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Crooks You Work With. Larry Bailey Executive Director WSRMP. Aug, 12, 2011 Former Birch Bay water district treasurer gets three years for theft ZOE FRALEY / THE BELLINGHAM HERALD

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Crooks you work with

Crooks You Work With

Larry Bailey

Executive Director WSRMP


Crooks you work with

Aug, 12, 2011

Former Birch Bay water district treasurer gets three years for theft

ZOE FRALEY / THE BELLINGHAM HERALD

The former treasurer of the Birch Bay Water and Sewer District will have to serve three years in prison and pay back $450,000 to the district that he stole while working there.

Blaine resident Glenn Golay, 65, pleaded guilty to nine counts of theft and was sentenced Thursday, Aug. 11, in Whatcom County Superior Court.

Golay had been stealing about $37,000 to nearly $80,000 per year between Jan. 1, 2003, and Dec. 31, 2010, according to a Washington State Auditor's Office investigation. He had been the district's treasurer for more than 20 years.

Feb, 23, 2011

Treasurer suspected of stealing nearly $500,000 from Birch Bay Water and Sewer district

ZOE FRALEY / THE BELLINGHAM HERALD

BIRCH BAY - The former treasurer of the Birch Bay Water and Sewer District is suspected of stealing about $470,000 from the district over seven years, according to the district.

The alleged misappropriations by longtime treasurer Glenn Golay came to light in January during a State Auditor's Office review of the district's finances for 2008-09.


Someone you trust

Someone You Trust

  • Church Treasurer

  • Deacon Board

  • Leader in Professional Association

  • PTA Board President


Self deception

Self Deception

  • Procrastination

  • Rationalization


The fraud triangle

The “Fraud Triangle”

Motive/Pressure

Opportunity

Rationalization


Catching the office manager

Catching the Office Manager


Isn t it the sao s job to find fraud

Isn’t it the SAO’s job to Find Fraud?


Auditor s role

Auditor’s Role

  • “Expectation Gap”

    • Public assumes purpose of the audit is to catch fraud.

  • Statement on Auditing Standards 99 (AICPA Acct StdsBd)

    • “The auditor has responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. “

  • Auditors prepare report on whether the financial statements are fairly presented. They should investigate suspected frauds uncovered during their review, but not primary objective.


How much fraud is there

How Much Fraud Is There?

  • Association of Certified Fraud Examiners (ACFE) Annual Report (www.acfe.org)

  • 1,843 cases surveyed Jan08-Dec09 (40% outside US)

  • Average loss 5% of annual revenue

  • Median Loss $160k, 25% > $1m

    • Financial Statement Fraud $4.1m, Corruption $280k, Asset Misappropriation $135k

    • Asset misappropriation cases most common 90%, Corruption 22%, Financial Statement Fraud 4% (Overlap because many cases involve more than one)

  • SOURCE: 2010 ACFE Annual Fraud Report


Who commits fraud

Who Commits Fraud?

  • Employees 42% (median loss $80k)

  • Managers 41% (median loss $200k)

  • Executives 17% (median loss ($723k)

  • SOURCE: 2010 ACFE Annual Fraud Report


Gender and age of fraudsters

Gender and Age of Fraudsters

  • Men 57%

    • The median $ loss is 2.5x women

  • 40% have between 1-5 years seniority

    • The longer they have worked there, the bigger the average theft

  • 50% between ages 31-45

    • Losses sharply increase with age

  • SOURCE: 2010 ACFE Annual Fraud Report


Crooks you work with

Fraudster’s Departments

  • Accounting 22%

  • Sales 14%

  • Upper Management 14%

  • Purchasing 6%

  • IT 3%

  • HR 1.3%

  • Internal Audit 0.2%

  • SOURCE: 2010 ACFE Annual Fraud Report


Crooks you work with

Fraudsters Records

  • 87% had no previouscriminal record

  • 83% never punished

    or terminated from

    earlier job

  • SOURCE: 2010 ACFE Annual Fraud Report


How long does fraud last

How Long Does Fraud Last?

