Presentation on theme: "RED FLAGS OF OCCUPATIONAL FRAUD Caroline Burnell, CFE, CGFM."— Presentation transcript:
RED FLAGS OF OCCUPATIONAL FRAUD Caroline Burnell, CFE, CGFM
CAROLINE BURNELL Fraud Investigator 25 years experience in auditing and fraud investigations
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
RED FLAGS Defined
RED FLAGS A set of circumstances that are unusual in nature or vary from the normal activity.
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.
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.
FRAUD And Its Perpetrators
KEY POINTS Required Conditions:
ANYONE within the organization can commit fraud.
Highly trusted employees are NOT always honest.
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
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
WAR STORY RED FLAGS
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
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.
SHELL COMPANIES No phone number No or web address No physical address No company logo No contact information No federal identification number
FALSE INVOICES Running unsanctioned invoices through the accounts payable system. May be done with vendor collusion.
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.
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
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.
CHECK TAMPERING Missing checks. Voided checks Bank accounts that are not reconciled on a timely basis. Sudden activity in dormant bank accounts
CHECK TAMPERING Significant increase in payments to one vendor Duplicate payments Payments without supporting documentation Accounting records that disagree with the supporting documentation
CHECK TAMPERING Checks to employees, in excess of the # and $ amount of normal payroll checks. Vendor & customer complaints regarding nonpayment. t