Detecting Frauds

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Overview of misappropriation fraud, CPA responsibilities in relation to fraud, fraud investigative methods, common red flags, simple preventive controls for small business

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  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Misappropriation Frauds October 24, 2009 Copyright Raymond S. Kulzick [email_address]
  • Detecting Frauds

    1. 1. Detecting Misappropriation Frauds Dr. Raymond S. Kulzick, CPA, CFE, FCPA, CDFA 305.812.4998 – rays@kulzick.com
    2. 2. Detecting Misappropriation Frauds <ul><li>Presentation for </li></ul><ul><li>FIU – Fall Seminars </li></ul><ul><li>October 24, 2009 </li></ul><ul><li>Dr. Raymond S. Kulzick, CPA, CFE, FCPA, CDFA </li></ul><ul><li>St. Thomas University </li></ul><ul><li>Kulzick Consulting, PA </li></ul><ul><li>305.812.4998 – rays@kulzick.com </li></ul><ul><li>Information in this presentation is believed to be reliable at the time of the presentation; but the authors do not assume any responsibility for its use and it should not be relied upon as authoritative. </li></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    3. 3. Ray Kulzick Kulzick Consulting, PA <ul><li>Forensic Accounting </li></ul><ul><li>Divorce </li></ul><ul><li>Fraud </li></ul><ul><li>Business Damages </li></ul><ul><li>Data Analysis for Litigation </li></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    4. 4. Overview <ul><li>Introduction </li></ul><ul><li>Responsibilities of CPAs </li></ul><ul><li>Small vs large companies </li></ul><ul><li>Fraud triangle </li></ul><ul><li>Detection – Known fraud </li></ul><ul><li>Detection – Unknown fraud </li></ul><ul><li>Common symptoms in small business </li></ul><ul><li>Conclusions </li></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    5. 5. 2008 Kroll/Economist Report <ul><li>In past 3 years 85% of firms had fraud </li></ul><ul><ul><li>37% theft of assets </li></ul></ul><ul><ul><li>27% theft of information </li></ul></ul><ul><ul><li>26% management conflict of interest </li></ul></ul><ul><li>Large firms average loss = $ 23 million </li></ul><ul><li>Small Firms average loss = $ 5.5 million </li></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    6. 6. Large firms – perceived causes of increased fraud <ul><li>2007 report </li></ul><ul><ul><li>31% complexity of IT </li></ul></ul><ul><ul><li>28% entry into new markets </li></ul></ul><ul><ul><li>26% greater inter-firm collaboration </li></ul></ul><ul><li>2008 report </li></ul><ul><ul><li>25% weaker controls </li></ul></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    7. 7. ACFE 2008 Report <ul><li>Average loss was 7% of revenue </li></ul><ul><li>89% involved asset misappropriations </li></ul><ul><li>Average loss $175,000 </li></ul><ul><li>Average loss for small business was $200,000 </li></ul><ul><li>Average scheme duration = 24 months </li></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    8. 8. ACFE 2008 Report Types of Small Business Fraud <ul><li>29% Billing </li></ul><ul><li>25% Check tampering </li></ul><ul><li>21% Skimming </li></ul><ul><li>16% Expense reimbursement </li></ul><ul><li>15% Cash larceny </li></ul><ul><li>14% Payroll </li></ul><ul><li>15% Non-cash misappropriation </li></ul><ul><li>Note: Many schemes involved multiple types of fraud </li></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    9. 9. Responsibilities of CPAs External Audits, Reviews, Compilations <ul><li>SAS 99 – Fraud in a FS Audit </li></ul><ul><li>SAS 78 – Internal Controls </li></ul><ul><li>SAS 103-112 – Risk-based Audits & Internal Controls </li></ul><ul><li>SSARS 10, 11 & 12 – Reviews and Compilations </li></ul><ul><li>ISA 240 – Fraud in a FS Audit </li></ul><ul><li>SOX 404 & PCAOB AS 5 – Internal Controls </li></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    10. 10. Responsibilities of CPAs External Audits, Reviews, Compilations <ul><li>If find fraud during an attest engagement that requires further investigation </li></ul><ul><ul><li>AICPA Rule 101 – Independence </li></ul></ul><ul><ul><li>AU 317 – Illegal acts by clients </li></ul></ul><ul><ul><li>AU 333 – Management representations </li></ul></ul><ul><li>Attest engagements include </li></ul><ul><ul><li>Audits, Reviews, Prospective Financials </li></ul></ul><ul><ul><li>In conformance with SAS or SSARS </li></ul></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    11. 11. Responsibilities of CPAs Other types of engagements <ul><li>Internal audits </li></ul><ul><ul><li>IIA PA 1210.A2-1 & -2 – Auditors responsibilities relating to fraud </li></ul></ul><ul><ul><li>IIA PA 2120.A1-1 – Assessing & reporting on control processes </li></ul></ul><ul><ul><li>1/2009 revisions require assess potential for occurrence and how organization handles risks </li></ul></ul><ul><li>Public perceptions and malpractice </li></ul><ul><ul><li>CAMICO survey showed 64% of the public believes that CPAs are required to find ALL fraud in an audit. </li></ul></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    12. 12. Small vs Large Companies Differences Impacting Fraud <ul><li>Trust </li></ul><ul><li>Small workforce </li></ul><ul><li>Failure to delegate </li></ul><ul><li>Overlapping/unclear job responsibilities </li></ul><ul><li>Controls not a priority </li></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    13. 13. The Fraud Triangle Copyright 2007-2009 - R. S. Kulzick October 24, 2009 PRESSURE OPPORTUNITY RATIONALIZATION
