Letchworth Controls. Nonprofit Fraud Prevention

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A Plan Designed to Reduce the Risk of Embezzlement in Non-Profits and Small Businesses

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Letchworth Controls. Nonprofit Fraud Prevention

  1. 1. Letchworth Controls Fraud & Embezzlement Prevention
  2. 2. Fraud Awareness & Prevention Daniel P. Healy, CPA PROFESSIONAL EXPERIENCE • Genworth Financial 9/05 – Present; Director Operations & Controllership • The Brink’s Company 11/03 – 9/05; Audit Manager (Acting Audit Director) • Carpenter Co. 2/00 – 11/03; Audit Director • Cendant Corporation 12/97 – 2/00; Senior Manager – International Audit • RCSB Financial 10/94 - 12/97; Corporate Audit - Senior Manager • HSBC 12/88 – 12/94; Corporate Investigations Officer / Audit Officer • Public Accounting 9/87 – 12/88; “Big 8” Firm Internship & Staff Accountant EDUCATION • University of Rochester- MBA Finance • Canisius College – BS Accounting PUBLICATION • M2 Fraud Case Study – American Institute of Certified Public Accountants
  3. 3. Embezzlement Definition The wrongful appropriation of money or property by a person to whom it has been lawfully entrusted. Embezzlement implicitly involves a breach of trust, it's not necessary to show a fiduciary relationship among the parties.
  4. 4. Control/Efficiency Balance Efficiency Controls •The More Control Steps the Longer the Process Takes •The Less Control Steps the More Exposed to Fraud
  5. 5. Control/Efficiency Balance Controls Efficiency To Decide on Balance Must Have Understanding of Risk
  6. 6. Do We Need to Act Now ?
  7. 7. Recent Area Non-Profit Embezzlements 1 Catholic Diocese of Richmond Priest 1,000,000 2 Richmond Metropolitan Youth Soccer Treasurer 480,000 3 Skating Club of Staunton President 350,000 00 4 National Kidney Foundation of VA Accountant 170,000 ,0 5 Santa Pal - Christmas Program Kids Director 75,000 17 6 Bacon District Volunteer Fire Dpt. Volunteer 70,000 $1 7 Portmouth Firefighters/Paramedics Union Treasurer 44,000 ss 8 Land America Financial Group Employee 34,000 9 Big Island Emergency Crew Volunteer 31,000 10 L Arthur Ashe Jr. Elementary School PTAo President 20,000 11 ag e St. Michael's Episcopal School Teacher 17,500 er 12 Jacob Adams Elementary School PTA Treasurer 15,000 Av 13 Charity for Grand daughter Jackie Parent 10,500 14 Tuckahoe Football & Cheerleading Assoc. President 8,900 15 Shady Grove United Methodist Church Office Mgr 5,000 16 Clover Hill High School Band Booster Club President 4,900 17 Blandford Elementary School PTA President 4,000 18 Radford Iron Foundry Union Official 3,100 19 Peabody Middle School PTA President 2,500 20 Mary Washington College Student Gov. President _______ 1,800 2,347,200 Richmond Times Dispatch
  8. 8. Recent Area Non-Profit Embezzlements 1 Catholic Diocese of Richmond Priest 1,000,000 2 Richmond Metropolitan Youth Soccer Treasurer 480,000 3 Skating Club of Staunton President 350,000 00 4 National Kidney Foundation of VA Accountant 170,000 ,0 5 Santa Pal - Christmas Program Kids Director 75,000 17 6 Bacon District Volunteer Fire Dpt. Volunteer 70,000 $1 7 Portmouth Firefighters/Paramedics Union Treasurer 44,000 ss 8 Land America Financial Group Employee 34,000 9 Big Island Emergency Crew Volunteer 31,000 10 L Arthur Ashe Jr. Elementary School PTAo President 20,000 11 e Consistent National Average for Embezzlements ag St. Michael's Episcopal School Teacher 17,500 er 12 Jacob Adams Elementary School PTA Treasurer 15,000 Av 13 Charity for Grand daughter Jackie Parent 10,500 14 Tuckahoe Football & Cheerleading Assoc. President 8,900 15 Shady Grove United Methodist Church Office Mgr 5,000 Clover Hill High School Band Booster 16 Club President 4,900 17 Blandford Elementary School PTA President 4,000 18 Radford Iron Foundry Union Official 3,100 19 Peabody Middle School PTA President 2,500 20 Mary Washington College Student Gov. President _______ 1,800 2,347,200 Richmond Times Dispatch
