Fraud In the Workplace

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RIT. 2. IACA's Mission. Institute Audit, Compliance

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Fraud In the Workplace

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1. RIT 1 Fraud In the Workplace Patrick M. Didas, CPA, CFE, Associate Director, IACA Stacy DeRooy, Assistant Director/Investigator, Public Safety July 28, 2009

2. RIT 2 IACAs Mission

3. RIT 3 Internal Auditing at RIT Annual Risk Assessment Performed by IACA Quantitative Qualitative Academic and non-academic areas Creation of Annual Audit Plan Audit Engagements Business Process Reviews Questionnaire Reviews Continuous Auditing Management Advisement Requests Annual Audit Plan is approved by Audit Committee of the RIT Board of Trustees

4. RIT 4

5. RIT 5 Objectives: Why you should be concerned about fraud Who typically commits fraud, and why Common fraud myths Methods typically used by individuals committing fraud How you can reduce the risk of fraud in your area of responsibility The fraud investigation process The legal process of a typical fraud case How to report suspected fraudulent activity What to look for to detect potential fraud

6. RIT 6 Introduction Bad news fraud cannot be totally prevented Good news - you are not powerless; you can take action to reduce the risk of fraud By the end of this presentation You will know which actions to take Your awareness about fraud will be heightened

7. RIT 7 What is Fraud? Fraud definition Intentional misrepresentation Victim suffers monetary or property loss Wrongful obtaining of a benefit Cost of fraud to U.S. organizations Over $650 billion annually 5% of annual revenues of an entity What is 5% of your departments budget?

8. RIT 8 Occupational Fraud The use of ones occupation for personal enrichment through the deliberate misuse or misapplication of the employing organizations resources or assets.

9. RIT 9 Why Should you be Concerned about Fraud? White collar crime is increasing Management is being held responsible Applicable laws and regulations Federal Civil False Claims Act and whistleblower law Sarbanes Oxley implications State laws and contract provisions Fiduciary responsibility to taxpayers/donors SAS 99 requires external auditors to identify risks that may result in a material misstatement due to fraud.

10. RIT 10 Who Typically Commits Fraud and Why? The fraud triangle Financial need Opportunity Rationalization

11. RIT 11 Who Typically Commits Fraud and Why? Classic characteristics of person who commits fraud Lifestyle: flashy, addictive need Work habits: trusted, responsible Attitude I deserve mentality Repeat offender Works alone Reluctance to take vacations Intelligent Well respected Technologically savvy

12. RIT 12 Who Typically Commits Fraud and Why? Non Profits Female, no criminal record Earning < $50k Worked at least 3 years Median age 41 Employee 66% Manager 25% Executive 9%

13. RIT 13 Signs of Trouble The Employee: Keeps disorganized books, Frequently misfiles deposit records, supplier correspondence and other important documents, Explains away controllers notices or inquiries as error, Insists on handling activities such as picking up mail or liaising with financial contacts, or Suggests that you get rid of your other staff to save money.

14. RIT 14 How Management Unintentionally Encourages Fraud Management Attitude - Too Embarrassing - Bad Press Little or poor applicant screening - unqualified employees Inadequate training Not listening to employees Weak enforcement policies

15. RIT 15 How Management Unintentionally Encourages Fraud Responsibility, accountability, and authority not established or documented Goals and objectives neither established nor monitored for success No written policies or procedures

16. RIT 16 Common Myths About Fraud It cant happen on MY watch No one would do that here... We have an excellent accounting system My accounting clerk is my best employee We dont handle cash - Whats to steal? Problem employees are likely suspects I wouldnt know where to start looking Controls prevent collusion

17. RIT 17 Fraudulent disbursements, in which the perpetrator causes his organization to disburse funds through some trick or device. Skimming, in which cash is stolen from an organization before it is recorded on the organizations books and records. Cash larceny, in which cash is stolen from an organization after it has been recorded on the organizations books and records.

