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Internal Controls – The Fraud Triangle
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  1. Internal Controls – The Fraud Triangle Dennis Osuch, CPA - Partner Dennis Maschke, CPA - Manager

  2. Objectives

  3. What – Occupational Fraud Occupational Fraud • The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets.

  4. Types of Occupational Fraud

  5. Occupational Fraud by Category

  6. When – The Fraud Triangle

  7. Who commits fraud?

  8. Who commits fraud? (continued)

  9. Who commits fraud? (continued)

  10. Who commits fraud? (continued)

  11. Where is fraud committed?

  12. Why does fraud happen?

  13. Asset Misappropriation

  14. Asset Misappropriation Cash receipting

  15. Asset Misappropriation – Cash Receipts

  16. Fraud in State and Local Government “The auditor reported that the daily collections from the transfer station were not remitted to the county trustee for long periods, as long as 35 days, allowing the buildup of large sums. The auditor also found the receipts were not always issued in sequential order and there were numerous alterations made to the accounting records”

  17. Asset Misappropriation - Cash Receipts

  18. Asset Misappropriation: Cash Theft

  19. Asset Misappropriation: Cash Theft

  20. Solutions to Internal Segregation Difficulties Person A: Collect the cash, issue pre-numbered receipt to customer. Perform the month-end bank reconciliation Person B: Review and approve the cash collection form. Physically make the deposit.

  21. Asset Misappropriation Payroll schemes

  22. Types of Payroll Fraud Schemes

  23. Payroll Fraud - Detection

  24. Payroll Fraud - Prevention

  25. Payroll – Internal Control Recommendations

  26. Payroll – Internal Control Recommendations (Continued) • Payroll reconciliations: • Comparison of paid checks to payroll registers • Payroll registers reviewed and approved before disbursement: • Names of employees • Hours worked • Wage Rates • Deductions • Unusual items • Payroll bank account should be reconciled by employee • Not involved in the preparation of payroll • Does not sign the checks • Does not handle the check distributions

  27. Payroll – Internal Control Recommendations (Continued) • Distribution of payroll checks should be rotated periodically to different employees without prior notice • Distribution by employee other than department head or the person who prepares the payroll

  28. Payroll Fraud • Annual Salary $68,307.82 • 2007 $122,888.62 • 2008 $195,440.58 • The accused took the money after he injured his back and became addicted to pain medication.

  29. Asset Misappropriation Billing

  30. Types of Billing Fraud Schemes:

  31. Billing Scheme - Detection • Analytical Review • Inventory purchases in relationship to supply requests • Comparison with prior years and budget • Computer Assisted Analytical Review • Vendors & employees with same address • More the one vendor with the same address • Vendors with only PO box addresses • Vendor Complaints

  32. Billing Scheme - Prevention

  33. Billing Scheme - Prevention

  34. The Impact of Hotlines

  35. Impact of Hotlines

  36. Fraud Hotlines

  37. Fraud Hotlines (Continued)

  38. Pitfalls & Solutions

  39. Concluding Remarks

  40. Dennis J Osuch, CPA • Partner • Dennis.Osuch@CliftonLarsonAllen.com • Dennis V Maschke, MBA, CPA • Assurance Manager • Dennis.Maschke@CliftonLarsonAllen.com