  9. 9. 2009 Area Embezzlements
  10. 10. 2009 Area Embezzlements Local JetBlue manager guilty to $338,000 embezzlement Published: March 21, 2009 Woman guilty in swindle Ex-JetBlue terminal boss pleads to stealing $338,000 from airline. The former manager of JetBlue Airways' terminal operations in Richmond pleaded guilty yesterday to swindling the airline of more than $338,000. Investigators discovered $800 worth of pizza, $8,000 in sports club memberships for family members and their friends, $104,000 in travel expenses, $45,000 in clothing and the costs of a trip taken by the James River High School Robotics team. Carol Davidson, 43, of Midlothian, pleaded guilty to 13 felony charges for embezzlement, forgery or uttering bogus checks, all in a matter of months in 2007 and 2008. She forged employee names on JetBlue checks and used a company credit card for her own expenses.
  11. 11. 2009 Area Embezzlements Woman embezzled $300,000 from church Published: May 1, 2009 ISLE OF WIGHT -- A former secretary has admitted embezzling more than $300,000 from a Smithfield church. Debra Lee Epps pleaded guilty yesterday in Circuit Court to eight counts of embezzlement and one count each of forging and uttering checks. The 51-year-old Epps apologized to the congregation of Christ Episcopal Church. Commonwealth's Attorney Wayne Farmer says Epps took the money over a 10-year period beginning in 1998. Farmer says Epps told investigators she used the money to pay school tuition and credit card debt, and to pay for horseback riding lessons and her family's annual trip to Florida. Epps faces 180 years in prison when she's sentenced. -- The Associated Press
  12. 12. 2009 Area Embezzlements Ex-bookkeeper guilty of embezzling Published: February 26, 2009 A former bookkeeper for an arts program at Shady Grove United Methodist Church in western Henrico County is facing up to 40 years in prison in June when she is sentenced on two embezzlement convictions. Henrico Circuit Judge Burnett Miller III found Lisa H. Pauley, 49, guilty yesterday of stealing nearly $1,000 through two checks she wrote on church accounts linked to an arts program at the church. The thefts turned up when questions were raised about unaccounted for funds and church officials looked more closely at the church's loose payroll and check-writing controls. Pauley was convicted of swindling a realty firm of nearly $5,000 in 2003 and received a suspended sentence. She has made restitution in both cases. Sentencing is scheduled for June 3. -- Bill McKelway
  13. 13. 2009 Area Embezzlements Former Farm Bureau lawyer gets 15 years Published: February 4, 2009 A former Virginia Farm Bureau lawyer will spend 15 years in prison for stealing at least $2 million from the organization from 1996 through last summer. Judge Timothy K. Sanner yesterday sentenced Lawrence H. Bidwell in Goochland County Circuit Court to 30 years in prison but suspended half of that term, said Goochland Commonwealth's Attorney Claiborne Stokes. Sanner also ordered Bidwell to pay $2,103,737 in restitution. Bidwell, 49, of the Farmville area, pleaded guilty Nov. 14 to five embezzlement charges and a forgery count. Authorities say Bidwell had been stealing money since 1996, a pattern that was discovered in August. In 1996, the Farm Bureau had learned Bidwell had been disbarred in Tennessee, where he earned his law degree, Stokes has said.
