How to Protect Your Organization from Fraud

1. How to Protect Your Organization from Fraud Jake Dunton, CPA, CFE jdunton@duntonandco.com

5. Objectives • Key Internal Control Concept! • Key factors that must occur before fraud Occurs! • Fraud Prevention Check-up: Simple Test

6. What is Fraud? • deliberate action by individual or entity to cheat another, causing damage. • intentional deception resulting in injury to another. Fraud usually consists of a misrepresentation, concealment, or nondisclosure of a material fact, or at least misleading conduct, devices, or contrivance.

7. Definition of Fraud (Continued) • Deliberate and improper manipulation of the recording of sales revenue and/or expenses (with a purpose of making a company’s profit performance look better than it actually is) is qualified as accounting fraud. • Consumer fraud encompasses a wide range of fraudulent and deceptive practices in the advertising, marketing, sale, or provision of goods or services. Consumer fraud occurs when a product or service does not perform in the manner in which it was advertised or represented to perform.

8. Definition of Fraud (Continued) • lar·ce·ny: the wrongful taking and carrying away of the personal goods of another from his or her possession with intent to convert them to the taker's own use.

9. Key Factors that Occurs for Fraud to Occur

10. Fraud Triangle • Need: The employee is somehow motivated to commit a fraud. Economic factors such as personal financial distress, substance abuse, gambling, overspending, or other similar addictive behaviors may provide motivation. The current national economic recession may serve to increase the incidence of such financial motivations. • Opportunity: The employee has sufficient access to assets and information that allows him or her to believe the fraud can be committed and also successfully concealed. • Justification: The employee finds a way to rationalize the fraud, convincing themselves that their actions are really justified. Such rationalizations can include perceived injustices in compensation or promotions, the idea that they are simply “borrowing” from the company and fully intend to return the assets at a future date, or a belief that the company doesn’t really “need” the assets and won’t even realize they are missing.  

11. Key Concept _ Breaking The Flow and Control

12. Little Changes Make A Difference

13. Little Changes Make A Difference

14. The Following is from The Association of Certified Fraud Examiners 2010 Report to the Nation

15. Fraud Detection:ACFE 2010 Report to the Nation

16. Fraud by Department

17. Perpetrators of Fraud • Owners/ Executives losses were over three times those of managers and over nine times that of employee fraud. • Owners and Executive fraud were the most difficult to detect. • 85% of fraudsters had never been previously charged or convicted of fraud

18. Warning signs • Living beyond their means – 43% of the cases • Experiencing Financial difficulty – 36% • Unwillingness to share duties- 22.6% • Refusal to take vacations – 10.2% • Close assoc. with vendor/customer- 22.1% • Wheeler/Dealer attitude – 18.2% • Divorced/family problems – 17.4%

19. Median Loss • Median Loss $160,000 • Approximately 25% had losses greater than 1 Millions dollars

33. Skimming Schemes Skimming schemes include: • Collecting cash, but not recording the sale • Collecting cash, keeping a portion of the cash, and underreporting the sale amount • Collecting a customer’s payment, but not crediting the amount to the customer’s account • Collecting cash and holding it in a personal interest-bearing account before depositing it into the company account

34. – Cash Larceny Schemes Cash larceny schemes include: • Stealing cash at the point of sale or register • Stealing cash receipts posted to sales and receivable journals • Stealing cash from bank deposits

35. Check Tampering Schemes • Forged maker schemes involve forging an authorized signature on a company check. • Forged endorsement schemes consist of forging the signature endorsement of an intended recipient of a company check. • Altered payee schemes involve changing the payee designation on the check to the perpetrator or an accomplice. • Authorized maker schemes occur when employees with signature authority write fraudulent checks for their own benefit.

36. Payroll Schemes • Ghost employee schemes occur when a person not employed by the company is on the payroll. • Overpayment schemes occur when a company pays an employee based on falsified hours or rates. • Commission schemes occur when the amount of sales made or the rate of commission is fraudulently inflated.

44. Anti-Fraud Controls Create a perception - employee may be caught • External audit • Code of Conduct – tone at the top • Management review • Fraud training • Job rotation/mandatory vacation • Separation of duties • The most trusted employee

45. Summary Minimize control of any employee – Key concept Fraud Triangle – do not provide the opportunity, cannot control the employee’s need or justification Board of Directors and Management set the tone for fraud prevention

46. Association of Certified Fraud Examiners

47. Questions Jake Dunton, CPA, CFE Indianapolis, IN jdunton@duntonandco.com 317-842-6325

48. Thank you!