Fraud & Internal Controls Joe Garofalo, Jr., CPA Chief Financial Officer Sarasota County Tax Collector JGarofalo@SarasotaTaxCollector.com (941) 861-8346

Fraud Trends Rate of fraud has increased Primary factors: Financial crisis Smaller staffs due to budget cuts – doing more with less

Fraud Trends Non-SEC companies continue to be disproportionately impacted by fraud and misconduct within their organizations Average organization loses 5% of revenue to fraud Street crime only costs the U.S. $4 billion Business fraud and abuse in the U.S. cost about $750 billion a year

Fraud Trends Government and Public Administration have a median loss of $81,000 per fraud scheme Estimated that 11% of all fraud cases occur in governments (2nd behind banking & finance) The typical fraud lasts 1.5 years from the time it begins until it is discovered Frauds are much more likely to be detected by a tip than by audits, controls or any other means Frauds detected by those outside the organization (external auditors, tips from vendors or customers) tend to be for higher losses than those detected within an organization Lack of adequate internal controls was most commonly cited as the factor that allowed fraud to occur

Fraud Trends Profile of a fraud perpetrator… Intelligent and in management Men commit fraud at a rate of nearly 2 times that of women. In addition, men generally commit the largest dollar frauds due to men still controlling majority of executive/senior management positions Married and under some type of significant stress Long-time employees, hard working Highly trusted employee

Fraud Trends

Internal Controls The Fraud Triangle

Internal Controls Separation of Duties Three legged stool   Three legged stool Possession/Authorization Recording/Accounting Reconciliation/Monitoring

Internal Controls Risk Assessment – Review areas of risk to determine priorities based on potential financial risk and perceived political risk Control Environment – The organizations view of internal controls Emphasis placed on control Tone at the top – management’s philosophy Integrity Ethical values Competency Cost to benefit ratio

Internal Controls What do employees steal – Assets Areas of greatest financial risk

Internal Controls Cash Disbursements Tax Distributions Refunds Other distributions Payroll Payables

Internal Controls Risk areas & related controls Bank account access – online access and authorities Wire & ACH – online and manual Check signers Accounting system access Refund records file access Relationship with bankers Who reconciles bank accounts

Internal Controls Cash Receipts (all things “cash”, which includes cash, checks, credit, debit, ACH, wire, etc.) Cash payments Checks In the office Thru the mail ACH & Wire Voids Daily Balancing

Internal Controls Physical Assets Equipment & Supplies Inventory

Internal Controls Other thoughts: New employees are a risk because they may not know or understand the office's internal controls and could be taken advantage of. They may also attempt to test the internal control system under the guise of "I thought that was what I suppose to do." New computer systems are at risk because often only the manager overseeing the system installation knows the system's weaknesses and how to exploit them.

Internal Controls Danger Signs of Potential Fraud Higher standard of living than income level should be able to provide Creditors calling or showing up at work Known grave family illness or other financial situation Employee passed over for promotion the employee was expecting Borrowing from fellow employees Exchanges personal checks for cash

Internal Controls Danger Signs of Potential Fraud – Cont. Gambling more frequently and for higher amounts Drug and alcohol problems Getting annoyed or defensive at reasonable questioning Working overtime regularly, especially for a position in charge of cash receipts or disbursements Employee not taking vacations Always carries a large amount of cash Employee rewrites records stating that they are doing it so that the records are neat

Internal Controls How to prevent employee theft and fraud Positive work environment – Happy, low stressed, well paid employees are less likely to steal Design and implement an effective and efficient internal control system Hire quality people – Honesty is a quality! Train employees about the benefits of internal controls and include examples Have a fraud tip “hotline” or at least make sure employees know who they can contact Conduct regular audits, and a few surprise ones too Investigate all frauds Walk the talk; Tone at the top; Practice what you preach…

Fraud & Internal Controls Questions?