  14. 14. 2009 Area Embezzlements Chesterfield County Woman Faces 20 Years Drytac Corporation Embezzlement Published: May 7, 2009 Faye G. Barksdale, 48, faces up to 20 years in prison or, at the discretion of the court, 12 months in jail and a fine of up to $2,500 for embezzlement after she pleaded guilty yesterday to stealing $151,000 over five years from her employer, Drytac Corp., where she worked as the accounts payable clerk for nearly a decade. Henrico prosecutor David Stock said Drytac might not have ever discovered the theft had Barksdale not left one of her counterfeit checks in the company's copying machine on the Friday before she went on vacation last year. "Another employee checked the copier [the following] Monday and sees a check on the copier that's got Faye Barkdsale's name and address taped over" the name of the recipient, Stock said. "They never would have caught her [otherwise]."Her employer manufactures and sells heat- activated and pressure-sensitive mounting adhesives, over laminating films and inkjet media, as well as other products. The company has a local office on Glen Alden Drive in Henrico.
  15. 15. 2009 Area Embezzlements President of Chesterfield Group Jailed Embezzlement Published: May 22, 2009 The former president of the Providence Athletic Association will spend three months in jail for stealing nearly $2,000 meant to benefit sports-minded children. Pulliam, who has two other theft convictions in the past two years, originally was charged with stealing about $5,000 from the athletic association in March and April of last year. Lastly, Pulliam created a phony bill from the Internal Revenue Service that said the Association needed to pay $300 to keep its tax-exempt status. "She struck off a check for that and it ended up in her own pocket," Hogan said.
  16. 16. 2009 Area Embezzlements Newport News detective charged embezzling from group Published: March 5, 2009 NEWPORT NEWS — A Newport News police detective is on administrative leave after being charged with embezzling from a fraternal group. Thomas David Crouch of Portsmouth is charged in Norfolk with using a credit card from the Police Emerald Society for personal use between late 2007 and mid-2008. Norfolk police spokesman Chris Amos says the 45-year-old Crouch was an officer for the society. Crouch turned himself in at the Newport News police headquarters yesterday. He remains free on $1,000 bond. Newport News police spokesman Lou Thurston says Crouch has been placed on administrative leave and the department is conducting an internal investigation
  17. 17. 2009 Area Embezzlements Va. law-office worker charged with embezzlement Published: March 30, 2009 FAIRFAX -- Fairfax County police say a former law-office administrator has been charged with stealing tens of thousands of dollars from the office. Police announced last week that 36-year-old Lisa Mylan McCormick of Sterling has been charged with four counts of felony embezzlement. Police say that after McCormick stopped working for lawyer Kevin Fitzpatrick, he discovered the thefts and reported them. The thefts allegedly occurred between 2006 and 2008. McCormick was questioned by police and surrendered this month. -- The Associated Press
  18. 18. 2009 Area Embezzlements Lee County woman guilty of embezzling Published: January 29, 2009 A Lee County woman faces up to 120 years in prison after pleading guilty to embezzling nearly a half-million dollars from the bank where she worked. Rebecca Dawn Long likely will receive a much shorter sentence, however, because she reached a plea agreement with prosecutors, said U.S. Attorney Julia C. Dudley. Long, 35, of Jonesville, pleaded guilty Tuesday in U.S. District Court in Abingdon to all five counts against her: bank fraud, bank embezzlement, money laundering, making a false statement on a loan document and engaging in a monetary transaction with criminally derived property. Long was an employee of The Peoples Bank in Lee County between 2004 and 2008 when she established a line of credit under a fictitious name, then withdrew $487,685 under the name, according to prosecutors. The withdrawals occurred over her four years of employment.