  • Median time before detection 18 months

  • Our frauds for two Water

    & Sewer Districts went on

    for 6-7 years

  • SOURCE: 2010 ACFE Annual Fraud Report


How did they do it

How Did They Do It?

  • Missing/Weak Internal Controls (37.8%)

  • Override of Good Internal Controls (19.2%)

  • Lack of Management Review (17.9%)

  • Poor “Tone at the Top” (8.4%)

  • Incompetent Oversight (6.9%)

  • No Independent Oversight (5.6%)

  • All others (4.2%)

  • SOURCE: 2010 ACFE Annual Fraud Report


How do manager think fraud is detected

How Do Manager Think Fraud is Detected?

  • External Audit – 76%

  • Internal Audit 69%

  • Fraud Training-Managers 42%

  • Fraud Training-Employees-40%

  • Job Rotation/Mandatory Vacations-15%

  • SOURCE: 2010 ACFE Annual Fraud Report


How is fraud actually detected

How is Fraud Actually Detected?

  • Fraud Tip Line (40.2%)

  • Management (15.4%)

  • Internal Audit (13.9%)

  • Accident (8.3%)

  • Account Reconciliations (6.1%)

  • Document Review (5.2%)

  • External Audit (4.6%)

  • SOURCE: 2010 ACFE Annual Fraud Report


Warning signs

Warning Signs

  • Living beyond means (43%)

  • Financial difficulties (36%)

  • Control issues (23%)

  • Close with vendors/customers (22%)

  • “Wheeler-Dealer” style (19%)

  • Divorce/Family Issues (18%)

  • Addictions (12%)

  • Never takes vacations (10%)

  • Frequent complaints about pay/promotions (5%)

  • SOURCE: 2010 ACFE Annual Fraud Report


Three steps to a fraud

Three Steps to a Fraud

  • Commit-Take the money, create the false vendor, etc.

    • Perception of effective internal controls is best way to stop this.

  • Conceal-Alter records to make detection difficult

    • Effective internal controls make hiding the fraud more difficult

  • Convert-Alter the form of what has been taken into something useful to the fraudster

    • Conversion can be internal (check for cash) or external (ebay?)


Magic anti fraud bullet segregation of duties

Magic Anti-Fraud Bullet:Segregation of Duties

  • When one person can perform any two of the following, there it’s a fraud opportunity:

    • Custody Function

      • Who actually handles the cash, stuff, etc? This includes the District checkbook.

    • Approval

      • Who approves the use or transfer of the asset?

    • Recording/Reconciliation

      • Who records the use or transfer? Who prepares the source documents?


Types of fraud

Types of Fraud

  • Theft of assets (generally cash, but could be equipment/inventory)

    • Most common, but lower in total amount

  • Improper expenditures (fake vendors

    “ghost” employees)

    • Less common, but larger

  • Financial Statement


Cash receipts frauds

Cash Receipts Frauds

  • Is all money getting to bank when it should, and are all adjustments valid?

    • Skimming/Underreporting (before entering system)

    • Cash Theft (receipts already recorded in accounting system)

  • Ways money comes in?

    • Mail, credit cards, wire, cash receipts at the counter, etc?


Preventing cash receipts fraud

Preventing Cash Receipts Fraud

  • Segregation of duties

    • Handlers of cash should never be able to adjust accounts

  • Separate tills (can be a challenge)

  • Use receipts that are difficult to alter (prenumbered, Z-Tapes,etc)

  • Daily deposit of ALL funds (RCW requires)

    • Even if you don’t know why you got it, accounting can figure it out later

    • Daily reconciliation of deposit to CR records

    • Composition of deposits (Does check/cash composition match what the bank received?)


Are you getting the benefit of all your purchases

Are you getting the benefit of all your purchases?

