Washington State Auditor’s Office Fraud in the Workplace: Safeguarding assets and your employees Community College Budget, Accounting and Reporting Group Wenatchee, WA May 19, 2011 Sarah Walker, CFE Ann Strand Fraud Manager Higher Education Coordinator
“There is no kind of dishonesty into which otherwise good people more easily and frequently fall than that of defrauding the government.” − Benjamin Franklin
Agenda • We will learn how to identify, prevent and detect employee fraud schemes including: • Cash receipting • Accounts payable disbursements • Expense reimbursements • Credit and gasoline card disbursements • Payroll disbursements • By the end of the session, you will also understand: • How to identify red flags • Why effective internal controls and monitoring are crucial to your organization
Fraud Program 2010 Statistics • As of December 31, 2010, 406 known or suspected losses have been reported to our Office, totaling at least $2,915,976.
Fraud Program 2010 Highlights • As of December 31, 2010, we reported 75 frauds totaling $1,864,652
Community College Fraud Statistics • Between June 2009 and May 2011, 61 known or suspected losses have been reported to our Office, totaling at least $85,618.
Examples of recent Higher Education fraud reports • After an employee resigned, the Director noted questionable transactions the former employee had submitted for reimbursement. The investigation found a total of $5,318 for personal items the employee had charged to the University. • The University found an employee was paid $14,356 more than her actual earnings. The employee also accrued 40 hours of sick leave and 56.7 hours of vacation leave that she did not earn.
Examples of recent Higher Education fraud reports • An employee in the fiscal department reported that a faculty member was collecting fees directly from the students, in violation of policy. Further research found these funds were not being deposited into College accounts. The funds were deposited into a personal bank account. The faculty member did not produce valid receipts to support the amount of funds collected by the students, causing a loss of $50,000.
Higher Education Audit Issues • Audit issues for the last three years have shown weaknesses in controls over key accounting areas, thus increase the risk of loss.
Fraud and Internal Controls • What are internal controls? • Established and monitored by management • Evaluated and tested by auditors • Why are they important? • Safeguard assets • Protect employees • Provide accurate and reliable information • Promote and improve operational efficiency
Monitoring Controls • Ongoing monitoring • Review of budget to actual reports for revenues and expenses • Comparing receipts to daily deposits • Bank reconciliation review • Periodic monitoring • Trend analysis of revenues by source code • Trend analysis of expenses by fund and object code • Annual risk assessment of control processes
Cash Receipting Schemes • Skimming • Generally involves off-book sales or services that are never recorded in the books − employee misappropriates the funds • Larceny • Involves misappropriating funds that are already recorded in the accounting system • Daily deposits • Less cash schemes • Voids and returns • “Missing” funds
Red Flags of Cash Receipting Fraud • Lack of segregation of duties or other compensating controls • Deposits not made daily and intact • Check/cash composition of the daily deposit does not agree to the mode of payment on the cash receipts • Cash deposits differ from normal patterns • Inventory discrepancies • Unusual over/short activity • Missing deposit slips • Unusual journal entries • High-void activity
Cash Receipting Prevention and Detection • Have adequate segregation of duties or other compensating controls • Compare bank deposits to cash receipt records and verify the mode of payment agrees • Review voided transactions to ensure they are supported • Verify inventory records agree to usage • Review bank reconciliations
Cash Receipting Fraud Cases • While an employee was on administrative leave the supervisor found cash receipts for the payment of electronic home confinement did not agree to the court records. Loss amount: $44,015 • A citizen called to report they did not receive credit for a money order payment that was sent in for child support payments. Loss amount: $25,572 • A management company for the housing authority found the bank records did not agree to the system reports for August. Loss amount: $15,330 • A student notified the college that his payment was not properly applied to his account. Loss amount: $11,260
Accounts Payable Disbursements • Schemes in which a person causes his or her employer to issue a payment by submitting invoices for: • Fictitious goods or services • Inflated invoices • Invoices for personal purchases
Red Flags of Accounts Payable Fraud • Higher-than-usual costs • Excess goods and services • Copies of documents rather than originals • Missing documents • Unusual vendors • Unusual changes in the behavior or lifestyle of employees • Unusual endorsements on the checks
Accounts Payable Prevention and Detection • Have adequate segregation of duties or other compensating controls • Review vendor listings for unusual vendors or excessive payments to vendors • Ensure voided transactions are truly voided • Review for transactions that are out of the ordinary • Only pay original invoices – make sure they make sense • Ensure payments made outside normal process are approved, supported and for a public purpose • Ask questions and confirm with a third party if necessary
Accounts Payable Fraud Cases • While performing the monthly reconciliation, the City found a suspicious warrant made payable to a long-term, trusted employee that had recently retired. Loss amount: $1,091,208 • A bank teller contacted the department regarding a check that was being deposited into a personal account. It required two signatures but only had one. Loss amount: $170,000 • A supervisor received an anonymous complaint alleging childcare payments were being issued for care that was not provided. Loss amount: $130,377
Accounts Payable Fraud Cases • While filling in for an absent employee it was determined a case workers dependents were receiving payments for services that were not rendered. Loss amount: $126,000 • A case manager was partnering with a contracted service provider to process false payments for services that were not provided. The funds were then split between the two individuals. Loss amount: $45,978