18. RIT 18 Fraudulent Disbursement Types Billing schemes a fraudster causes the victim organization to issue a payment by submitting invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases. This is done through

19. RIT 19 Payroll schemes an employee causes the victim organization to issue a payment by making false claims for compensation. Expense reimbursement schemes an employee makes a claim for reimbursement of fictitious or inflated business expenses. More Fraudulent Disbursement Types

20. RIT 20 Check tampering the perpetrator converts an organizations funds by forging or altering a check on one of the organizations bank accounts, or steals a check the organization has legitimately issued to another payee. Register disbursement schemes where an employee makes false entries on a cash register to conceal the fraudulent removal of currency. Even More Fraudulent Disbursement Types

21. RIT 21 Non-Cash Methods Schemes involving non-cash assets are much less common, but more costly, on average. Inventory Fixed Assets Insurance Claims http://www.whitecollarfraud.com/

22. RIT 22 Fraud Discovery Methods Not for Profit Overall Tips 48.8% 46.2% By Accident 10.7% 20.0% Internal Controls 24.8% 23.3% Internal Audit 13.2% 19.4% External Audit 14.9% 9.1% Notified by Police 1.7% 3.2% The sum >100% because some respondents identified more than one detection method.

23. RIT 23 10 minute BREAK

24. RIT 24 Internal Controls Reduce Fraud Risk Internal control is a process, effected by people, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Effectiveness and efficiency of operations Reliability of financial reporting Compliance with laws and regulations

25. RIT 25 How can you Reduce Fraud Risk? Supervisory approval of financial/payroll transactions Initiator and approver should not be the same person Approver should be able to vouch for business integrity of transactions Approver should not allow others to sign his/her name or use system passwords to approve transactions or use signature stamps

26. RIT 26 How can you Reduce Fraud Risk? Segregation of duties Ensures a person is not in a position to initiate and conceal an error or irregularity If duties cannot be segregated, compensating controls should be established

27. RIT 27 How can you Reduce Fraud Risk? Safeguard assets Secure cash and other assets Cash received by mail Property and equipment inventory Restrictive endorsements Secure accounts payable and payroll checks Review and approve accounts receivable write-offs

28. RIT 28 How can you Reduce Fraud Risk? Personnel policies Perform national criminal background checks Train and cross-train employees Require employees to take vacations Ensure annual / sick leave is reported Verify active employees on payroll; remove terminated employees Establish written job descriptions incorporating internal controls Obtain IDs of terminated employees

29. RIT 29 When an Investigation Occurs Once fraud is suspected and reported, an investigation is started during which the typical scenario is: Interview appropriate staff to gather all of the facts. Obtain supporting documentation in the department Secure computer and email activity Review ledgers via Oracle to determine what was reimbursed to the suspect Obtain supporting documentation if necessary Interview the suspect

30. RIT 30 When an Investigation Occurs Prepare final evidence package for law enforcement authorities A law enforcement investigator will meet with Public Safety and IACA to review the case Depositions may be required from witnesses The law enforcement agency will present the package to the District Attorneys office The DAs office reviews the case and usually offers a plea deal The case is registered in the court dockets at which time the case is a public record

31. RIT 31 The Legal Process Petit Larceny : When a person steals property. Class A Misdemeanor Grand Larceny 4th degree: Class E Felony: When property exceeds $1,000 Grand Larceny 3rd degree: D Felony: When property exceeds $3,000 Grand Larceny 2nd degree: C Felony: When property exceeds $50,000, or received by extortion Grand Larceny 1st degree: B Felony: When property exceeds $1,000,000 Falsifying Business Records 2nd degree: A Misdemeanor: Falsifying Business Records 1st degree: E Felony Forgery 3rd degree: A Misdemeanor - Altering a written instrument with the intent to defraud, deceive or injure another Forgery 2nd degree: E Felony - Same as above but includes public records, deeds, wills, contracts, etc. Forgery 1st degree: C Felony - Same as 3rd degree but is dealing with money, stamps, securities and government instruments

32. RIT 32 The Legal Process Basic Sentencing guidelines Class A Felony : At least 3 years up to life in prison B Felony : At least 3 years but not to exceed 25 years C Felony : At least 3 years but not exceed 15 years D Felony : At least 1 1/2 years but not exceed 7 years E Felony :At least 1 1/2 years but not exceed 4 years A Misdemeanor : up to and including 1 year B Misdemeanor : Up to three months

33. RIT 33

34. RIT 34 Contacts Helpful Websites and Phone Numbers Institute Audit, Compliance & Advisement x57647 http://finweb.rit.edu/iaca/ Public Safety x52853 http://finweb.rit.edu/publicsafety/ Institute of Internal Auditors: http://www.theiia.org Association of Certified Fraud Examiners: http://www.acfe.com/home.asp

35. RIT 35 Conclusion Hopefully Your awareness about fraud has been heightened You are now prepared to reduce fraud risk in your area Remember - implementing basic controls approval of financial transactions, segregation of duties, and expenditure review is the key Many controls are common sense

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