  • Small and attractive items

  • Theft of inventory

  • Borrowing of equipment

  • Disposal of “Surplus” or “Damaged” equipment


Preventing misappropriation frauds

Preventing Misappropriation Frauds

  • Internal Controls

    • Separate approval of purchases

    • Separate approval of writeoffs, surplus, scrap

    • Policy prohibiting personal use of district assets

    • Tagging the assets

    • Physical control over inventory/equipment (locked room)

    • Periodic inventory count

  • Fraud Hotline (SAO, District)


Disbursement frauds

Disbursement Frauds

  • Do you know where your money is going?

  • False Billing Fraud

    • Fake invoices/Fake Vendors

    • Pay & Return Scheme (Real vendors asked to return “overpayment”)

    • Kickback schemes (Vendor actually participates in fraud)

    • Mileage expenses


Padded mileage expense reports

Padded mileage expense reports


Preventing disbursement frauds

Preventing Disbursement Frauds

  • Separate person authorizing payment

  • Original invoice supports expenditure

    • Documentation supports vouchers

    • Person who actually knows is the person who approves it

    • Duplicate payments?

    • Do warrants from the county agree to the warrant register?

      • Different person making the comparison

    • Control of the mailing of the warrants

      • Different person mails the payments after they are prepared


Payroll frauds

Payroll Frauds

  • Are you paying the right people?

    • “Ghost” employees/PT padded to FT

  • Right people paid wrong amount?

    • Padding timesheets

    • Unapproved Raises/Benefits

  • Leave records?

    • Effectively a raise, since the employee has more vacation as a result


Padded time sheets

Padded time sheets


Preventing payroll frauds

Preventing Payroll Frauds

  • Internal Controls

    • Reconciliation of the pay disbursements to the pay records

    • Who creates and maintains the payroll/records?

    • Who approves the timesheets?

      • Can the fraudster alter them after approval?

    • Who hands out the checks?


Financial statement frauds

Financial Statement Frauds

  • Takes place in the public sector as well

    • Bond covenants

    • Grant requirements

  • Types of Frauds

    • Concealment of expendituresor liabilities

    • Improper disclosures

    • Related parties


Preventing frauds generally

Preventing Frauds Generally

  • “Tone at the Top”

    • District’s leadership must embrace integrity as a core value of the organization.

    • Truthful reporting more important than favorable reporting

  • Segregation of Duties

    • Challenging in smaller entities. Compensating controls must be found


Preventing frauds generally1

Preventing Frauds Generally

  • Organizational Structure – commissioner as acting treasurer

    • RCW 57.12.010 does not require it (Risk vs Compliance)

  • Hiring Practices

    • Background checks on employees and vendors regarding finance/accounting

  • Employee Training

    • All employees are part of the fraud fighting team

  • Terminate and Prosecute Fraudsters


What can electeds gms do

What Can Electeds/GMs Do?

  • Ask Dumb Questions!

    • Until you understand the answers. Don’t let accounting’s sophistication intimidate you.

  • Review Transactions

    • Spend an afternoon every few months at the District looking at vouchers. Ask more questions


What can elected officials do

What Can Elected Officials Do?

  • Listen to Staff

    • How would they improve their jobs?

  • Don’t expect to

    see fraud

    everywhere,

    but don’t be afraid

    to see it either


Example of what you can do

Example of What You Can do

  • Acting treasurer role – needed for oversight function on every district Board of Commissioners

“I gave my first treasurer’s report at the commissioners meeting last night. I only pretended to know what I was talking about, fortunately, the other commissioners only pretended that they were listening.”


Resources

Resources

  • State Auditor’s Office –www.sao.wa.gov

    • Fraud Hotline - 1-866-902-3900

  • Washington State Society of CPAs – WSCPA.Org

  • Association of Certified Fraud Examiners – ACFE.Org

  • WSRMP Internal Control Handouts


Trust but verify

“Trust but Verify”


Answers

Answers?

Larry Bailey email: [email protected]

(425) 952-9750


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