1. Fraud & Internal Controls
Joe Garofalo, Jr., CPA
Chief Financial Officer
Sarasota County Tax Collector
(941)

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

3. 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

4. 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

5. 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

6. Fraud Trends

7. Internal Controls
The Fraud Triangle

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

9. 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

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

11. Internal Controls Cash Disbursements Tax Distributions Refunds
Other distributions
Payroll
Payables

12. 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

13. 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

14. Internal Controls
Physical Assets
Equipment & Supplies
Inventory

15. 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.

16. 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

17. 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

18. 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…

19. Fraud & Internal Controls
Questions?