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Fraud & Embezzlement: How it Happens & How to Prevent it! Edward J. McMillan, CPA, CAE P.O. Box 771 Forest Hill, MD 21050 Telephone: (410) 893-2308 Fax:

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Presentation on theme: "Fraud & Embezzlement: How it Happens & How to Prevent it! Edward J. McMillan, CPA, CAE P.O. Box 771 Forest Hill, MD 21050 Telephone: (410) 893-2308 Fax:"— Presentation transcript:

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2 Fraud & Embezzlement: How it Happens & How to Prevent it! Edward J. McMillan, CPA, CAE P.O. Box 771 Forest Hill, MD Telephone: (410) Fax: (410) Website:

3 Payee: US Postal Service Amount: $2, For: Postage Requested by: Sally Geek Date: 06/30/yy Approved by: Date: CHECK REQUEST

4 Payee: US Postal Service Amount: $2, For: Postage Requested by: Sally Geek Date: 06/30/yy Approved by: C. E. Officer Date: 06/30/yy CHECK REQUEST

5 CHECKS 1234 Date 06/30/yy Pay to the order of US Postal Service $2, Two thousand and 00/100 ~~~~~~~~~~~~~~ Dollars Memo : FRONT BACK

6 CHECKS (Continued) 1234 Date 06/30/yy Pay to the order of US Postal Service $2, Two thousand and 00/100 ~~~~~~~~~ ~~~~~ Dollars Memo C.E. Officer : FRONT BACK

7 CHECKS (Continued) 1234 Date 06/30/yy Pay to the order of US Postal Service $2, Two thousand and 00/100 ~~~~~~~~~ ~~~~~ Dollars Memo : FRONT BACK 1

8 CHECKS (Continued) 1234 Date 06/30/yy Pay to the order of $2, Two thousand and 00/100 ~~~~~~~~~ ~~~~~ Dollars Memo : FRONT BACK

9 CHECKS (Continued) 1234 Date 06/30/yy Pay to the order of Sally Geek $2, Two thousand and 00/100 ~~~~~~~~~ ~~~~~ Dollars Memo : FRONT BACK

10 CHECKS (Continued) 1234 Date 06/30/yy Pay to the order of Sally Geek $2, Two thousand and 00/100 ~~~~~~~~~ ~~~~~ Dollars Memo C.E. Officer : FRONT BACK Sally Geek

11 CHECKS (Continued) Pay to the order of Sally Geek Two thousand and 00/100 Two thousand and 00/100 Memo : Date 06/30/yy $2, $2, ~~~~~~~~ ~~~~~~ Dollars ~~~~~~~~ ~~~~~~ Dollars C.E. Officer C.E. Officer 1234

12 CHECKS (Continued) 1234 Date 06/30/yy Pay to the order of US Postal Service $2, Two thousand and 00/100 ~~~~~~~~~ ~~~~~ Dollars Memo C.E. Officer : FRONT BACK

13 CHECKS (Continued) 1234 Date 06/30/yy Pay to the order of US Postal Service $2, Two thousand and 00/100 ~~~~~~~~~ ~~~~~ Dollars Memo C.E. Officer : FRONT BACK FOR DEPOSIT ONLY US Postal Service

14 CHECKS (Continued) 1234 Date 06/30/yy Pay to the order of US Postal Service $2, Two thousand and 00/100 ~~~~~~~~~ ~~~~~ Dollars Memo C.E. Officer : FRONT BACK FOR DEPOSIT ONLY US Postal Service BANK STAMP

15 CHECKS (Continued) 1234 Date 06/30/yy Pay to the order of US Postal Service $2, Two thousand and 00/100 ~~~~~~~~~ ~~~~~ Dollars Memo C.E. Officer : FRONT BACK FOR DEPOSIT ONLY US Postal Service BANK STAMP

16 CHECKS (Continued) 1234 Date 06/30/yy Pay to the order of US Postal Service $2, Two thousand and 00/100 ~~~~~~~~~ ~~~~~ Dollars Memo C.E. Officer : FRONT BACK FOR DEPOSIT ONLY US Postal Service BANK STAMP

17 CHECKS (Continued) 1234 Date 06/30/yy Pay to the order of US Postal Service $2, Two thousand and 00/100 ~~~~~~~~~ ~~~~~ Dollars Memo C.E. Officer : FRONT BACK FOR DEPOSIT ONLY US Postal Service BANK STAMP

18 CHECKS (Continued) 1234 Date 06/30/yy Pay to the order of Sally Geek $2, Two thousand and 00/100 ~~~~~~~~~ ~~~~~ Dollars Memo C.E. Officer : FRONT BACK Sally Geek

19 Payee: US Treasury Amount: $1, For: Federal Payroll Taxes Requested by: Aunt Bea Date: 04/19/yy Approved by: Date: CHECK REQUEST

20 Payee: US Treasury Amount: $1, For: Federal Payroll Taxes Requested by: Aunt Bea Date: 04/19/yy Approved by: Andy Taylor Date: 04/19/yy CHECK REQUEST

