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No Fraud Left Behind. Fraud Risks and Prevention (Info gathered from the Association of Certified Fraud Examiners) Runyon Kersteen Ouellette. No Fraud Left Behind. Types of fraud Red flags Controls to help prevent fraud Specific cases. Opportunity. Motivation. Pressure.

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No Fraud Left Behind

Fraud Risks and Prevention

(Info gathered from the Association of Certified Fraud Examiners)

Runyon Kersteen Ouellette

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No Fraud Left Behind

  • Types of fraud

  • Red flags

  • Controls to help prevent fraud

  • Specific cases

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The Fraud Triangle

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Types of Fraud

  • Corruption

  • Fraudulent financial statements

  • Asset misappropriation

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  • Schemes in which employees use their influence in business transactions in a way that violates their duty to their employers in order to obtain a benefit for themselves or someone else

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  • Conflict of interest

  • Bribery (i.e. kickbacks, bid rigging)

  • Illegal gratuities

  • Economic extortion

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Fraudulent Financial Statements

  • Involves the intentional misstatement or omission of material information from the entity’s financial reports

  • Referred to as “cooking the books”

  • Often involves reporting fictitious revenues or concealment of expenses or liabilities in order to make entity appear more profitable than it really is

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Fraudulent Financial Statements

  • Least commonly reported type of occupational fraud

  • Cause considerably more damage than frauds in the other two categories

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Asset Misappropriation

  • Employee steals or misuses an entity’s resources

  • This is the most commonly reported fraud

  • The least costly of the three categories of fraud

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Asset Misappropriation

  • Cash receipts

  • Cash disbursements

  • Non-cash (physical assets)

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Schemes Involving Cash Receipts

  • Skimming – cash is stolen before it is recorded on the entity’s books

    • Employee accepts payment but does not record the transaction

  • Larceny – cash is stolen after it is recorded on the entity’s books

    • Employee steals cash from daily receipts before they can be deposited in the bank

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Schemes Involving Cash Disbursements

  • Billing – causing entity to issue a payment by submitting invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases

    • Employee creates shell company and bills employer for nonexistent services

    • Employee purchases personal items and submits invoices to employer for payment

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Schemes Involving Cash Disbursements

  • Check Tampering – stealing funds by forging or altering checks or stealing legitimately issued checks to other payees

    • Employee steals blank company checks, makes them out to self or an accomplice

    • Employee steals outgoing check to a vendor and deposits into own account

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Schemes Involving Cash Disbursements

  • Expense Reimbursements – claims for reimbursement of fictitious or inflated business expenses

    • Employee files fraudulent expense reports, claiming personal travel or nonexistent expenses

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Schemes Involving Cash Disbursements

  • Payroll – causing entity to issue a payment by making false claims for compensation

    • Employee claims overtime for hours not worked

    • Employee adds ghost employees to the payroll

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Schemes Involving Cash Disbursements

  • Cash Register Disbursements – false entries entered onto cash register to conceal the fraudulent removal of cash

    • Employee fraudulently voids a sale on cash register and steals the cash

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Cash on Hand Misappropriation

  • Any scheme in which the employee misappropriates cash kept on hand at the entity’s premises

    • Employee steals cash from a vault or cash box

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Non-Cash Misappropriation

  • Any scheme in which the employee steals or misuses non-cash assets of the entity

    • Employee steals inventory

    • Employee steals or misuses confidential customer financial information

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Protecting Yourself

  • Ask “What’s the worst thing that can happen?”

  • Become familiar with typical warning signs or “red flags”

  • First priority is to prevent fraud

  • Second priority is to detect fraud once it occurs

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Red Flags in the Organization

  • High employee turnover in key areas

  • Lack of segregation of duties

  • Lack of controls or enforcement of controls

  • Inattention to detail, sloppiness, inexperienced personnel

  • Decentralized activities not closely monitored

  • Management inattention, disregard, or blind faith in employees

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Red Flags for Employees

  • Employees living beyond their means

  • Employees with financial difficulties

  • Employees with control issues

  • Refusal to take vacations, accept a promotion, delegate tasks or share duties

  • Defensive, suspicious, or irritable attitude

  • Complaining about pay, lack of authority

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Red Flags for Employees

  • Unstable life situations (e.g. divorce)

  • Addiction or legal problems

  • Unusually close relationship with vendors

  • Other changes in behavior (showing up late, lapse in performance)

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Red Flags for Management

  • Not forthcoming with information

  • Excessive year-end transactions

  • Journal entries or transactions that don’t make sense

  • Increased write-offs of receivables

  • Cash shortages

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Red Flags for Cash Receipts

  • Large deposits in transit

  • Cash is not deposited in a timely manner

  • Bank reconciliations aren’t timely, aren’t done at all, or don’t match records

  • Large, numerous errors in cash accounts

  • Bank deposits vary from records

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Red Flags for Cash Disbursements

  • Very old, outstanding checks

  • Checks issued out of sequence

  • Unexpected checks clearing

  • Manual checks, typed checks, checks made out to cash

  • Large number or amount of reimbursements to one employee

  • Photocopied, missing or altered documents

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Red Flags for Cash Disbursements

  • Invoices for unspecified or poorly defined services

  • Unfamiliar vendors

  • Company names that consist of only initials

  • Vendors with only P.O. Box addresses

  • Rapidly increasing purchases from one vendor

  • Vendor address matches employee address

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What Can You Do?

  • Set the tone at the top

  • Assess what areas contain risks

  • Have policies and procedures in place

  • Ensure that duties are segregated and other internal controls are in place

  • Proper oversight

  • Timely reconciliations of accounting records

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Decentralized Risk Areas

  • Student activity funds

  • School lunch, where there is a separate checking account maintained

  • Booster clubs if under control of the School (using School ID number)

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Policies and Procedures

  • Should cover the following (at a minimum)

    • Actual bank accounts

    • Procedures for receipts

    • Procedures for deposits

    • Procedures for disbursements and check writing

    • Record maintenance

    • Bank reconciliations

    • Periodic reporting

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Internal Auditing

  • Annual audits are only done once a year

  • Internal audits can be done periodically throughout the year and on a surprise basis

  • Someone from central office becomes familiar with the process and can be the point person

  • Gives perception that these accounts are being monitored

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Student Activity Funds

  • What to look at

    • Bank reconciliations (Do they reconcile? Are they done timely?)

    • Deposits (Are they made timely? Are they accurate?)

    • Disbursements (Do they have proper approval and supporting documentation?)

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Student Activity Funds

  • What to look at

    • Cancelled checks (Anything unusual? Any made out to employee in charge of the account? Checks made out to cash?)

    • Account balances (Are there any with negative balances? How will these be funded?)

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Case #1 Personal Reimbursements

  • Professional skepticism-no blind faith in employees

  • Insist receipts get turned in on a timely manner (e.g. receipts that aren’t turned in within 2 weeks will not be reimbursed; no exceptions!)

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Case #2 Paying Personal Bills

  • Review accounts payable warrants and supporting documentation

  • Ensure all disbursements have proper approval notated

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Case #3 School Activity Funds

  • Dual signatures on checks or check signing authority granted to principal only

  • Have another employee perform the bank reconciliations

  • Require approval before checks are signed (e.g. check vouchers)

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Case #4 Tuition Billing

  • Segregate cash receipts from preparing deposits

  • Management review of billings/receivables for outstanding items

  • Program policy-checks made out to the program only