  19. 19. Do We Need to Act Now ? yes
  20. 20. Embezzlement Triangle
  21. 21. Embezzlement Triangle
  22. 22. Embezzlement Triangle Pressure/Need Opportunity Rationalization
  23. 23. Reduce Fraud Opportunity
  24. 24. Reduce Fraud Opportunity 1. Tone at The Top / Leadership 2. Segregation of Employee Duties 3. Instilling a Perception of Detection
  25. 25. Fraud Fact Small Organizations 100X More Fraud Risk • Basic accounting controls often lacking • Small organization often have one employee write & sign checks, reconcile the bank statement & keep the books. • Level of trust exists due to entity's size, • Small companies were less likely to be audited. FBI & Association of Fraud Examiners
  26. 26. Fraud Fact The U.S. Department of Justice reports that more than one-third of all thefts from organizations are by employees. It is imperative for today’s organizations to build a company culture of integrity and honesty. U.S. Department of Justice
  27. 27. Fraud Fact Fraud levels are expected to continue rising Almost 90 percent of respondents said they expect fraud to continue to increase during the next 12 months. Additionally, the fraud most expected to increase is embezzlement. 2008 ACFE Report on Occupational Fraud
  28. 28. Fraud Fact Employees pose greatest fraud threat currently When asked which, if any, of several categories of fraud increased during the previous 12 months, the largest number of survey respondents (48 percent) indicated that embezzlement was on the rise. 2008 ACFE Report on Occupational Fraud
  29. 29. Fraud Fact Layoffs affecting internal control systems. Nearly 60 percent of CFEs who work as in-house fraud examiners reported that their companies had experienced layoffs during the past year. Among those who had experienced layoffs, almost 35 percent said their company had eliminated some controls, while 44.2 percent said the layoffs had no effect on controls and only 3.2 percent said their company had increased controls. 2008 ACFE Report on Occupational Fraud
  30. 30. Tone at The Top (The Organization’s Control Expectation)
  31. 31. Tone at The Top • Steps taken by leadership to set expectations • Foundation for all other forms of control • Set’s ethical tone for organization • Leadership integrity, ethical values, competence Ask Yourself: 1. Is Ethical Behavior Demanded in Your Organization ? 2. Do Your Organizational Leaders Project Ethical Values ?
  32. 32. Tone at The Top How to Set Ethical Expectations Require new hire background investigations Require new hire drug screens Code of Conduct annual refresh meeting Annual Code of Conduct questionnaire Annual Code of Conduct sign-off on Establish a anonymous “tip line” to attorneys Set out clear consequences for ethical breach Make sure to follow through – consequences Leadership consistently display ethical behavior
  33. 33. Tone at The Top Questions ?
  34. 34. Fraud Fact Most fraud is uncovered as a result of tips and complaints from other employees. To deter and detect fraud and abuse, many experts believe a 1-800 employee hotline is the single most cost-effective measure.
  35. 35. Fraud Fact
  36. 36. Segregation of Duties
  37. 37. Segregation of Duties Ensure that a single person does not have access to cash/checks and the ability to update organizational accounting records
  38. 38. Segregation of Duties Cash & Receipt Donuts/Assets
  39. 39. Segregation of Duties Customer Places Order, Pays & Receives Receipt
  40. 40. Segregation of Duties
  41. 41. Segregation of Duties Business receives cash Customer receives receipt Customer Places Order, Pays & Receives Receipt Business receives receipt Customer receives goods Customer Receives Donuts
  42. 42. Segregation of Duties Typical Cash/Receivable Process
  43. 43. Segregation of Duties OK $1,000
  44. 44. Segregation of Duties Work Flow Problem
  45. 45. Segregation of Duties OK $1,000
  46. 46. Segregation of Duties OK $1,000
  47. 47. Segregation of Duties RECALL Ensure that a single person does not have access to cash/checks and the ability to update the organizational accounting records
  48. 48. Segregation of Duties Customer Places Order, Pays & Receives Donuts Customer Pays for Week of Daycare Customers Account is Updated to Reflect Payment
  49. 49. Segregation of Duties ce ip t Re No How do we know the transaction was rung up on the register ?
