • High-level perpetrators cause the greatest damage to their organizations. Summary of Findings Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 11. • More than 75% of frauds were committed by individuals in one of six departments. • More than 85% of fraudsters had never been previously charged or convicted for a fraud-related offense. • Fraud perpetrators often display warning signs. • Nearly half of victim organizations do not recover any losses that they suffer due to fraud. Summary of Findings Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 12. Brown Smith Wallace LLP© 2016 All Rights Reserved. What is the most common way fraud is detected.?
- 13. How Are Frauds Detected? Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 14. Source of Tips Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 15. Source: 2016 ACFE Global Fraud Study Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 16. ACFE Fraud Tree Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 17. • Most common category of occupational fraud – over 83% of cases reported. • Least costly – median loss of $125,000. • Billing schemes were most common and check tampering the most costly (median loss of $158,000) Overall Asset Misappropriation Findings Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 18. 1. CheckTampering 2. Billing 3. Non-Cash 4. Payroll 5. Skimming 6. Expense Reimbursements 7. Cash Larceny 8. Cash on Hand 9. Cash Register Disbursements Asset Misappropriation Schemes Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 19. • Steal employer funds by intercepting, forging or altering a check drawn on employer bank account. • ACFE Global Fraud Study Findings – 11.4% of cases. – $158,000 median loss. – 24 months median duration. Asset Misappropriation - Check Tampering Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 20. • Cause employer to issue payment for fictitious goods or services, inflated invoices or invoices for personal purchases. • ACFE Global Fraud Study Findings: – 22.2% of cases. – $100,000 median loss. – 24 months median duration. Asset Misappropriation - Billing Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 21. • Employee steals or misuses any non-cash assets of the organization. • ACFE Global Fraud Study Findings: – 19.2% of cases. – $70,000 median loss. – 15 months median duration. Asset Misappropriation - Non-Cash Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 22. • Employee causes employer to issue a payment by making false claims for compensation. • ACFE Global Fraud Study Findings: – 8.5% of cases. – $90,000 median loss. – 24 months median duration. Asset Misappropriation - Payroll Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 23. • Employee steals an incoming payment from an organization before it is recorded on the organization’s books and records. • ACFE Global Fraud Study Findings: – 11.9% of cases. – $53,000 median loss. – 22 months median duration. Asset Misappropriation - Skimming Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 24. • Employee makes a claim for reimbursement of fictitious or inflated business expenses. • ACFE Global Fraud Study Findings: – 14% of cases. – $40,000 median loss. – 24 months median duration. Asset Misappropriation - Expense Reimbursements Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 25. • Employee steals cash receipts from an organization after it has been recorded on the organization’s books and records. • ACFE Global Fraud Study Findings: – 8.4% of cases. – $90,000 median loss. – 20 months median duration. Asset Misappropriation - Cash Larceny Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 26. • Employee steals cash kept on hand at organization. • ACFE Global Fraud Study Findings: – 11.5% of cases. – $25,000 median loss. – 15 months median duration. Asset Misappropriation - Cash on Hand Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 27. • Employee makes false entries on a cash register to conceal the fraudulent removal of cash. • ACFE Global Fraud Study Findings: – 2.7% of cases. – $30,000 median loss. – 13 months median duration. Asset Misappropriation - Cash Register Disbursements Disbursements Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 28. • 35.4% of cases reported. • Median loss of $200,000. • Median duration – 18 months. • Employees acting alone or in collusion with vendors/contractors. Overall Corruption Findings Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 29. • Conflicts of Interest • Bribery • Illegal Gratuities • Economic Extortion Corruption Schemes Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 30. • Employee has an undisclosed personal or economic interest in a matter that influences decisions/undermines professional responsibility to their organization. • Types – Purchasing – Sales Corruption - Conflicts of Interest Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 31. • Improper, undisclosed payments made to obtain favorable treatment. • Collusion between external and internal parties = makes it hard to detect. • Types: – Invoice Kickbacks – Bid Rigging Corruption - Bribery Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 32. • Giving or receiving something of value to reward a business decision. Corruption - Illegal Gratuities Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 33. • Employee, through the wrongful use of actual or threatened force or fear, demands money or other form of consideration to make a particular business decision. • Refusal to pay results in harm to the vendor. • “Pay up or else…..” Corruption - Economic Extortion Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 34. Brown Smith Wallace LLP© 2016 All Rights Reserved. What is the top red flag of fraud.?
