FRAUD: Risks and Prevention

Fraud: Risks and Prevention Implications of fraud What motivates one to commit fraud The importance of internal control Fraud indicators – what to look for Professional resources 2

Implications of fraud According to the Association of Certified Fraud Examiners (ACFE), U.S. organizations lose an estimated 7% of annual revenues to fraud. Among those, the median loss suffered by organizations with fewer than 100 employees was $200,000 higher than any other category. 3

Implications of fraud The average length of occupational fraud goes on about 18 months before being discovered. Fraud is not limited by industry or size of an organization. 4

Motivating Factors 5

Employee motivation: Personal financial matters, the unexpected (I’m just borrowing it) Entitlement, getting back at the employer Support lifestyle Challenge 6

Motivating Factors Business weaknesses: Limited controls – lack of division of responsibilities between employees Inadequate employee prescreening- reference checks, criminal records, professional recommendation, drug screening, etc. Too much trust – the human element. Never having faith in your employees is a bad thing; so is always trusting them. 7

Types of Fraud from Within Asset misappropriation Cash – Skimming: stealing money before it is received and recorded. Usual culprits are salespeople and accounting personnel. – Larceny : Theft of currency after the company has received and recorded it. Usually a cashier or someone with easy access to currency. 8

Fraud from Within Asset misappropriation [cont’d] Cash – Fraudulent disbursements – the most expensive of the cash frauds. » Employees in accounting or bookkeeping dept. » Employee submits a false invoice the company unknowingly pays to the benefit of the thief, commonly for services not rendered to the company 9

Fraud from Within Asset misappropriation [cont’d] Non-cash – Items that are important to the employee personally, such as electronics or jewelry. – Laptops, handhelds, software and calculators top the list of items likely to be stolen. 10

Fraud from Within Corruption Less common but more expensive Corrupt employee conspires with someone outside the company Can involve accounting personnel, bank employees, purchasing agents and buyers 11

Types of External Fraud Check Fraud Forged, stolen or counterfeit checks are common. Know your customers and train your employees who accept checks to be alert to common signs. Credit Card Fraud Four types: stolen credit cards, identity fraud, altered cards, and counterfeit cards Like checks, the front line of defense is employee education. 12

Types of External Fraud Shoplifting Internet and Computer With limited personnel an attempt should be made to assign separate workers to the functions of data entry and asset control. Cyber security – Passwords, virus protection, firewalls Computer fraud has increased with the increase in identify theft. 13

Indicators of Potential Fraud Rising expenses and/or declining revenue Abnormally high inventory shrinkage Unfamiliar vendors or other payees Excessive spending by employees 14

Prevention and Detection 15

Prevention and Detection Internal control reviews with Segregation of duties Reasonable internal controls are critical. Review the existing systems and make improvements. Segregate duties to ensure no employee has complete authority over one area – create checks and balances Utilize Passwords and software module access controls. 16

Prevention and Detection Cash reviews and reconciliations Since 9 in 10 occupational frauds involve the company's cash, regularly review receipts and disbursements for anomalies. Owners should receive unopened bank statements and review for suspicious transactions Secure check stock and limit access Perform daily register reconciliations Require dual signatures for large transactions Limit access on authority to initiate wire transactions 17

Prevention and Detection Accounts Receivable review Review aging and investigate old balances Review for write-offs of balances Inventory observations and asset verifications For companies with inventory or other assets that make attractive targets, observe inventory procedures and/or verify specific items. Financial statement review Review financial reports on a monthly basis and look for unusual amounts or trends Accounts Payable & Payroll review Ensure vendors and expenses are valid Review Payroll registers for employees and amounts 18

Prevention and Detection Physical Controls Consider security cameras and locked areas – helps prevent internal and external fraud. Security systems Control receiving and shipping areas Utilize bank controls Tools such as positive pay, payroll accounts or approved vendor lists are available at most banks and can greatly reduce check fraud Run background checks on potential employees Train employees on Risks and have documented procedures Seek professional assistance when have concerns – don’t wait! 19

Professional Resources Questions, assistance: Certified Public Accountant (CPA) Certified Fraud Examiner (CFE) Online general resources: – American Institute of Certified Public Accountants Public pages section on fraud, forensics and valuation: (browse by topic) – Association of Certified Fraud Examiners