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W:\Scott & Baldwin\Marketing\Business Leadership Seminars\September 2008\Reducing Fraud Potential


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A slideshow to give small to mid sized businesses a basic background on business and employee fraud.

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W:\Scott & Baldwin\Marketing\Business Leadership Seminars\September 2008\Reducing Fraud Potential

  1. 1. Reducing Fraud Potential in your Workplace Presented by: David L. Scott, CPA, Scott & Baldwin, CPAs
  2. 2. Overview <ul><li>Definition of terms </li></ul><ul><li>Cost of fraud </li></ul><ul><li>How does fraud and abuse occur? </li></ul><ul><li>Who commits fraud? </li></ul><ul><li>Who are victims of fraud? </li></ul><ul><li>Why does fraud commonly occur? </li></ul><ul><li>4 Techniques for reducing fraud </li></ul>
  3. 3. Terminology <ul><li>Occupational Fraud and Abuse </li></ul><ul><ul><li>Criminal deception intended to financially benefit the deceiver </li></ul></ul><ul><ul><li>Criminal deception refers to any serious wrong action taken with malicious intent </li></ul></ul><ul><ul><li>Sometimes these deceptions do not even benefit the deceiver </li></ul></ul><ul><li>Internal Control </li></ul><ul><ul><li>Plan of the organization and methods and measures used by a business to monitor assets, prevent fraud, minimize errors, verify the correctness and reliability of accounting data, promote operational efficiency and ensure that established managerial policies are followed </li></ul></ul>
  4. 4. Cost of Fraud <ul><li>According to a recent survey conducted by The Association of Certified Fraud Examiners of 959 occupational fraud cases… </li></ul><ul><li>U.S. organizations lose estimated 7% of annual revenue to fraud </li></ul><ul><li>Median loss caused by occupational fraud was $175,000 </li></ul><ul><li>Average organization loses $4,500 per employee, per year to fraud and abuse </li></ul>
  5. 5. How Fraud Occurs
  6. 6. Occurrence of Fraud & Abuse <ul><li>Cash Fraud Schemes </li></ul><ul><ul><li>Skimming </li></ul></ul><ul><ul><li>Under-rings </li></ul></ul><ul><ul><li>Voids and Sales Returns </li></ul></ul><ul><ul><li>Fictitious Refunds and Discounts </li></ul></ul><ul><ul><li>Theft of a Daily Deposit </li></ul></ul><ul><ul><li>Swapping Checks for Cash </li></ul></ul><ul><ul><li>Late Closing </li></ul></ul><ul><ul><li>Kiting </li></ul></ul>
  7. 7. Occurrence of Fraud & Abuse <ul><li>Accounts Receivable Schemes </li></ul><ul><ul><li>Lapping </li></ul></ul><ul><ul><li>Old or Written Off A/R </li></ul></ul><ul><ul><li>Unauthorized Credit Memos </li></ul></ul><ul><ul><li>Fictitious A/R </li></ul></ul><ul><ul><li>Revenue Recognition in Improper Period </li></ul></ul><ul><ul><li>Sales with Conditions </li></ul></ul><ul><ul><li>Improper Revenue Recognition </li></ul></ul>
  8. 8. Occurrence of Fraud & Abuse <ul><li>Inventory </li></ul><ul><ul><li>Appropriating Inventory for Personal Use </li></ul></ul><ul><ul><li>Theft of Scrap Proceeds </li></ul></ul><ul><ul><li>Scrapping and Selling Good Inventory </li></ul></ul><ul><ul><li>Sales Return Schemes </li></ul></ul><ul><ul><li>Charging Embezzlements to Inventory </li></ul></ul><ul><ul><li>Altering Inventory Accounts </li></ul></ul><ul><ul><li>Counting the Same Inventory at 2 Locations by Physically Moving Goods </li></ul></ul>
  9. 9. Occurrence of Fraud & Abuse <ul><li>Fixed Assets </li></ul><ul><ul><li>Theft or Personal Use of Fixed Assets </li></ul></ul><ul><ul><li>Personal Capital Improvements Paid by Organization </li></ul></ul><ul><ul><li>Manipulation of Records to Conceal Fraud </li></ul></ul><ul><ul><li>Improper Capitalization </li></ul></ul><ul><ul><li>Understanding Depreciation </li></ul></ul><ul><ul><li>Not Removing Assets Disposed of from the Books </li></ul></ul><ul><ul><li>Failing to Write Down Impaired Assets </li></ul></ul>
  10. 10. Occurrence of Fraud & Abuse <ul><li>Cash Disbursements and Purchasing </li></ul><ul><ul><li>Kickbacks </li></ul></ul><ul><ul><li>False or Inflated Vendor Invoices </li></ul></ul><ul><ul><li>Excess Purchasing </li></ul></ul><ul><ul><li>Duplicate Payment </li></ul></ul><ul><ul><li>Employees Writing Checks to Themselves </li></ul></ul>
  11. 11. Occurrence of Fraud & Abuse <ul><li>Payroll </li></ul><ul><ul><li>Ghost Employees </li></ul></ul><ul><ul><li>Overpayment </li></ul></ul><ul><ul><li>Diverting Wages or Payroll Tax </li></ul></ul><ul><ul><li>Theft of Paychecks </li></ul></ul><ul><ul><li>Employees Writing Extra Payroll Checks to Themselves </li></ul></ul>
  12. 12. Who Commits Fraud <ul><li>In 2004, 65.1% of perpetrators acted alone with a median loss of $58,500 </li></ul><ul><li>The average loss where 2 or more perpetrators were involved was $200,000 </li></ul>
  13. 13. Who Commits Fraud
  14. 14. Who Commits Fraud
  15. 15. Who Commits Fraud
  16. 16. Who Commits Fraud
  17. 17. Who are the Victims? <ul><li>Small businesses are especially vulnerable to occupational fraud </li></ul>