- 35. Overall Financial Statement Findings • 10% of cases reported • Median loss of $975,000 • Median duration – 24 months • Occurs at higher levels/positions in the organization Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 36. • Fictitious Revenues Recording of sales of goods or services that did not occur. • Timing Differences Recording of sales of revenues or expenses in improper periods. • Improper Asset Valuations Manipulation of the valuation of a company’s assets to strengthen the balance sheet and financial ratios. • Concealed Liabilities and Expenses Understate liabilities and expenses to manipulate financial statements to make a company appear more profitable. • Improper Disclosures Management fails to disclose all significant (material) information appropriately in the financial statements. Financial Statement Fraud Schemes Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 37. Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 38. Fraud Triangle Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 39. 1. Living beyond their means – 45.8% 2. Financial difficulties – 30% 3. Unusually close association with vendor/customer – 20.1% 4. Wheeler-Dealer attitude – 15.3% 5. Control issues/unwillingness to share duties – 15.3% 6. Divorce/Family problems – 13.4% 7. Irritability, suspiciousness, or defensiveness – 12.3% 8. Addiction problems – 10% Behavioral Red Flags – Top 8 Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 40. • Middle aged male • Employed by the organization for a number of years • In a position of trust • Educated • Works in the financial department • Member of management • Driven by money and opportunity Typical Fraudster Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 41. Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 42. Anti-Fraud Culture Fraud Policy Fraud Awareness/Training HotlineAssess Fraud Risks Review/Investigation Improved Controls Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 43. • Set the tone at the top = Lead by Example • Create a positive workplace environment • Hire and promote appropriate employees • Code of Conduct • Discipline Anti-Fraud Culture Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 44. • Oversight Process – Audit Committee or Board of Directors – Management – Internal Auditor • Discipline Anti-Fraud Culture Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 45. • Demonstrate commitment to combating fraud • Apply to all Directors, Management, employees, consultants, vendors, contractors, etc. • What should it include? • Signed off and agreed to by the CEO and Board Chair. • Reviewed and updated regularly. • See the ACFE for an example Fraud Policy http://www.acfe.com/uploadedFiles/ACFE_Website/Content/documents/Sample_Fraud_Policy.pdf Fraud Policy Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 46. • All new employees should be trained at time of hiring on the Code of Conduct and Fraud Policy. • What should training include? • Refresher training periodically Fraud Awareness/Training Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 47. • Enable employees, vendors, customers and others to communicate concerns about known or suspected wrongdoing. • Telephone, email, internet. • Anonymous. • Adequately publicized. • Internal or External. • Complaint monitoring and investigation/resolution. Hotline Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 48. Brown Smith Wallace LLP© 2016 All Rights Reserved. When was the last time your organization conducted a fraud risk assessment.?
- 49. • Conduct an annual fraud risk assessment. – Assists management in systematically identifying where and how fraud may occur and who may be in a position to commit fraud – Focus on fraud schemes and scenarios to determine the presence of internal controls and whether or not the controls can be circumvented. – How do you conduct a fraud risk assessment? • Mitigate Fraud Risks – Make changes to activities and/or processes = transfer or eliminate the risks – Improve anti-fraud controls • Monitor Fraud Risks – Develop data analytics for management to use to monitor fraud risks – Utilize Internal Audit to conduct audits of risk areas. Assess Fraud Risks Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 50. • All concerns/suspicions of wrongdoing should be reviewed and determination made whether a fraud investigation is warranted. • Develop a policy for fraud reviews and investigations. • What should be included in a fraud policy? Fraud Review/Investigation Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 51. • Gather sufficient information and perform procedures necessary to determine: – Whether fraud has occurred – Loss or exposure associated with the fraud – Who was involved and how it happened • Must prepare, document and preserve evidence sufficient for potential legal proceedings. • Include experts = Certified Fraud Examiner (CFE) Fraud Review/Investigation Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 52. • Use lessons learned from any fraud reviews or investigations to improve anti-fraud controls. • All fraud review and investigations should include a report to management with recommendations for control improvement. Improved Controls Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 53. Questions and Answer Session Ron Steinkamp, CPA, CIA, CFE, CRMA, CGMA Partner, Advisory Services Brown Smith Wallace LLP 314.983.1238 (Direct) rsteinkamp@bswllc.com www.bswllc.com Please Ask Me Some Questions..!! Brown Smith Wallace LLP© 2016 All Rights Reserved.