  50. 50. Segregation of Duties Cash/Receivable Embezzlement Scam #1 Lapping
  51. 51. Embezzlement - Lapping Scam Day 2 $500 OK $1,000
  52. 52. Segregation of Duties Embezzlement Scam #2 False Debit
  53. 53. Embezzlement – False Debit Scam $500 OK $500
  54. 54. Segregation of Duties Recommended Structure
  55. 55. Segregation of Duties
  56. 56. Segregation of Duties Business receives cash Customer receives receipt Customer Places Order, Pays & Receives Receipt Business receives receipt Customer receives goods Customer Receives Donuts
  57. 57. Segregation of Duties OK
  58. 58. Segregation of Duties OK
  59. 59. Segregation of Duties A Disbursements/Accounts Payable Process
  60. 60. Segregation of Duties A Disbursements/Accounts Payable Process Typical Disbursement Process
  61. 61. Segregation of Duties
  62. 62. Segregation of Duties Department 1 Order Invoice Finance Department 2 Director Vendor ACCOUNTING Director APPROVES Asset 20,000 A/P 20,000 Department 3 Check ACCOUNTING A/P 20,000 Cash 20,000
  63. 63. Segregation of Duties Department 1 Order Invoice Finance Department 2 Director Vendor ACCOUNTING Director APPROVES Asset 20,000 A/P 20,000 Department 3 Check ACCOUNTING A/P 20,000 Cash 20,000
  64. 64. Segregation of Duties Work Flow Problem
  65. 65. Segregation of Duties Department 1 Order Invoice Finance Department 2 Director Vendor ACCOUNTING Director APPROVES Asset 20,000 A/P 20,000 Department 3 Check ACCOUNTING A/P 20,000 Cash 20,000
  66. 66. Kay Lemon - Story Association of Certified Fraud Examiners
  67. 67. Kay Lemon - Story Kay Lemon, a seemingly prim-and-proper grandmother, stole $416,000 from a small Nebraska lighting store where she had been employed for 20 years as a bookkeeper. Then spent three years in the Nebraska Women's Correctional institute after confessing that she'd been hitting the books for eight years and had blown all the loot on herself and her family. Association of Certified Fraud Examiners
  68. 68. Kay Lemon - Story Lemon's crime is typical of the risk to small business: The lighting store's CPA only prepared the company's tax returns, so the business was not audited. Lemon also acted as the store's "accounting department." She made deposits, signed checks and reconciled the store's bank account. Although any entry-level accountant could recognize this situation as an accident waiting to happen, the store's owner did not. Association of Certified Fraud Examiners
  69. 69. Kay Lemon - Story After 12 years of unrelenting temptation, Lemon finally gave in. Thereafter, for years, she systematically stole money from the lighting store using the same method. She would make out a company check to herself (in her own true name), sign it and deposit the proceeds in her personal checking account.
  70. 70. Kay Lemon - Story To cover the theft, Lemon would do three simple things: • First, she'd enter "void" on the check stub when she wrote the check to herself. • Second she would add the amount of the theft to the check stub when she paid for inventory. For example, if she took $5,000 and was paying a vendor $10,000, she would show $15,000 on the vendor's check stub. • Third, when the checks paid to Lemon were returned in the bank statement, she would tear them up and throw them in the trash
  71. 71. Kay Lemon - Story Lemon chose the most logical (and common) method for covering a cash embezzlement: the false debit. When Lemon credited the bank account for the checks she made out to herself, the corresponding debit was false. Still, from the standpoint of the accounting equation, the books were in balance. Lemon and other embezzlers have two choices concerning the false debit: The transaction can be allocated to an asset account or an expense account. In Lemon's case, she added her thefts to the inventory account--an asset. A false debit will stay on the books until some action is taken to remove it. In this situation, the lighting store's inventory was overstated by $416,000 over eight years, as the store never performed a physical count of its inventory. As a result, when Lemon's crime came to light, a huge writeoff was necessary, almost bankrupting the store. Association of Certified Fraud Examiners