21 CHECKS (Continued) 2345 Date 04/19/yy Pay to the order of US Treasury $1, One thousand four hundred ten and 00/100~~~~~ Dollars Memo : ATTACHED FEDERAL TAX PAYMENT COUPON $1,410.00

22 CHECKS (Continued) 2345 Date 06/30/yy Pay to the order of US Treasury $1, One thousand four hundred ten and 00/100~~~~~ Dollars Memo Andy Taylor : ATTACHED FEDERAL TAX PAYMENT COUPON $1,410.00

23 Transfer: $35,000 From: (Lock Box Account) To: (Disbursing Account) Signature: Date: FUNDS TRANSFER

24 Transfer: $35,000 From: (Lock Box Account) To: (Disbursing Account) Signature: Andy Taylor Date: 03/17/yy FUNDS TRANSFER (Continued)

25 Payee: Aunt Bea Amount: $25.00 For: Local Travel Requested by: Aunt Bea Date: Approved by: Andy Taylor Date: CHECK REQUEST

26 CHECKS (Continued) 4567 Date 08/17/96 Pay to the order of Aunt Bea $25.00 Twenty-five and 00/100~~~~~~~~~~~~~~~ Dollars Memo

27 CHECKS (Continued) 4567 Date 08/17/96 Pay to the order of Aunt Bea $25.00 Twenty-five and 00/100~~~~~~~~~~~~~~~ Dollars Memo Barney Fife

28 Transfer: $35,000 From: (Lock Box Account) To: (Disbursing Account) Signature: Andy Taylor Date: 03/17/yy FUNDS TRANSFER (Continued)

29 Transfer: $35,000 From: (Lock Box Account) To: (Disbursing Account) Signature: Andy Taylor Date: 08/17/yy FUNDS TRANSFER (Continued)

30 CHECKS (Continued) 4567 Date 08/17/96 Pay to the order of Aunt Bea $25.00 Twenty-five and 00/100~~~~~~~~~~~~~~~ Dollars Memo Barney Fife

31 CHECKS (Continued) 4567 Date 08/17/96 Pay to the order of Aunt Bea $ Dollars Dollars Memo Barney Fife

32 CHECKS (Continued) 4567 Date 08/17/96 Pay to the order of Aunt Bea $35, Thirty Five Thousand and 00/100~~~~~~~~~~ Dollars Memo Barney Fife

33 Payee: Walter Nerd Amount: $ For: Petty Cash Requested by: Walter Nerd Date: 04/15/yy Approved by: Date: CHECK REQUEST

34 CHECKS (Continued) 6453 Date 04/15/96 Pay to the order of Walter Nerd $ One hundred and 00/100~~~~~~ Dollars One hundred and 00/100~~~~~~ DollarsMemo

35 CHECKS (Continued) 6543 Date 04/15/96 Pay to the order of Walter Nerd $10, Ten thousand One hundred and 00/100~~~~~~~~ Dollars Memo

36 INTERNAL CONTROLS An effective and documented system of internal controls is an absolute must if your organization is serious about protecting itself against employee dishonesty.

37 INTERNAL CONTROLS How Does YOUR Organization Stack Up? 1) Are copies of bank statements forwarded off- site to the CEO and are checks and debit memorandums reviewed? 2) Are copies of the credit card detail forwarded offsite to the CEO and are charges reviewed? 3) Are two signatures required on all checks and wire transfers? 4) Does accounting attach a copy of the bank reconciliation to the monthly financial statements? How does your organization stack up? The adequacy of the internal controls currently used by your organization can be quickly gauged by answering the following: YES NO YES NO ________ Copyright 2005, Edward J. McMillan, CPA, CAE

38 5) Are financial personnel prohibited from being signers on all bank accounts? 6) For remittances via the mail, do you take advantage of a bank’s Lock Box service? 7) Are checks that are received in the mail immediately endorsed by whomever opens the mail? 8) After checks have been endorsed, do you prohibit employees other than accounting from coming into contact with the original checks? YES NO YES NO ________ INTERNAL CONTROLS How Does YOUR Organization Stack Up? (Continued) Copyright 2005, Edward J. McMillan, CPA, CAE

39 9) Does your restrictive endorsement stamp NOT include your account number? 10) Is the amount on manual checks protected with a check protector machine? 11) Does your CPA firm undertake a thorough analysis of your internal controls and do you take their recommendations for improvement seriously? 12) Are all employees who handle checks bonded? YES NO YES NO ________ INTERNAL CONTROLS How Does YOUR Organization Stack Up? (Continued) Copyright 2005, Edward J. McMillan, CPA, CAE

40 13) Is the amount of your Fidelity Bond adequate and are you aware of any contractual obligations concerning it? 14) Do you require employees to take at least one full uninterrupted week of vacation annually? 15) Do you require key employees to be subject to a “Management Day”? 16) Is the check supply under lock and key? YES NO YES NO ________ INTERNAL CONTROLS How Does YOUR Organization Stack Up? (Continued) Copyright 2005, Edward J. McMillan, CPA, CAE

