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© 2012 Financial Operations Networks LLC Safeguarding Your Organization From Employee Theft, Embezzlement & AP Fraud.

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Presentation on theme: "© 2012 Financial Operations Networks LLC Safeguarding Your Organization From Employee Theft, Embezzlement & AP Fraud."— Presentation transcript:

1 © 2012 Financial Operations Networks LLC Safeguarding Your Organization From Employee Theft, Embezzlement & AP Fraud

2 Chris Doxey, CAPP, CCSA, CICA Has extensive experience in accounts payable, procurement, internal auditing, internal controls, Sarbanes-Oxley compliance, payroll, logistics, financial systems strategy, and financial integration at Digital, Compaq, Hewlett Packard, and MCI. She was recruited to assist MCI (formally WorldCom) recover from their internal control challenges. Chris has a bachelor's degree in English, a bachelor's in accounting, a master's in business administration, and a graduate certificate in project management. Chris has published two handbooks: AP Leadership Skills and Implementing a Controls Self Assessment Program for Your Account Payable Process

3 Agenda  About Fraud  Types of Fraud that Impact AP –External Fraud –Internal Fraud  Fraud Prevention Models –Control Self Assessments –Fraud Risk Assessments –Hotlines  Discussion/Q&A

4 The Fraud Problem  “Few people begin their careers with the goal of becoming liars, cheats, and thieves. Yet that turns out to be the destiny of all too many.” –Joseph T. Wells, Founder and Chairman, Association of Certified Fraud Examiners  60% of all fraud is committed by insiders –PricewaterhouseCoopers

5 Fraud: The Big Picture According to major accounting firms, professional fraud examiners and law enforcement:  Fraud costs the WORLD $1 TRILLION per year. (5%) (ACFE)  Business losses due to fraud increased 20% in last 12 months, from $1.4 million to $1.7 million per billion dollars of sales. (2010/2011 Global Fraud Report)  75% of the companies surveyed experienced at least one incident of fraud in the last 12 months (KPMG)

6 Fraud: The Big Picture (Cont’d.)  Average cost for each incident of fraud is $160K (ACFE)  Approximately 60% of corporate fraud committed by insiders (PwC)

7 What is Fraud? ASSOCIATION OF CERTIFIED FRAUD EXAMINERS: “Any illegal acts characterized by deceit, concealment, or violation of trust.. These acts are not dependent upon the application of threat of violence or of physical force. Frauds are perpetrated by individuals and organizations to obtain money, property, or services; to avoid payment or loss of services; or to secure personal or business advantage.”

8 What is Fraud? (Cont’d.) AICPA SAS NO. 99: “A broad legal concept that is distinguished from error depending on whether the action is intentional or unintentional.”

9 The Two Main Types of Fraud 1. External Fraud 2. Internal Fraud

10 External Fraud Main Types of External Fraud: 1.Vendor/Supplier –Billing schemes – double billing –Delivery of sub-standard goods at full price –Phony vendors 2.Check and ACH Fraud 3.Theft of confidential information

11 Vendor Fraud  Vendor fraud occurs when: –Payments are made to “phony vendors,” scam vendors, or shell companies –Even current or prior employees can “act” as vendors

12 Introduction to Check Fraud  Causes $20 billion in losses every year (Nilson Report)  1.2 million fraudulent checks enter the financial systems every day (Abagnale Associates)  Check fraud is growing at 25% a year—much faster then ACH fraud (ABA)

13 Introduction to Check Fraud (Cont’d.)  New legal standards put extra risk on checking account holders  Moving target—new forms all the time

14 Check and ACH Fraud  Check Fraud occurs when checks are stolen, altered, or counterfeited  ACH Fraud occurs when an account is accessed for unauthorized ACH payments or debits

15 Information Based Threats Main Threats:  Theft of confidential information (employee info; trade secrets, intellectual property)  System sabotage by hackers  Account takeover  Phishing

16 Information Based Threats (Cont’d.) Phishing: To obtain confidential data about individuals— customers, clients, employees or vendors— that can be used to commit various types of identity fraud such as… –Opening bank accounts in your name –Applying for loans in your name –Applying for credit cards in your name


18 Pressure  Excessive credit card debt  Uninsured medical expenses  Substance abuse or gambling addiction  Sudden life crisis-- divorce, death of a spouse

19 Opportunity  Access to blank checks  Access to financial records  Ability to manipulate accounting records

20 Opportunity (Cont’d.)  Approached by a co-worker with access to company funds/assets/payroll systems, A/P, etc.

21 Rationalization  “I’m only borrowing the money”  “I’m entitled to the money”  “I had to do it to provide for my family”

22 Rationalization (Cont’d.)  “I’m underpaid/my employer cheated me”  “My bosses are dishonest so why shouldn’t I do what they’re doing?”