  18. 18. Why Does Fraud Occur? <ul><li>Theory 1: American work force is generally disgruntled </li></ul><ul><li>Recent survey reveals the following: </li></ul><ul><ul><li>Workers admit that they spend more than 7 hours/week goofing off (20% of workweek) </li></ul></ul><ul><ul><li>50% of workers admitted to chronic malingering, calling in sick when they are not, and doing it regularly </li></ul></ul><ul><ul><li>1 in 6 surveyed used drugs or drank on the job </li></ul></ul><ul><ul><li>50% of the work force believes that one gets ahead on the basis of politics, not hard work </li></ul></ul><ul><ul><li>25% of workers expect to compromise their beliefs in order to get ahead </li></ul></ul><ul><ul><li>Only 1 in 5 workers say they are “very satisfied” with their jobs </li></ul></ul><ul><ul><li>Workers say they put about 45% effort into their jobs </li></ul></ul>
  19. 19. Why Does Fraud Occur? <ul><li>Theory 2: Pressure to keep up an appearance of wealth (American Dream) </li></ul><ul><li>Recent study reveals the top five office “crimes”: </li></ul><ul><ul><li>Taking office supplies and equipment </li></ul></ul><ul><ul><li>Lying to a boss or co-worker </li></ul></ul><ul><ul><li>Stealing company funds </li></ul></ul><ul><ul><li>Affair with boss or co-worker </li></ul></ul><ul><ul><li>Taking credit for work not done </li></ul></ul>
  20. 20. Consistent Conclusions <ul><li>There is a direct correlation between the employee’s age, sex and position and the median loss due to fraud. The most costly frauds are committed by well-educated male executives. </li></ul><ul><li>Smaller organizations are the most vulnerable to occupational fraud and abuse </li></ul><ul><li>Cash is the asset most frequently targeted by dishonest employees </li></ul><ul><li>Most occupational frauds are ongoing lasting an average of 18 months </li></ul><ul><li>Most common detection of fraud and abuse is through tips and complaints </li></ul><ul><li>Internal controls are a deterrent to occupational fraud </li></ul>
  21. 21. Reducing Fraud <ul><li>Implement Internal Controls </li></ul><ul><ul><li>Separate the duties of receiving funds, disbursing funds, writing checks, signing checks and reconciling bank accounts </li></ul></ul><ul><ul><li>Have monthly bank statements delivered unopened to the owner, who should review it for unusual transactions such as declining deposits or unfamiliar payees </li></ul></ul><ul><ul><li>Owners should look for signatures or endorsements that look forged, missing checks, check numbers that are out of order, and checks where the payee listed does not match the name in the check register </li></ul></ul><ul><ul><li>Consider an independent review of the cash accounts and bank statements by an anti-fraud specialist </li></ul></ul>
  22. 22. Reducing Fraud <ul><li>Monitor Employment Conditions </li></ul><ul><ul><li>Institute background checks on new employees </li></ul></ul><ul><ul><li>Provide regular training to employees on the detrimental aspects of fraud </li></ul></ul><ul><ul><li>Employees who feel well-treated and adequately compensated are less likely to commit fraud </li></ul></ul><ul><ul><li>Employees who hold grudges against their employers -whether or not justified- are more likely to turn to occupational fraud and abuse </li></ul></ul>
  23. 23. Reducing Fraud <ul><li>Manage Workplace Conditions </li></ul><ul><ul><li>Insist that employees take a vacation for at least one week every year and use that time to have the books reviewed for discrepancies </li></ul></ul><ul><ul><li>Adopt a tip hotline or complaint-reporting mechanism that will enable employees, vendors, customers or outside sources to report suspected fraud anonymously </li></ul></ul><ul><ul><li>Employers can gain valuable information by simply asking questions in a non-threatening, non-accusatory manner </li></ul></ul><ul><ul><li>Conduct internal and external audits, especially a “Fraud Audit” instead of a “General Audit” if you suspect fraud </li></ul></ul>
  24. 24. Reducing Fraud <ul><li>Adopt Automation </li></ul><ul><ul><li>Have an accounting software program expert, preferably a CPA, do the initial set-up of the program to make sure that helpful features are turned on and unhelpful features are disabled </li></ul></ul><ul><ul><li>Access to personnel and vendor master file records should be password protected and restricted by job function </li></ul></ul><ul><ul><li>Computer systems should create an audit trail of all changes made to the vendor master file records, including an identification of those who made changes </li></ul></ul><ul><ul><li>Changes to vendor master file records should require supporting documentation, supervisory approval and independent review </li></ul></ul>
  25. 25. Summary <ul><li>Cost of occupational fraud and abuse is significant </li></ul><ul><li>Small businesses are particularly vulnerable to fraud and abuse </li></ul><ul><li>Internal control procedures must be adopted and enforced to keep everyone honest </li></ul>
  26. 26. Questions <ul><li>David L. Scott, CPA </li></ul><ul><li>Scott & Baldwin, CPAs </li></ul><ul><li>Tel: 916/722-2524 </li></ul><ul><li>[email_address] </li></ul><ul><li> </li></ul>