FRAUD: Risks and Prevention

1. FRAUD: Risks and Prevention

2. Fraud: Risks and Prevention • Implications of fraud • What motivates one to commit fraud • The importance of internal control • Fraud indicators – what to look for • Professional resources

3. Implications of fraud • According to the Association of Certified Fraud Examiners (ACFE), U.S. organizations lose an estimated 7% of annual revenues to fraud. • Among those, the median loss suffered by organizations with fewer than 100 employees was $200,000 higher than any other category.

4. Implications of fraud • The average length of occupational fraud goes on about 18 months before being discovered. • Fraud is not limited by industry or size of an organization.

5. Motivating Factors

6. Motivating Factors • Employee motivation: • Personal financial matters, the unexpected (I’m just borrowing it) • Entitlement, getting back at the employer • Support lifestyle • Challenge

7. Motivating Factors • Business weaknesses: • Limited controls – lack of division of responsibilities between employees • Inadequate employee prescreening-reference checks, criminal records, professional recommendation, drug screening, etc. • Too much trust – the human element. Never having faith in your employees is a bad thing; so is always trusting them.

8. Types of Fraud from Within • Asset misappropriation • Cash • Skimming: stealing money before it is received and recorded. Usual culprits are salespeople and accounting personnel. • Larceny: Theft of currency after the company has received and recorded it. Usually a cashier or someone with easy access to currency.

9. Fraud from Within • Asset misappropriation [cont’d] • Cash • Fraudulent disbursements – the most expensive of the cash frauds. • Employees in accounting or bookkeeping dept. • Employee submits a false invoice the company unknowingly pays to the benefit of the thief, commonly for services not rendered to the company

10. Fraud from Within • Asset misappropriation [cont’d] • Non-cash • Items that are important to the employee personally, such as electronics or jewelry. • Laptops, handhelds, software and calculators top the list of items likely to be stolen.

11. Fraud from Within • Corruption • Less common but more expensive • Corrupt employee conspires with someone outside the company • Can involve accounting personnel, bank employees, purchasing agents and buyers

12. Types of External Fraud • Check Fraud • Forged, stolen or counterfeit checks are common. • Know your customers and train your employees who accept checks to be alert to common signs. • Credit Card Fraud • Four types: stolen credit cards, identity fraud, altered cards, and counterfeit cards • Like checks, the front line of defense is employee education.

13. Types of External Fraud • Shoplifting • Internet and Computer • With limited personnel an attempt should be made to assign separate workers to the functions of data entry and asset control. • Cyber security • Passwords, virus protection, firewalls • Computer fraud has increased with the increase in identify theft.

14. Indicators of Potential Fraud • Rising expenses and/or declining revenue • Abnormally high inventory shrinkage • Unfamiliar vendors or other payees • Excessive spending by employees

15. Prevention and Detection

16. Prevention and Detection • Internal control reviews with Segregation of duties • Reasonable internal controls are critical. Review the existing systems and make improvements. • Segregate duties to ensure no employee has complete authority over one area – create checks and balances • Utilize Passwords and software module access controls.

17. Prevention and Detection • Cash reviews and reconciliations • Since 9 in 10 occupational frauds involve the company's cash, regularly review receipts and disbursements for anomalies. • Owners should receive unopened bank statements and review for suspicious transactions • Secure check stock and limit access • Perform daily register reconciliations • Require dual signatures for large transactions • Limit access on authority to initiate wire transactions

18. Prevention and Detection • Accounts Receivable review • Review aging and investigate old balances • Review for write-offs of balances • Inventory observations and asset verifications • For companies with inventory or other assets that make attractive targets, observe inventory procedures and/or verify specific items. • Financial statement review • Review financial reports on a monthly basis and look for unusual amounts or trends • Accounts Payable & Payroll review • Ensure vendors and expenses are valid • Review Payroll registers for employees and amounts

19. Prevention and Detection • Physical Controls • Consider security cameras and locked areas – helps prevent internal and external fraud. • Security systems • Control receiving and shipping areas • Utilize bank controls • Tools such as positive pay, payroll accounts or approved vendor lists are available at most banks and can greatly reduce check fraud • Run background checks on potential employees • Train employees on Risks and have documented procedures Seek professional assistance when have concerns – don’t wait!

20. Professional Resources • Questions, assistance: • Certified Public Accountant (CPA) • Certified Fraud Examiner (CFE) • Online general resources: • American Institute of Certified Public Accountants www.aicpa.org Public pages section on fraud, forensics and valuation: http://www.aicpa.org/ForThePublic/Pages/ForthePublic.aspx (browse by topic) • Association of Certified Fraud Examiners www.acfe.org http://www.acfe.com/documents/Fraud_Prev_Checkup_IA.pdf