41 17) Are all checks signed manually? 18) Is the check stock non-scannable? 19) Are two people involved in preparing payroll and remitting payroll taxes? 20) Do you have a “Conditions of Employment Agreement”? 21) Do you have a “Conflict of Interest Agreement”? 22) Are your internal control policies in writing? YES NO YES NO ________ INTERNAL CONTROLS How Does YOUR Organization Stack Up? (Continued) Copyright 2005, Edward J. McMillan, CPA, CAE

42 23) Does your CPA firm or Internal Audit Committee visit the office during the “Window of Opportunity” for embezzlement? 24) Have you instructed the bank not to change authorized signers without approval of management? 25) Do you occasionally test cash, check and credit card transactions? 26) When employees terminate, do you conduct an “Exit Interview”? YES NO YES NO ________ INTERNAL CONTROLS How Does YOUR Organization Stack Up? (Continued) Copyright 2005, Edward J. McMillan, CPA, CAE

43 INTERNAL CONTROLS How Does YOUR Organization Stack Up? (Continued) 27) Do you prohibit making checks payable to acronyms? 28) If your organization is known by its acronym, do you encourage payment be made to its full legal name? 29) Do you take advantage of your bank’s Positive Pay service? 30) Did you eliminate employee credit cards? YES NO YES NO ________ Copyright 2005, Edward J. McMillan, CPA, CAE

44 31) Do you do thorough background checks on key employees? 32) Do you have approved vendor files and do you investigate new vendors? 33) Do you have a system in place whereby employees are encouraged to report suspicious or unethical activity? 34) Do you have a formal “Whistle Blower Protection” policy? YES NO YES NO ________ INTERNAL CONTROLS How Does YOUR Organization Stack Up? (Continued) Copyright 2005, Edward J. McMillan, CPA, CAE

45 INTERNAL CONTROLS How Does YOUR Organization Stack Up? (Continued) The previous questions is of course just a short managerial evaluation of your existing internal controls. Hopefully, the answers to most if not all of the questions are “yes.” If not, give serious consideration to a thorough analysis of your internal controls and make changes for improvement accordingly to ensure your organization’s assets are protected.

46 The FRAUD Triangle Incentive OpportunityRationalization Copyright 2005, Edward J. McMillan, CPA, CAE

47 A Few Facts You do not know what is going on in peoples’ personal lives! You do not know what is going on in peoples’ personal lives! In almost every situation where fraud has been discovered, the guilty party is above suspicion! In almost every situation where fraud has been discovered, the guilty party is above suspicion! And finally... Remember that the purpose of effective internal controls is to keep honest people honest by removing the “opportunity” factor of the fraud triangle! And finally... Remember that the purpose of effective internal controls is to keep honest people honest by removing the “opportunity” factor of the fraud triangle! Copyright 2005, Edward J. McMillan, CPA, CAE

48 Plan of ACTION If you find yourself the victim of Fraud: 1) Call your attorney and CPA for advice on how to handle the situation initially 2) Call your bank and freeze all accounts until the situation is resolved 3) Change your computer passwords 4) Preserve the evidence. Safeguard all original documents and work from copies 5) Take detailed and copious notes of the incident and follow up 6) Know the requirements of your Fidelity Bond Copyright 2005, Edward J. McMillan, CPA, CAE

49 Plan of ACTION (Continued) 7) When confronting the person: Protect yourself and fellow employees if there is any possibility of an incident Protect yourself and fellow employees if there is any possibility of an incident The discussion should never take place in the offender’s office, etc. Meet in a neutral location The discussion should never take place in the offender’s office, etc. Meet in a neutral location The discussion should take place before or after work hours The discussion should take place before or after work hours Always have a witness present. This is of particular importance if this is a male-female discussion Always have a witness present. This is of particular importance if this is a male-female discussion Make sure you get your credit cards, keys, etc. from the offender and consider changing door locks if necessary Make sure you get your credit cards, keys, etc. from the offender and consider changing door locks if necessary The offender should be escorted out of the building and not be allowed back to his/her office, etc. (Note the “Conditions of Employment Agreement”) The offender should be escorted out of the building and not be allowed back to his/her office, etc. (Note the “Conditions of Employment Agreement”) Copyright 2005, Edward J. McMillan, CPA, CAE

50 Plan of ACTION (Continued) 8) Get advice from counsel on how to relate the circumstances of dismissal to other employees, etc. and how to handle references 9) And when it’s all over... Work with an experienced CPA to thoroughly review your system of internal controls and correct whatever deficiencies that led to the problem! Copyright 2005, Edward J. McMillan, CPA, CAE

51 Fraud & Embezzlement: How it Happens & How to Prevent it! Edward J. McMillan, CPA, CAE P.O. Box 771 Forest Hill, MD Telephone: (410) Fax: (410) Website:

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