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Discovering and Preventing Employee Dishonesty and Fraud


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Learn about common fraud schemes, how to conduct a fraud investigation and how to prevent fraud for the future.

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Discovering and Preventing Employee Dishonesty and Fraud

  1. 1. Hidden in Plain Sight:Discovering and Preventing Employee Dishonesty and Fraud Presented by: Mary O’Connor, ASA, MRICS Partner, Dispute Advisory Services
  2. 2. Agenda• Distinctions among fraud, embezzlement, theft and occupational dishonesty• Uniform Occupational Fraud Classification System• Interesting statistics• Common fraud schemes• Conducting a fraud investigation• Prevention systems 2
  3. 3. Distinctions AmongFraud, Embezzlement, Theft and OccupationalDishonestyFraud is a much larger legal concept specifically related to a criminalact as defined in the law. Fraud is both a civil and criminal matter inlitigation.Fraud has Four Elements: • Material false statement • Knowledge that the statement was false • Reliance on the statement by the victim • Damages 3
  4. 4. Distinctions AmongFraud, Embezzlement, Theft and OccupationalDishonesty Embezzlement is theft committed by a person who is trusted.Theft is the act of stealing by a person who is unknown to the victim.Occupational fraud, also known as employee dishonesty, is the use of employment to commit fraud for personal enrichment through deliberate misuse of misapplication of employer’s resources and assets. 4
  5. 5. Uniform Occupational Fraud Classification System 5
  6. 6. Uniform Occupational Fraud Classification System 6
  7. 7. But my Auditor Gave a Clean Opinion• An unqualified audit opinion does NOT mean that there is no employee dishonesty occurring in the organization• Employee dishonesty can be significant and the books can still balance• SAS 99, professional skepticism and materiality 7
  8. 8. Interesting Statistics• Losses estimated at twice the annual budget of the US Department of Defense• Direct correlation between age of fraudster and size of theft• Direct correlation between job title of fraudster and size of theft• Overwhelmingly happens in small operations• External auditors rarely identify fraudulent activity 8
  9. 9. Who is the Fraudster?• Otherwise honest and responsible citizen• Computes the likelihood of capture and believes it is worth the risk• Tends to be middle-aged, of either gender and well-regarded in the organization 9
  10. 10. Interesting Statistics Initial Detection of Frauds 10
  11. 11. Fraud Hot Spots• Departments with Independent • Sensitive information on desks Systems; Remote locations • Insecure checks• Cash and cash registers • Mail handling• Too many bank accounts • Deposit handling• Accounts Payable • Deficient IT System; loose• Voucher System controls on voids and restarts• Reliance on part-time employees• Stop payments; Outstanding checks 11
  12. 12. Red Flags of Fraud/Occupational Dishonesty• Independent IT Systems without proper interface• Poor separation of duties; one person controls the accounting system• Outdated IT system with inadequate security• Poor internal controls- no one is really looking• Over-reliance on certain employees• Extravagant lifestyles• Missing documents; “special” procedures 12
  13. 13. The Problem with Departmental Systems Businesses are composed of numerous sub-units and many are located remotely from the Central Administration. A manual interfacewith the departmental system and the Finance Office is a major red flag that requires investigation. Manual Interface Dept System General Accounting System 13
  14. 14. The Problem with Department Systems Departments often run autonomously and many collect significant amounts of cash in total annually. However, the daily deposits to the Finance Department may be small and seemingly immaterial. Cashtheft can easily occur and the entity’s books still balance. Note that theft can occur and the department system can be accurate. 14
  15. 15. Uniform Occupational Fraud Classification System 15
  16. 16. Common Fraud SchemesCorruption• Conflicts of interest• Schemes with and without vendor knowledge• Bribery and kickbacks• Bid rigging and Procurement Fraud • Use of Shell Intermediary Companies • Improper use of Minority Companies • Multiple names for same Vendor • Different rules for different Vendors • Material Substitution • Change Order Game 16
  17. 17. Uniform Occupational Fraud Classification System 17
  18. 18. Common Fraud SchemesFinancial Statement Fraud • Fictitious revenues • Concealed liabilities • Journal entry fraud • Expenditures contrary to law or policy • This is the focus of the external auditor 18
  19. 19. Uniform Occupational Fraud Classification System 19
  20. 20. Common Fraud SchemesSkimming and Lapping • Recorded (lapping) and unrecorded (skimming) revenue • Write-offs of receivables • Voids and restarts • Refunds • Locus around cash 20
  21. 21. Common Fraud SchemesFraudulent Disbursements • Billing: Shell companies; pass through entities • Payroll: Ghost employees, falsified time record, failure to terminate • Expense reimbursement • Check tampering • Bank reconciliations can miss the fraud • Register disbursements: false voids, false refunds 21
  22. 22. Common Fraud SchemesInventory Misappropriation • False acquisitions and transfers • Simple theft • Conversion to personal use 22