    14. 14. Known vs Unknown Fraud <ul><li>Known fraud </li></ul><ul><ul><li>Search for symptoms based on specific types of fraud </li></ul></ul><ul><li>Unknown fraud </li></ul><ul><ul><li>Search for common symptoms not necessarily related to a specific type of fraud </li></ul></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    15. 15. Detection Known Fraud Approach <ul><li>Used for: </li></ul><ul><ul><li>SAS 99 requires this approach </li></ul></ul><ul><ul><li>Forensic and proactive audits </li></ul></ul><ul><li>Steps: </li></ul><ul><ul><li>Risk analysis </li></ul></ul><ul><ul><li>Identify symptoms based on risk </li></ul></ul><ul><ul><li>Search for symptoms </li></ul></ul><ul><ul><li>Further investigation </li></ul></ul><ul><ul><li>Use of CAATTs recommended </li></ul></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    16. 16. Detection Unknown Fraud Approach <ul><li>Used for: </li></ul><ul><ul><li>Initial stage or supplementary in audits </li></ul></ul><ul><ul><li>Reviews </li></ul></ul><ul><ul><li>Internal audits </li></ul></ul><ul><li>Approaches: </li></ul><ul><ul><li>Data profiling </li></ul></ul><ul><ul><li>Fraud ratio/variance analysis </li></ul></ul><ul><ul><li>Benford’s Law </li></ul></ul><ul><ul><li>Further investigation </li></ul></ul><ul><ul><li>Use of CAATTs recommended </li></ul></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    17. 17. Some Common Small Business Fraud Symptoms - General <ul><li>Tolerance of petty thefts </li></ul><ul><li>Lack of or override of controls </li></ul><ul><li>No segregation of duties </li></ul><ul><li>High pressure environment </li></ul><ul><li>High turnover </li></ul><ul><li>Complaints or lack of complaint tracking </li></ul><ul><li>No IT access controls </li></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    18. 18. Some Common Small Business Fraud Symptoms - Individuals <ul><li>Living beyond means </li></ul><ul><li>Financial pressures on key individuals </li></ul><ul><li>No vacations in key positions </li></ul><ul><li>Employees complain about low pay or chaotic environment </li></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    19. 19. Some Common Small Business Fraud Symptoms - Records <ul><li>Books & records out of balance </li></ul><ul><li>Transactions not entered timely </li></ul><ul><li>Journal entries at or near year-end </li></ul><ul><li>Missing documents </li></ul><ul><li>Only copies in files </li></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    20. 20. Some Common Small Business Fraud Symptoms - Specific <ul><li>Inventory adjustments </li></ul><ul><li>Credit memos or A/R write-offs </li></ul><ul><li>Debit memos or A/Pay adjustments </li></ul><ul><li>Bank reconciliations not done, not in balance or containing stale items </li></ul><ul><li>New, major vendors or customers </li></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    21. 21. Some Common Small Business Fraud Symptoms - Analysis <ul><li>Significant changes evident in horizontal, vertical or ratio analysis </li></ul><ul><li>Unexplained increased borrowing </li></ul><ul><li>Subsidiary ledgers not in balance with general ledgers </li></ul><ul><li>Payroll taxes don’t balance with salaries </li></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    22. 22. Some Simple Controls For a Small Business <ul><li>Pre-number & reconcile forms </li></ul><ul><li>Screen prospective employees </li></ul><ul><li>Segregate cash-related functions as much as possible </li></ul><ul><li>Implement controls over checks </li></ul><ul><li>Limit computer access </li></ul><ul><li>Match invoices with checks </li></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    23. 23. Some Simple Controls For a Small Business <ul><li>Periodically review Accounts Receivable and Accounts Payable </li></ul><ul><li>Receive unopened bank and credit card statements </li></ul><ul><li>Approve all Journal Entries </li></ul><ul><li>Be a good example </li></ul><ul><li>Be aware for red flags </li></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    24. 24. Conclusions <ul><li>Fraud is a major problem in organizations </li></ul><ul><li>CPAs are expected to detect it </li></ul><ul><li>Tools and approaches are available </li></ul><ul><li>Skepticism and common sense are essential </li></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    25. 25. Questions? <ul><li>Thanks for your attention. </li></ul><ul><li>Ray Kulzick – 305.812.4998 </li></ul><ul><li>Kulzick Consulting, PA </li></ul><ul><li>[email_address] </li></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009
    26. 26. Ray Kulzick Kulzick Consulting, PA <ul><li>Forensic Accounting </li></ul><ul><li>Divorce </li></ul><ul><li>Fraud </li></ul><ul><li>Business Damages </li></ul><ul><li>Data Analysis for Litigation </li></ul>Copyright 2007-2009 - R. S. Kulzick October 24, 2009

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