Presented By: David A. Landman, CPA, CFE Gorfine, Schiller Gardyn, P.A.

2. GORFINE, SCHILLER & GARDYN, PAPRESENTS, Employee Theft By David A. Landman, CPA, CFE I wondered why the bank wants me to teach them fraud Introduction - CFE I wondered why the bank wants me to teach them fraud Introduction - CFE

3. How Does Fraud Happen? “Usually” is highlighted because there are times when the opportunity and rationalization is there without the pressure. Story of the payroll clerk. “Usually” is highlighted because there are times when the opportunity and rationalization is there without the pressure. Story of the payroll clerk.

4. Pressure Some examples of “pressure” are: Foreclosure Spouse / significant other loses job Keeping up with the Jones family Medical issues Drugs / alcohol Gambling Shopping addictions Extramarital affairs

5. RATIONALIZATION “Nobody” may mean fellow employees – but they care less about the company or the bank loans at stake. The last item is a typical rationalization for financial statement fraud.“Nobody” may mean fellow employees – but they care less about the company or the bank loans at stake. The last item is a typical rationalization for financial statement fraud.

6. Opportunity Lack of internal controls / segregation of duties. Layoffs are pervasive and are leaving holes in organizations’ internal controls. No management oversight. Explain internal controls and segregation of duties. (separating the bookkeeping function and the cash handling functions) Even if there are internal controls in place, lack of oversight will encourage fraud. Example – expense reports Story - Lynn Explain internal controls and segregation of duties. (separating the bookkeeping function and the cash handling functions) Even if there are internal controls in place, lack of oversight will encourage fraud. Example – expense reports Story - Lynn

7. What is Segregation of Duties? Segregation of duties means separating employees’ duties so that one person does not have too much control over a particular area of accounting. Generally, segregation of duties results from separating the accounting function (e.g. data input and export) from the administrative functions – such as invoicing and cash handling. In other words, this means maintaining appropriate checks and balances.

8. Who Would Steal From Me? By far, it is usually the most trusted person in the organization! Long-time bookkeepers, Controllers or Treasurers. Most dedicated employees – come in early and leave late; work weekends. They can even be family members – brother-in-law, son-in law and sometimes even a blood child. BUT - Don’t go on a witch hunt!!!!

9. The Ways They Steal Stealing money or merchandise – there are many ways! Taking kickbacks or bribes from suppliers – usually more expensive suppliers. Claiming overtime when it is not due. Cheating / falsifying expense reports. Claiming fictitious sales – for more commissions. Stealing and selling company trade secrets. Giving friends and relatives unauthorized discounts on company merchandise or services.

10. Types of Fraud While there are many ways employees can steal, the following are a few examples: (due to poor or no segregation of duties)

11. Theft of Incoming Checks Employee has access to incoming checks and is responsible for their related bookkeeping function. Employee opens up a bank account with a fictitious company name similar to that of the employer. Or, he/she simply endorses it to themselves. Employee writes off the balance due by issuing a credit, or simply leaves the balance open. Employee buys a new car. Story – Not for profit company controller – charming -- stamped “for deposit only” and changed account # to his and diverted checks. Story – HW rent checks came in, bookkeeper endorsed it to herself, endorsed her signature and deposited in her own account. When they gave her a gold watch, she admitted. Story – Not for profit company controller – charming -- stamped “for deposit only” and changed account # to his and diverted checks. Story – HW rent checks came in, bookkeeper endorsed it to herself, endorsed her signature and deposited in her own account. When they gave her a gold watch, she admitted.

12. Fraudulent Disbursements Employee has access to company checks and their related bookkeeping functions. Employee opens up a bank account with a fictitious company name. The fraudulent check is made payable to the fictitious company and mailed to the employee. Checks may be made payable to legitimate vendors and then changed after the check is signed, or signature is forged. The check is posted to an account with large balances (purchases?) to hide the expense. The employee buys new houses. Examples – articles Examples – articles

13. More Fraudulent Disbursements Employee purposely pays invoices twice or overpays invoices - refund is then pocketed. Employee sells company inventory (usually after hours) and pockets the sale. Employee cheats on expense reports by including duplicate expenses and / or receipts belonging to others. Employee “borrowing” of office supplies.

14. Fraudulent Payroll Payroll administrator / manager adds a non-existent employee (possible in large companies) and cashes that person’s check. Payroll administrator / manager changes his pay amount Many employers do not review monthly payroll reports and year-end W-2 forms!!

15. Example of Improper Segregation of Duties One person receives mail (checks). One person opens mail containing checks. One person accounts for all checks to be deposited One person creates deposit slip. One person deposits the checks. One person is in charge of receivables and/or payables; cash receipts and/or cash disbursements; billings, etc.

16. Lowering Your Risk Conduct a fraud risk assessment in order to assess your company’s risk and to protect your hard-earned money. Holes in internal controls are patched up and duties are segregated. Investigation of, and prosecuting known fraud. Mandatory vacations. To end, let’s hope that all thieves can be easily caught! Mandatory vacations. To end, let’s hope that all thieves can be easily caught!

17. THANK YOU ! For any questions, please call David Landman at 410-517-6823.