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Spotting Fraud

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Information on how to find fraud and stop it.

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Spotting Fraud

  1. 1. Spotting Fraud: How to Find It, How to Stop It <ul><li>By Mike Morley, CPA </li></ul><ul><li> [email_address] </li></ul>
  2. 2. A crime of opportunity <ul><li>Statistics </li></ul><ul><li>ACFE </li></ul><ul><li>FBI </li></ul>
  3. 3. Lack of reporting <ul><li>Wrongful dismissal suits </li></ul><ul><li>Looking bad to investors </li></ul>
  4. 4. Management inertia <ul><li>Not on their watch </li></ul><ul><li>Reluctance </li></ul><ul><li>Pervasiveness </li></ul>
  5. 5. Concerns <ul><li>Effective frauds </li></ul><ul><li>Only errors </li></ul><ul><li>Fiduciary duty </li></ul>
  6. 6. Human nature <ul><li>The good, the bad, and the rest of us </li></ul><ul><li>Background checks </li></ul><ul><li>Fear of bad publicity </li></ul><ul><li>Setting the example </li></ul>
  7. 7. Fraud triangle – Donald R. Cressey
  8. 8. Motivation <ul><li>Job dissatisfaction </li></ul><ul><li>Gambling & personal debts </li></ul><ul><li>Substance abuse </li></ul>
  9. 9. Motivation cont. <ul><li>Personal gain coupled with dissatisfaction about compensation </li></ul><ul><li>Chumminess with customers </li></ul><ul><li>Desire to “beat the system” </li></ul>
  10. 10. Motivation cont. <ul><li>Lax attitude toward rules </li></ul><ul><li>Real or imagined grievances </li></ul><ul><li>Revenge </li></ul>
  11. 11. Visible symptoms/indicators <ul><li>Short vacations </li></ul><ul><li>Unusual working hours </li></ul><ul><li>Appearance of stress </li></ul><ul><li>Lifestyle changes </li></ul>
  12. 12. Susceptible organizations <ul><li>Poor controls </li></ul><ul><li>Little emphasis on employee rewards </li></ul><ul><li>General sense of malaise </li></ul>
  13. 13. Controls issues <ul><li>Lack of controls </li></ul><ul><li>Controls not being followed </li></ul><ul><li>Star performers “controls don’t apply to me” </li></ul>
  14. 14. Controls issues cont. <ul><li>Inexperience </li></ul><ul><li>Laziness </li></ul><ul><li>Ego </li></ul>
  15. 15. Controls issues cont. <ul><li>Impatience </li></ul><ul><li>Inadequate staffing </li></ul><ul><li>Sloppiness </li></ul>
  16. 16. Categories of fraud <ul><li>Corruption </li></ul><ul><li>Asset misappropriation </li></ul><ul><li>Fraudulent statements </li></ul>
  17. 17. Largest risk areas <ul><li>Billing 45.5% </li></ul><ul><li>Payroll 17.7% </li></ul>
  18. 18. Information flow <ul><li>Someone always knows, </li></ul><ul><li>so why don’t they tell? </li></ul><ul><li>Nobody wants to be the bearer of bad news </li></ul><ul><li>Internal auditors and forensic accountants </li></ul>
  19. 19. Group behaviour <ul><li>Unspoken messages in organizations </li></ul><ul><li>When something is too good to be true… </li></ul><ul><li>Long-term employees </li></ul>
  20. 20. Conditioned behaviours <ul><li>Cyclists on the sidewalk </li></ul><ul><li>Buildings that don’t move </li></ul>
  21. 21. Whistle blowers <ul><li>The dilemma </li></ul><ul><li>The scapegoat </li></ul><ul><li>Reality: Statistics </li></ul><ul><li>Walking the line </li></ul><ul><li>Is it worth the fight? </li></ul>
  22. 22. Choice of strategies <ul><li>Good, quick, cheap, ------ pick two </li></ul><ul><li>Broken window theory </li></ul><ul><li>Segregation of duties </li></ul>
  23. 23. Steps for the fraud examiner <ul><li>Become aware of the fraud </li></ul><ul><li>Gather the evidence </li></ul><ul><li>Determine scope of problem </li></ul><ul><li>Evaluate options </li></ul><ul><li>Present to a trusted authority </li></ul>
  24. 24. Steps for the company <ul><li>Stop the bleeding </li></ul><ul><li>Decide on course of action </li></ul><ul><li>Evaluate controls – what went wrong? </li></ul><ul><li>Preventative measures </li></ul>
  25. 25. HR implications <ul><li>Avoid emotional decisions </li></ul><ul><li>Sometimes easier to buy out the thief, might be cheaper than pursuing and proving a criminal case </li></ul>
  26. 26. Specific concerns <ul><li>Bidding process </li></ul><ul><li>Purchasing </li></ul><ul><li>Cash application </li></ul><ul><li>Write-offs </li></ul>
  27. 27. Financial clues <ul><li>Ratios as guidelines </li></ul><ul><li>Sales </li></ul><ul><li>Cost of sales </li></ul>
  28. 28. Financial clues cont. <ul><li>Inventory </li></ul><ul><li>Expenses </li></ul><ul><li>Cash </li></ul>
  29. 29. Financial clues cont. <ul><li>Receivables </li></ul><ul><li>Payables </li></ul><ul><li>Documentation </li></ul>
  30. 30. Financial clues cont. <ul><li>Estimates </li></ul><ul><li>Purchasing </li></ul><ul><li>Valuation </li></ul>
  31. 31. Other clues <ul><li>Related party transactions </li></ul><ul><li>Inter-company </li></ul><ul><li>Conflicts of interest </li></ul>
  32. 32. Other clues cont. <ul><li>Audit committee </li></ul><ul><li>Equity based compensation plans </li></ul><ul><li>Incentives </li></ul>
  33. 33. Other clues cont. <ul><li>Dividend policy </li></ul><ul><li>Special purpose entities </li></ul>
  34. 34. Other clues cont. <ul><li>Stock Analysts/Credit rating agencies </li></ul><ul><li>Chapter 11 </li></ul><ul><li>Common directorship </li></ul>
  35. 35. Spotting Fraud: How to Find It, How to Stop It <ul><li>By Mike Morley, CPA </li></ul><ul><li> [email_address] </li></ul>

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