- 54. The End – Please Take the Evaluation Survey Brown Smith Wallace LLP© 2016 All Rights Reserved.
Editor's Notes
- Cory Metz will be opening the webinar introduction starting on this slide. Title: Occupational Fraud - The Facts and How to Protect Your Organization Description: Occupational, or employee, fraud is a significant problem faced by all organizations. According to a recent study released by the Association of Certified Fraud Examiners (ACFE), occupational fraud costs organizations an estimated 5% of their annual revenue. Every organization should have a plan in place to prevent fraud rather than attempting to recover losses after the fact. Many organizations seem to accept that a certain amount of employee fraud is an inevitable cost of doing business, which is not the case. Putting a strong fraud prevention plan in place can go a long way toward preventing and detecting fraud in your organization and reducing losses. Please join Ron Steinkamp, CPA, CIA, CFE, CRMA, CGMA, as he discusses the findings from the 2016 ACFE study on fraud and the steps your organization can take to establish an effective fraud prevention and detection program to reduce your fraud risk. Learning Objectives: Occupational Fraud Defined Fraud Categories and Schemes ACFE Fraud Study Findings Red Flags of Fraud Keys to Fraud Prevention & Detection
- Cory Metz will be presenting this slide as part of the introduction
- Cory Metz will be presenting this slide as part of the introduction Post Event Email Digital Presentation (pdf download) Webinar Recording
- Cory Metz will introduce Ron Steinkamp on this slide as part of the introduction.
- Cory will give Ron Steinkamp control of the presentation [starting on this slide] from within GoToWebinar.
- Violation of trust Three general categories: Asset misappropriation Corruption Financial statement fraud
- Asset Misappropriation Examples: Clerk stealing cash receipts. Payroll Clerk creating a ghost employee. Purchasing Clerk creating a fictitious vendor and false invoice. Employees “borrowing” equipment, tools, etc. Sales person purchasing personal items on the Company credit card. Falsified expense reports. Corruption Examples: Purchasing Department Manager awarding a contract to a vendor for a kickback. Human Resources Director hiring unqualified “friends” to fill positions. City Council member trading votes for personal favors. Financial Statement Examples: Inflating revenues on the financial statements. Concealing liabilities and expenses. Improperly valuing assets
- 5% - applied to 2014 estimated Gross World Product, this translates to potential fraud loss of up to $3.7 trillion worldwide. Median loss - more than 23.2% of the cases involving losses over $1 million. Fraud lasted - losses rose with duration of scheme. Asset misappropriation schemes - fraudulent disbursements, theft of cash receipts, other asset misappropriations.
- Detected by tips - followed by management review (13%) and Internal Audit (16%).
- Six Departments: Accounting/Finance Operations Sales Executive/upper management Customer service Purchasing Warning signs – most common behavioral red flag reported in the survey were perpetrators living beyond their means (45%) and experiencing financial difficulty (30%).
- Cory Metz: will take control of the presentation from Ron Steinkamp. Cory will announce the polling question and pushing results back to the audience within the Control Panel. Polling Question No.1 of 3 What is the most common way fraud is detected.?
- Emphasize tips and internal audit Mention reliance on external audit and fact that detection is low
- Cory Metz will recap Learning Objective No.2 and introduce Learning Objective No.3
- Employee steals or misuses an organization’s resources.
- Examples: Steal blank check stock and make check out to self. Steal outgoing check to vendor and deposit into personal account.
- Examples: Create shell company and bill employer for services not rendered. Purchase personal item and submit invoice to employer for payment.
- Examples: Steal assets or inventory. Steal or misuse confidential organization or customer data. Misuse assets or equipment for personal use.
- Examples: Claim overtime for hours not worked. Add ghost employees to payroll. Inflate wages.