  23. 23. Conducting the Investigation – Why you need asystem in place for fraud incident investigationGoals to this Process are: • To follow-up on all credible tips and complaints • To follow-up on all management letter issues to fraud • Form a response team that preserves the secrecy of the situation • Avoid the “Dick Tracy” syndrome • Create a plan that allows the organization to work together in the future 23
  24. 24. Conducting the InvestigationGoals (Continued) • Preserve the evidence especially the computer record • Deal with the administrative leave and other employment issues • Deal with employee morale issues; manage emotions • Keep the place going!!!! • Work for restitution, insurance claim preparation and possible criminal referral • Learn from mistakes of the past and fix the problems • Communicate effectively to stakeholders 24
  25. 25. Reasons to Call in a Forensics TeamKnow the Endgame – Its not only to prosecute! • Preserve the relationship of audit team and staff • Preserve management relationship with staff • Tasks for the forensics team • Surveillance • Proof • Security of computer evidence • Interviewing • Insurance Claim/Restitution • Police/State’s Attorney Support 25
  26. 26. A System to Prevent Employee DishonestyFirst and Foremost: Secure the IT System • Passwords and encryption • Laptops and cell phones • Clean desk policy • One system among departments • Sufficient firewalls to prevent hacking 26
  27. 27. A System to Prevent Employee DishonestyCreate a Tone at the Top • Clear policy and procedures • Clear policy of punishment for malfeasance • Lead by example • Training, training, training • Employee background checks and hiring practices 27
  28. 28. A System to Prevent Employee DishonestyInstall an Effective Whistle-Blowing System • Anonymous • No reprisals • Off site answering service • Must follow-up on tips 28
  29. 29. A System to Prevent Employee DishonestyInternal Control System • Separation of duties • Authorizations; look at limits • Computer passwords • Independent and surprise checks • Separation of Treasury and Accounting functions • Think through each system – Where are the holes? • Rotate and Cross-Train • Look at how checks and cash functions are handled 29
  30. 30. A System to Prevent Employee DishonestyAlert Vendors and Install Strict Controls • Contract language to include right of audit • Master vendor file • Review addresses and relationships • Physical verification • Statistical analysis 30
  31. 31. A System to Prevent Employee DishonestySecure the Physical Assets of the Organization • Clean Desk Policy • IT policy related to laptops, desktops, phones, iPads • Checks!!!!!! • No passwords on computer screens!!!! • Secure receiving dock • Semi-annual inventory of major assets 31
  32. 32. Questions? Questions?
  33. 33. About Sikich• Sikich is an accounting, advisory, technology and managed services firm with eight offices in four states and with clients throughout the United States and internationally.• A reputation for professional $70M in projected revenue in 2012 excellence, unsurpassed client service, and timely and cost effective service delivery. 7,000 business clients• We employ more than 400 people including 68 partners, all of whom devote their careers to a 7,500 individual clients focused area. 153,882 square feet to serve clients• Accounting Today ranks the Firm 47th nationally among the Top 100 Accounting Firms and 12th in the Top 100 Value Added Resellers (VAR). 400+ total personnel• May 1, 2012 was our 30th anniversary. 68 partners• In 1998, Sikich began expanding through merging 8 offices in 4 states with firms already successful in target areas and hiring talent and developing service areas from scratch. 1 collaborative and positive culture
  34. 34. Honors & RecognitionsAccounting Technology• #47 in Accounting Today’s • Top 1% of all ERP solution 2012 Top 100 Accounting partners in the world Firms • 2012 Microsoft Dynamics Inner• INSIDE Public Accounting’s Circle Top 50 Accounting Firms in • 2012 Microsoft Dynamics 2012 Presidents Club• INSIDE Public Accounting’s • #12 on Accounting Todays Top All-Star Firms in 2012 100 VARs in 2012 • #13 on Bob Scotts Top 100 VAR List for 2012
  35. 35. Tracing Our Roots 2012 30th Anniversary$80,000,000$70,000,000 2008-2011$60,000,000 Merges with 4 CPA firms and 1998 solidifies$50,000,000 position in the Top 50 with Merges with Intelligent Computer$40,000,000 1982 Solutions LLC and starts its more than 375 employees technology practice Sikich Gardner & Co. was$30,000,000 formed; takes up residence in Aurora and Springfield$20,000,000$10,000,000 $0 35
  36. 36. The Sikich Service Areas Audit, Accounting & Tax Advisory • Financial Reporting • Business Valuation • Accounting Services • Dispute Advisory • Tax Planning • Flex-Staff Solutions • Human Resources • Graphic Design & Marketing Technology Managed Services • Accounting & ERP Software • Outsourced Accounting • CRM Software • Managed IT • IT Infrastructure • Outsourced Human Resources • Cloud & Hosting Solutions • Outsourced Marketing • Strategic IT Planning • Communication & Collaboration • IT Consulting
  37. 37. Industry Expertise, Tailored Approach• Agriculture• Construction Deep industry experience and• Government longevity.• Healthcare• Higher Education Cross sectional teams• Non Profit with a depth and breadth• Manufacturing & Distribution of experience to handle the complete solution.• Professional Services• Real Estate• Retail Solution centric and product agnostic.
  38. 38. Contact Information Mary O’Connor, ASA, MRICS Sean HastingsPartner, Valuation and Dispute Advisory Services Director, Business Development Sikich LLP Sikich LLP T: 312.648.6652 T: 630.210.3055 M: 708.646.8737 Email: Email: 38