23 Common Types of Internal Fraud  Embezzlement  Accounts Payable (A/P) Fraud  P-Card  Collusion with Vendors  Accounts Receivable (A/R) Fraud  Cash theft/Skimming  Billing schemes and kickbacks  Check theft/forgery/tampering

24 Common Types of Internal Fraud (Cont’d.)  T&E Fraud  Payroll schemes  Theft of confidential information

25 T&E Fraud What it is: Employees with authority to charge business- related expenses to the organization abuse the privilege by:  Submitting expense reimbursement claims twice  Falsifying travel/entertainment-related receipts for actual or fictitious expenses

26 T&E Fraud (Cont’d.)  “Over-purchasing” expenses: Booking business-class air travel, traveling coach and pocketing the reimbursed difference

27 T&E Fraud (Cont’d.) What it is:  Expense misclassification: Claiming reimbursement for personal expenses while traveling  Fraudulent/unauthorized use of organization credit card for personal expenses

28 T&E Fraud (Cont’d.) T&E Fraud Example: Book a trip, don’t take it but claim for it anyway Scenario: Jeff tells staff will be on business trip for one week, but is spotted by colleague walking his child to school

29 P-Card Fraud How it works:  Most frauds are committed by outsiders according to AFP  Insider P-Card fraud: Basic abuse by making personal or other unauthorized purchases in a company with inadequate controls

30 Check Fraud/ Tampering: Varieties  Check-Forging Schemes  Check Theft/Interception and Forged Endorsement  Altered Payees  Check Counterfeiting

31 Billing Schemes/Shell Companies What it is: Manager or accounting/purchasing employee creates “shell company” – bogus entity and bank account in name and paper only. Fraudster generates bogus invoices from phony company, forges approval and has invoice submitted for payment. Checks go to phony company P.O. box which fraudster controls

32 Conflict of Interest What it is: Situations where senior managers/executives abuse their authority by using their direct or indirect financial relationships with outside entities to award those contracts from their employer or similar benefits in conflict with the organization’s procurement policies.

33 Conflict of Interest: Case Study Brenda Belton, used her position as Executive Director of the District of Columbia School's Office of Charter School Oversight to divert money belonging to the District of Columbia to numerous bank accounts that she controlled…and to friends. How:  Submitted $200K in invoices from school services company controlled by friends of hers, indicating that the funds were for monitoring the quality of DC schools. Payments were deposited in her own “business” bank account AND personal accounts.  Awarded seven no-bid school service contracts worth over $400,000 to her own friends who in return paid Belton over $180,000 in kickbacks.

34 Kickback Schemes What it is: Similar to billing/AP fraud: Accounting or purchasing employee colludes with dishonest vendor: Allows vendor to...  Submit inflated invoices  Bill full price for low-quality goods  Get orders without competitive bidding  In all cases, vendor “kicks back” portion of ill-gotten gains THIS CRIME IS EXTREMELY WIDESPREAD IN HEALTHCARE

35 Hotlines: Statistical Overview Source: 2010 Report to the Nations on Occupational Fraud and Abuse, Association of Certified Fraud Examiners

36 Hotlines: Statistical Overview (Cont’d.) In 67% of the cases where there was an anonymous tip, that tip was reported through an organization’s fraud hotline. Lesson: Hotlines are an effective way to encourage tips from employees who might otherwise report misconduct Source: 2010 Report to the Nations on Occupational Fraud and Abuse, Association of Certified Fraud Examiners

37 Hotlines: Statistical Overview (Cont’d.)

38 The COSO Model

39 What Can Go Wrong?

40 Overview of Fraud Risk Assessment Steps  Identify key high-level business processes  Fraud team brainstorming  Group the fraud risks, scenarios and schemes  Choose the high level fraud risks in key processes to further analyze  Conduct the detailed fraud risk assessment

41 Internal Controls – Do’s  Update internal control programs if there has been a: –Management Change –Significant Process Change –Implementation of a Shared Service Center –Offshoring or Outsourcing a Process –Merger or Acquisition –System Implementation –Identification of a Risk –Audit Finding –Fraudulent Activity

42 Internal Controls – Don’ts  Don’t just go through the motions  Don’t sign off on results without asking questions  Don’t start a controls initiative without a sponsor  Don’t use a controls initiative to assign blame – focus on results  Don’t let controls become stagnant  Don’t get bogged down by the number of controls – focus on key controls

43 Top Ten Generic Controls to Detect and Prevent Fraud  Establish segregation of duties  Reconcile bank accounts every month  Restrict credit card usage  Provide Board with oversight of operations and management  Prepare written fiscal policies and procedures  Ensure that assets such as vehicles, cell phones, equipment, and other agency resources are used only for official business  Protect petty cash funds and other cash funds

44 Top Ten Generic Controls to Detect and Prevent Fraud (Cont’d.)  Protect checks against fraudulent use  Protect cash and check collections  Avoid or discourage related party transactions

45 If You Uncover or Suspect Fraud… 1.Do not take action yourself 2.Speak with your manager and/or the next highest level of authority 3.Involve Internal Audit and/or Corporate Security 4.Do not tell anyone else about your suspicions 5.Do not confront the employee

46 Questions?

47 © 2012 Financial Operations Networks LLC Thank You! The Accounts Payable Network 2100 RiverEdge Parkway, Suite 1010 Atlanta, GA 30328 Contact: 866-827-6389 770-984-1184 For further information on this topic, contact

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