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RED FLAGS OF OCCUPATIONAL FRAUD Caroline Burnell, CFE, CGFM.

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Presentation on theme: "RED FLAGS OF OCCUPATIONAL FRAUD Caroline Burnell, CFE, CGFM."— Presentation transcript:

1 RED FLAGS OF OCCUPATIONAL FRAUD Caroline Burnell, CFE, CGFM

2 CAROLINE BURNELL  Fraud Investigator  25 years experience in auditing and fraud investigations

3 SOURCES: State of New York, Office of State Comptroller, Red Flags for Fraud bs/red_flags_fraud.pdf bs/red_flags_fraud.pdf Accessed January 8, Wells, Joseph T; Corporate Fraud Handbook Prevention and Detection, 3rd Edition

4 RED FLAGS Defined

5 RED FLAGS A set of circumstances that are unusual in nature or vary from the normal activity.

6 RED FLAGS  Do not ignore a red flag!  Studies of fraud cases consistently show that red flags were present, but either weren’t recognized or were recognized but not acted upon by anyone.

7 RED FLAGS  The investigation should be done by a responsible person who is unlikely to be committing the fraud if one is occurring.  Sometimes an error is just an error.

8 FRAUD And Its Perpetrators

9 KEY POINTS Required Conditions:

10 ANYONE within the organization can commit fraud.

11 Highly trusted employees are NOT always honest.

12  Past Employment-Related Problems  Unusually Close Association with Vendor/Customer  Wheeler-Dealer Attitude  Irritability, Suspiciousness or Defensiveness  Control Issues, Unwillingness to Share Duties  Refusal to Take Vacations  Complained About Inadequate Pay  Complained About Lack of Authority

13  Excessive Pressure from Within Organization  Excessive Family/Peer Pressure for Success  Financial Difficulties  Addiction Problems  Divorce/Family Problems  Past Legal Problems Source: ACFE 2012 Report to the Nations

14 WAR STORY

15 WAR STORY RED FLAGS

16  Legal Pressure  Past Theft  Financial Pressure  Similar looking invoices  Sequentially numbered invoices  Same address / telephone number  No or web address  Executive Directive submitted an invoice from one of his companies for payment of an item that was never delivered.  Checks payable to companies endorsed by Executive Director and/or his family

17

18 SHELL COMPANIES Shell companies are fictitious entities created for the sole purpose of committing fraud by shielding identities of the perpetrator and/or hiding money.

19 SHELL COMPANIES  No phone number  No or web address  No physical address  No company logo  No contact information  No federal identification number

20 FALSE INVOICES Running unsanctioned invoices through the accounts payable system. May be done with vendor collusion.

21 FALSE INVOICES  Invoices cannot be traced to shipments.  Multiple payments to single vendor on the same date.  Pattern of purchases just below review level.  Unusually quick turnaround of invoices.  Payment to multiple vendors for same product.

22 FALSE INVOICES  Expenses increase dramatically.  Unexplained rise in cost of goods sold.  Unexplained decrease in gross/net profits.  Excessive materials orders.  Goods not purchased at optimal point.  High level approval of a low level transaction

23

24 CHECK TAMPERING  Preparing a check for one’s own benefit  Intercepting a check intended for a third party and converting the check for one’s own benefit.

25 Payee Maker Endorsemen t Check Tampering: Forged Maker Schemes Authorized Maker Schemes Concealed Check Schemes Intercepted Check Schemes

26 CHECK TAMPERING  Missing checks.  Voided checks  Bank accounts that are not reconciled on a timely basis.  Sudden activity in dormant bank accounts

27 CHECK TAMPERING  Significant increase in payments to one vendor  Duplicate payments  Payments without supporting documentation  Accounting records that disagree with the supporting documentation

28 CHECK TAMPERING  Checks to employees, in excess of the # and $ amount of normal payroll checks.  Vendor & customer complaints regarding nonpayment. t

29 QUESTIONS


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