This presentation was given by Pam Mantone at the 19th Annual Decosimo Accounting Forum at the University of North Alabama.

1. A Global Reach with a Local Perspective
University of North Alabama
19th Annual Decosimo Accounting Forum
July 22, 2011
www.decosimo.com
Fraud Prevention and Internal Controls
– A Winning Combination
PAM MANTONE, CPA, CFF, CFE, FCPA, CITP
Senior Assurance Manager

2. ACFE 2010 Report to the Nation
 Financial statement fraud cases were less than 5%
of the total fraud cases reported
 However
 Financial statement fraud cases were the most
costly of all fraud cases reported, causing a median
loss of more than $4 Million!

3. Percent of Total Dollar Losses
20.8%
Asset Missapropriation
11.30% Corruption
67.90%
Financial Statement
Fraud

4. Spotting Creative Accounting
 Why boost the Balance Sheet?
 Create appearance of a strong financial position –
 More easily obtain lines of credit at low interest rates
 Easier to issue debt financing or issue bonds on better terms
 Maintain compliance with existing loan covenants
 Increase earnings power in future periods
 Increase earnings power in current period
 Keep investors happy!
 Food for thought – Why decrease the Balance Sheet?

5. Financial Statement Fraud
 The deliberate misrepresentation of the financial
condition of an entity.
 Intentional misstatement or omission of amounts or
disclosures in the financial statements in order to
deceive financial statement users
 Objectives
 Overstate profits, revenues or assets
 Understate losses, expenses or liabilities
 What about reversing these – would you think
financial statement fraud in this case?
 Committed at the upper-management level

6. Common Schemes
 Improper revenue recognition
 End result – overvaluing assets
 Improper asset valuation
 Provision for doubtful accounts
 Inventory manipulation
 Fixed Assets
 Concealed expenses and liabilities
 In July 2002, the SEC charged Adelphia with fraudulently
excluding over $2.3B in bank debt by deliberately shifting
liabilities to off-balance sheet unconsolidated entities
 Improper disclosures or omissions

7. Common Schemes
 Additional concerns
 Subsidiaries and Joint Ventures – consolidation or
equity method

8. Overvaluing Assets
 My hints for the day:
 Inventory increasing faster than sales
 Inventory rising faster than total assets and falling
cost of sales as a percentage of sales
 Balance sheet item growing at a faster pace than the
income statement item
 Equity method limits available information-easier to
conceal or overstate

9. Improper Disclosures or Omissions
 Loan covenants or contingent liabilities
 Subsequent events
 Significant fraud committed by officers, executives,
and others in key positions of trust
 Changes in accounting principles, estimates, and
reporting entities
 Related party transactions
 Tyco – failed to disclose hundreds of millions of
dollars of low-interest and interest-free loans. Also
CEO forgave $50M in loans to himself and another
$56M for 51 favored employees

10. Preventive Controls
 Effective oversight a must!
 Gain a solid understanding of the business
 Maintain appropriate levels of skepticism
 Consider incentives, pressures, opportunities and
rationalizations to commit fraud
 Explore fraud risk scenarios
 Assess the financial reporting culture
 Organizational Structure
 “Tone at the Top”
 Zero Tolerance
 Ethics Policy

11. Preventive Controls
 Related Parties
 My hint for the day:
 Search for Inter-relationships (see next slide)

12. Co. B Board Co. A
Member
Board Your Board Co. C
Member Operation Member
Board Board
Member Member
Co. F Co. E
Co. G Board Member Inter-relationships

13. Accounts Payable Detection and Prevention
 Potential Fraud schemes
 Employees Committing Purchase Fraud
 Fictitious Vendors
 Personal purchases with company funds
 Vendors Committing Fraud
 Over-charging for goods purchases
 Duplicate billings
 Billing for goods not ordered or shipped
 Collusion
 Kickbacks

14. Identification of Red Flags
 Employees committing purchasing fraud
 Vendor name, address = employee name, address
 Undisclosed conflicts of interest
 Vendors committing fraud
 Documentation does not exist or lacks appropriate
detail
 Pricing does not agree with contracts
 Duplicate invoices
 Invoices submitted for materials not ordered or
delivered

15. Preventive Controls
 Implement a fraud hotline and notify employees and
vendors of its existence
 Separate duties of A/P processing, vendor file
maintenance, check stock custody, check
preparation, check signing, check mailing and bank
reconciliation
 Separate purchasing and receiving functions
 Require mandatory vacations and cross train
employees so that someone else can fill in for these
positions

16. Preventive Controls
 Use physical and software controls to restrict
access to A/P and cash disbursements systems,
including access to banking software
 Maintain an approved vendor list independently of
the purchasing department
 Restrict access to the vendor master file and flag
any changes to the file
 Periodically purge the vendor master file to maintain
only active approved vendors
 Require proper authorization of all transactions
 Do not pay from statements!

17. Preventive Controls
 Never sign blank checks!
 Severely restrict the use of manual checks
 Use positive pay or reverse positive pay systems
 Use quality check stock
 Investigate and void and reissue checks more than
90 days outstanding
 Deface voided checks
 Use pre-numbered, multi-part checks
 Do not allow access to blank checks to those with
signatory authority
 Lock up check stock, signature stamps, plates

18. Preventive Controls
 Require dual signatures for payments over an
established threshold
 Request bank notification if a duplicate debit is
pending posting

19. Detection
 My hints for the day:
 Use dimensional testing
 Use geo-coding

20. Standard Detection Testing
 Employees as Vendors:
 
 Common

 Common

  

21. Dimensional Testing Technique
 Employee Networks as Vendors:
 



 

  

22. Searching for Addresses: Geo-Coding
 Must be consistent in entering data for both the
Employee Master and the Vendor Master files for
matching
 Obstacles
 St. vs. Street
 NE vs. North East
 123 Main Street, Apartment B vs. 123 Main Street B
or
 123 Main Street
 Apartment B

23. Geo-Coding
 http://www.gpsvisualizer.com/geocode
 I enter: 1089 East Harrison Street, Martinsville, IN
 The Google geocoder found:
 1089 E Harrison St, Martinsville, IN 46151, USA street
address: 1089 E Harrison St ZIP/postal code: 46151 city:
Martinsville state/province: IN country: USA latitude,
longitude: 39.429443, -86.415746
 39.429443 -86.415746
 N39° 25.7666', W086° 24.9448'
 (precision: address)

24.  By themselves, internal controls will not prevent
fraud.
 - Yet -
 The perception of detection through monitoring of
internal controls is a great way of discouraging
fraud.

25. Connect with me
Pamela S. Mantone, CPA, CFF, CITP,
CFE, FCPA,
Senior Assurance Manager
423.756.7100
pammantone@decosimo.com
On LinkedIn:
http://www.linkedin.com/pub/pamela
-mantone/10/824/807
Disclaimer: The contents of this presentation are for informational purposes only. The information is not intended to be a substitute for
professional accounting counsel. Always seek the advice of your accountant or other financial planner with any questions you may have
regarding your financial goals or specific situations.