Expense Reimbursements • Any scheme in which an employee makes a claim for reimbursement of fictitious or inflated business expense such as: • Charging for items used for personal reasons • Seeking reimbursement for travel and expenses when they were paid on company credit card or advanced travel • Billing for expenses that did not occur • Falsifying receipts to make the purchases business related • Inflating mileage
Red Flags of Expense Reimbursement Fraud • Expenses exceed what was budgeted or prior year totals • Expenses claimed on days the employee did not work • Minimal or non existent support behind the request • Support is photocopies, not originals • Expenses all end in round numbers • Reports were approved by someone outside the department • Unusual or excessive reimbursements to one employee
Employee Reimbursement Fraud Prevention and Detection • Have adequate segregation of duties or other compensating controls • Establish policies and procedures and ensure they are enforced • Require detailed expense report with original receipts and documentation attached • Supervisor with knowledge of employees activities should be approving the report • Ask questions and get a supported answer
Employee Reimbursement Fraud Cases • An employee failed to provide valid receipts to support funds collected for travel purposes. Loss amount: $50,000 • Employees falsified lodging receipts to receive travel reimbursements that were not allowed. Loss amount: $7,876 • The department determined an employee was submitting mileage reimbursements for home visits with foster children that did not occur. Loss amount: $6,153
Credit and Gasoline Card Disbursements • Use of entity credit cards, gasoline cards or open purchase orders for personal purchases • Specific risks for credit purchases • Used at unauthorized vendors • Used for unauthorized purchases • The approved spending limit may be exceeded
Red Flags for Credit Purchases • Lack of policies and procedures for credit purchases • Credit purchases are paid from the statements without having detailed receipts for support • Lack of monitoring of credit purchases • The detailed credit receipt is not obtained, just the summary • Credit bills go directly to purchaser versus a supervisor/monitor • Credit purchases are higher than expected
Credit Fraud Prevention and Detection • Create and enforce adequate policies and procedures regarding credit purchases • Review bills and support documentation submitted to ensure the purchases are approved, supported and for a public purpose • When irregularities are found, follow up to ensure the purchases were appropriate • Ensure items that were purchased were received and are onsite
Credit Card Fraud Cases • The Hospital noticed unusual transactions on a hospital credit card that appeared to be personal in nature. Loss amount: $13,687 • The district found a gasoline card that had been reported stolen was actually being used by employees for personal use. Loss amount: $2,980 • During the monthly reconciliation, the City found credit card charges that appeared to be personal in nature. In addition, the supervisor signature appeared to be forged. Loss amount: $1,451 • Items were purchased on the College credit card that were for a personal vehicle. Loss amount: $1,270
Payroll Disbursements • A payroll fraud involves an employee causing his or her employer to issue a payment by making false claims for compensation • This can be achieved through several schemes such as: • Adding “ghost” employees to payroll • Adding hours to timesheets that was not worked • Taking leave without using annual or sick leave • Manipulating benefit information
Payroll Fraud Red Flags • Unusual fluctuations in payroll expenses, including benefit line items • Poor internal controls • Employees with P.O. Box addresses • Missing paychecks • Employees with the same direct deposit account • When questions are asked, you do not receive an answer
Payroll Fraud Prevention and Detection • Use the straight-line approach for payroll processing • Review payroll registers regularly – ask questions and get supported answers • Review personnel files to verify it is a real person and they are an employee (ghost employees can be real people) • Monitor to ensure overtime is supported and reasonable • Review leave reports for reasonableness • Keep unused check stock secured • Review returned checks for duel signatures • Create and review error reports • Same bank account number • Same address
Payroll Case Examples • An employee was calling in sick to one employer to work for another employer. Loss amount: $3,506.37 • An employee was overstating the amount of hours worked. Loss amount: $13,989.57 • An employee was clocking in for another employee prior to their arrival. Loss amount: $312.01 • An employee who had prior access in the payroll system authorized additional payment to himself. Loss amount: $13,850.79
Payroll Case Examples • An entity found an employee was employed and working at another entity at the same time. Loss amount: $38,535 • Overtime approval forms were falsified by an employee to receive additional pay they did not earn. Loss amount: $8,743 • An employee overstated their timesheet and was paid for hours not worked. Loss amount: $15,085.45 • An employee manipulated the leave system to ensure leave hours were not deducted from his balance. Hours were not “cashed out,” therefore loss is $0.
City of Arlington Case • Amount of the loss: $1,091,208 • Timeline: June 1, 2001 – June 2, 2008 • Background: The former employee had been with the City for more than 30 years in various positions. After she retired in 2008, the City found a questionable payment to her. When questioned about the payment by law enforcement, she confessed to misappropriating money.
City of Arlington Case • How the fraud was accomplished • Manual warrants were processed outside the normal A/P process. • Support documentation was included to make the payments look legitimate and to a legitimate vendor. • The warrants were altered. • The warrants had forged signatures. • How the fraud was detected • After the employee retired a different employee was performing the bank reconciliation. She found a suspicious check and further research found it was a false transaction.
Fraudulent Example Copy of “real” warrant on file
You could see white-out and the suspect’s name Copy of warrant on file at the City