1. Fraud detection and prevention
Shannon Haas, Senior Manager
Fraud detection and prevention

3. Sign of the Times…
Loyal employees have bills to pay and families to feed. In a good economy, they would never think of committing fraud against their employers. But especially now, organizations must be vigilant during these turbulent times by ensuring proper fraud prevention procedures are in place.
ACFE President James D. Ratley, CFE

4. Economic Recession
Employees pose the greatest fraud threat in the current economy
Layoffs are affecting organizations’ internal controls
Fraud levels are expected to continue rising

5. Employee Fraud
In How to Embezzle a Fortune, Bev Harris says that fraudsters and embezzlers are the nicest people in the world:
Wide-eyed mothers of preschoolers
People who profess deep religious commitments
CPAs with impeccable resumes
Loyal business managers who arrive early, stay late, and never take vacation
Your best friend
Your partner
Family members

6. Fraud Risk Fraud Triangle: Incentive/Pressure
Opportunity Rationalization

7. Association of Certified Fraud Examiners
The Association of Certified Fraud Examiners (ACFE) completes a report every two years summarizing the key characteristics of fraud.
The most recent report is from 2012.
1,388 cases worldwide.
The following are excerpts from that summary.

8. 3 Major Types of Fraud Asset misappropriations.
Corruption - bribery, extortion and a conflict of interest.
Financial statement fraud.

9. Most Common Fraud – United States
Source: ACFE 2012 Report to the Nation

10. Magnitude of Losses – United States
Source: ACFE 2012 Report to the Nation

11. Misappropriation Methods
Billing (fake vendors)
Skimming (cash is taken before recorded)
Expense reimbursements (inflated)
Check tampering
Cash on hand
Others
Source: ACFE 2012 Report to the Nation

12. Misappropriation Ranking
Source: ACFE 2012 Report to the Nation

13. Fraud Schemes – Financial Services
Source: ACFE 2012 Report to the Nation

14. Duration
Source: ACFE 2012 Report to the Nation

15. Initial Detection of Occupational Frauds- U.S
Fraud Detection
Initial Detection of Occupational Frauds- U.S
Source: ACFE 2012 Report to the Nation

16. Source of Tips
Source: ACFE 2012 Report to the Nation

17. Impact of Hotlines
Source: ACFE 2012 Report to the Nation

18. Presence of Anti-Fraud Controls
Source: ACFE 2012 Report to the Nation

19. Median Loss Based on Presence of Anti-Fraud Controls
Source: ACFE 2012 Report to the Nation

20. Duration and Anti-Fraud Controls
Source: ACFE 2012 Report to the Nation

21. Primary Internal Control Weakness Observed by CFEs
Source: ACFE 2012 Report to the Nation

22. Position of Perpetrator - Frequency
Source: ACFE 2012 Report to the Nation

23. Position of Perpetrator - Median Loss- United States
Source: ACFE 2012 Report to the Nation

24. Position of Perpetrator - Duration
Source: ACFE 2012 Report to the Nation

25. Age of Perpetrator - Frequency
Source: ACFE 2012 Report to the Nation

26. Age of Perpetrator – Median Loss
Source: ACFE 2012 Report to the Nation

27. RED FLAGS
Source: ACFE 2012 Report to the Nation

28. ACFE – Executive Summary
Asset misappropriation – 87% of all frauds.
More than 1/5 of frauds in study caused at least $1 million in losses.
Average life of a fraud = 18 months.
Tips continue to be the primary detection source.
Source: ACFE 2012 Report to the Nation

29. ACFE – Executive Summary
Smaller organizations most susceptible due to lack of controls.
Banking industry once again at the top of the list.
Anti-fraud controls helped to lower overall loss and duration. Even as simple as employee education on fraud and tolerance.
Frauds by executives cause the most damage.
Source: ACFE 2012 Report to the Nation

30. ACFE – Executive Summary
Organizations tend to over-rely on external audits as the fraud-prevention tool.
Surprise audits were underutilized. Less than 30% of victims actually performed these. These are key “perception” tools to rid of the “opportunity”.
Source: ACFE 2012 Report to the Nation

31. External Auditor’s Consideration of Fraud
Discussion among engagement personnel regarding the risk of material misstatement due to fraud in the planning stages of the audit
Obtain information needed to identify risk of material misstatement due to fraud by:
Inquiring of management and staff about fraud and fraud risk
Analytical procedures
Considering fraud risk factors
Other input/observations

32. External Auditor’s Consideration of Fraud
Perform additional audit tests to detect fraud and perform tests to bring an element of unpredictability
Review of employee loan and deposit accounts
Review of bonus arrangements
Review approval of large loans
Review low interest rate loans
Review of travel expenses
Review of variable rate loans
Review of journal entries
Review and testing of expenses

33. Fraud Risk Factors
Lack of detailed formal written policies and procedures
Lack of segregation of duties
Member complaints
Unreconciled accounts and review of reconcilements
Recurring audit findings
Missing financial records

34. Fraud Risk Factors Untimely preparation of financial statements
Lack of employee vacations
Lack of significant control over transaction cycles (LOANS)
Lack of management oversight
Excessive employee addictions, gambling, or drug addiction
Incorrect, incomplete, or erroneous financial reporting
Lack of internal control reports from data processing system

35. Fraud Risk Factors Bonus or incentive plans Complex transactions
Rapid growth
Corporate credit cards
Employee financial problems
Inactive Supervisory Committee
Lack of audit/verification
Lack of employee training
High employee turnover

36. Supervisory Committee Fraud Tips
Evaluate management’s assessment of fraud and mitigating controls
Evaluate the internal auditor’s testing of the effectiveness of each fraud control
Evaluate how management has “set the tone from the top” to promote ethical behavior
Communicate zero tolerance
Evaluate the tests of detection of fraud used by your external auditors

37. Supervisory Committee Fraud Tips
Ensure the internal audit function reports directly and candidly to you
Ensure that internal auditors continually conduct tests to detect fraud
Follow up on prior audit findings from the internal auditor, external auditor, and regulators
Evaluate the nature and cause of finding
Annual fraud policy signed by all employees

38. Basic Internal Control Safeguards
Tone at the top - diligence
Segregation of duties
Whistleblower policy
Rotation of personnel
Mandatory vacations
Reconciliation and review process
Setting of accounting system privileges
Access levels – review and adjust

39. Questions
Shannon Haas Moss Adams LLP