  72. 72. Kay Lemon - Story A less obvious move would have been for Lemon to charge the false debit to an expense account, which is written off every year. It doesn't matter what the expense is, although these are some favorites: advertising, legal expense, consulting fees and other "soft expenses." Here, the expense for fraud gets written off annually. If the fraud perpetrator can conceal the fraud long enough for the account to be closed to profit and loss, he or she has gone a long way toward avoiding detection—at least on a current basis. Association of Certified Fraud Examiners
  73. 73. Segregation of Duties Recommended Structure
  74. 74. Segregation of Duties
  75. 75. Segregation of Duties
  76. 76. Segregation of Duties
  77. 77. Segregation of Duties •Annual Budget Proposed by Department Heads & Senior Management •Approved by Board of Directors
  78. 78. Segregation of Duties • Annual Budget Proposed by Department Heads & Senior Management • Approved by Board of Directors • Budget Variances Brought to Board of Directors Attention Monthly Meetings
  79. 79. Segregation of Duties
  80. 80. Segregation of Duties Should Have a Process Where Vendor’s Are Approved and Lists Maintained
  81. 81. Segregation of Duties
  82. 82. Segregation of Duties
  83. 83. Segregation of Duties Kicked Back Rec NO In Order Department 1 Exec Director Budget Rec Approved ExDir Finance Department 2 Director Vendor Approved Rec Yes Approved Purchase Order Department 3 Vendor Invoice
  84. 84. Segregation of Duties
  85. 85. Segregation of Duties
  86. 86. Segregation of Duties
  87. 87. Segregation of Duties Questions ?
  88. 88. Perception of Detection
  89. 89. Perception of Detection One of the most important anti-fraud steps is to convince employees & venders that there is no way a fraud or embezzlement will go unnoticed & if noticed will be prosecuted
  90. 90. Perception of Detection Select a small number of disbursements each period and request supporting documentation including approvals. Vary requests, large dollar then small dollar, hit each department, select all checks with a employee as a payee, demand support.
  91. 91. Perception of Detection Enlist the Board of Directors to perform spot reviews on some key aspects of control quarterly. Have the results of quarterly reviews reported to Board regularly. Should consider inviting a CPA or Internal Auditor to join the Board (See Last Page)
  92. 92. Perception of Detection Potential Quarterly Board Testing Cash Inflows
  93. 93. Perception of Detection OK
  94. 94. Perception of Detection 1 1 OK
  95. 95. Perception of Detection 1 1 OK 2 2
  96. 96. Perception of Detection 1 1 OK 3 2 2
  97. 97. Perception of Detection Potential Quarterly Board Testing Cash Outflows
  98. 98. Perception of Detection Board of Directors
  99. 99. Perception of Detection Board of Directors
  100. 100. Perception of Detection Board of Directors
  101. 101. Perception of Detection Board of Directors
  102. 102. Perception of Detection Board of Directors
  103. 103. Early Warning Signs Skimming • Decreasing cash to total current assets. • A decreasing ratio of cash to credit card sales. • Flat/declining sales with increasing cost of sales. • Increasing A/R compared to cash. • Delayed posting of A/R payments. • Unexplained cash discrepancies. • Altered or forged deposit slips. • Customer billing and payment complaints. • Rising "in transit" deposits during bank reconciliations.
  104. 104. Early Warning Signs Fraudulent Disbursements • Increasing "soft" expenses (like consulting, advertising). • Employee home address matches a vendor's address. • Vendor address is a post office box or mail drop. • Vendor name vague business purpose. "JTW Enterprises"). • Excessive voided, missing or destroyed checks.
  105. 105. Early Warning Signs Signs an employee may be inclined toward theft • Holds a grudge against the organization • Living beyond their means • Experiencing extraordinary medical expenses • Spouse has lost his/her job • Divorced and/or separated • Other financial struggles, (lawsuits, foreclosures) • Short vacations • Defensive behavior overly nervous when questioned • Over-devotion to the job – working a lot of overtime • Missing documents and support data
  106. 106. Thank You !

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