- Examples: Accept payment, don’t record sale and pocket the money. Steal payments on receivables and write-off the account. Conceal theft of previous receipts by applying payments from current receipts (lapping).
- Examples: File a fraudulent expense report. Claiming personal travel. Nonexistent meals.
- Examples: Steal cash and checks from daily receipts before they can be deposited in the bank. False voids or refunds.
- Examples: Steal cash from company vault. Steal from petty cash funds.
- Examples: Void a sale on the register and steal the cash. Ring up a false refund and pocket the cash.
- Purchasing examples: Undisclosed financial interest in a supplier or contractor. Sets up a bogus contractor/vendor. Involved in other business ventures with supplier or contractor. Interest in competing business. Accepts inappropriate gifts, travel, entertainment or fees (kickbacks) from vendors. Negotiates for or accepts employment with a supplier. Sales examples Hidden interest in an outside company to which they sell goods/services at below market prices. Tampers with organizations books to decrease or write-off amounts owed by the company in which the employee has a hidden interest.
- Invoice Kickbacks: Vendor submits false invoices that either overstate the cost of goods/services or reflect fictitious sales and pays kickback to employee with approval authority. Bid Rigging: Employee receives kickback for directing business to a vendor.
- Examples: A Real Estate Director negotiated a land development deal with a group of private investors. After the deal was approved, the Director and his wife were rewarded with a free international vacation. A Government Purchasing Manager awarded a Government contract to a new supply company. After the contract was approved, the Purchasing Manager received World Series Tickets.
- Cory Metz: will take control of the presentation from Ron Steinkamp. Cory will announce the polling question and pushing results back to the audience within the Control Panel. Polling Question No.2 of 3 What is the top red flag of fraud.?
- Set the tone at the top = Lead by Example Responsibility of Directors and Officers Behave ethically and openly communicate expectations to employees Treat all employees equally Zero tolerance Create a positive workplace environment Focus on employee morale Empower employees Communicate Hire and promote appropriate employees Conduct background investigations before hiring or promoting Check candidate’s education, employment history, references Continuous and objective evaluation of compliance with entity values Violations addressed immediately Code of Conduct Formalized and founded on integrity Defines acceptable employee behavior Communicated to all employees All employees are held accountable for compliance Discipline Sends a strong message throughout the entity Should be appropriate and consistent Consequences of committing fraud clearly communicated throughout the entity
- Oversight Process Audit Committee or Board of Directors Evaluate management’s “tone at the top”, identification of fraud risks and implementation of anti-fraud controls Ensure that management implements anti-fraud measures Consider the potential for management override of controls Management Directs, implements and monitors anti-fraud controls Sets the ethical tone Trains employees Internal Auditor Identifies fraud indicators Assesses fraud risks Evaluates anti-fraud controls Recommends actions to mitigate risks Investigates potential frauds Discipline Sends a strong message throughout the entity Should be appropriate and consistent Consequences of committing fraud clearly communicated throughout the entity
- What should it include? Statement of organization’s position on fraud Scope of the policy – who does it apply to Management’s responsibility for prevention and detection of fraud Definition of fraud Actions constituting fraud Fraud reporting process/procedures Fraud investigation process/procedures Unit responsible for administration of the policy and investigating fraud allegations Statement on anonymity/confidentiality Consequences
- What should training include? Their duty to communicate certain matters A list of the types of matters to be communicated along with examples How to communicate those matters Affirmation from senior management regarding employee expectations and communication responsibilities
- Cory Metz: will take control of the presentation from Ron Steinkamp. Cory will announce the polling question and pushing results back to the audience within the Control Panel. Polling Question No.3 of 3 When was the last time your organization conducted a fraud risk assessment.?
- General steps: Identify areas and processes to assess Identify potential fraud schemes in each area/process Assess likelihood and significant of each scheme Map existing anti-fraud controls to potential fraud schemes Test operating effectiveness of antifraud controls Identify any control gaps and/or deficiencies = Residual risks Document and report on the fraud risk assessment
- Develop a policy for fraud reviews and investigations that specifies: Who is responsible for the review/investigation Roles of Legal Counsel, Human Resources, Internal Audit, others Process for conducting the review/investigation Documentation requirements Reporting requirements When to involve law enforcement