Occupational Fraud Don’t become a statistic

1. Occupational FraudDon’t become a statistic Jacque James, MBA, MAFM President Asset Recovery Associates, LLC August 29, 2012

2. Overview of Presentation • Discussion topics: • Overview of Occupational Fraud • Red Flags • Payroll Fraud Schemes • Fraud Prevention Techniques • Hiring Ethical Candidates • Q&A

3. What is Occupational Fraud?

4. Occupational Fraud The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.

5. Classifications of Fraud

7. Fraud Statistics In Small Business • Accounts for 31% of all fraud • Small businesses are targets for fraud due to fewer anti-fraud controls compared to that of larger organizations • Fraud is more likely to be detected by a tip than by any other method • The most common types of fraud are: • Payroll Fraud Schemes • Asset Misappropriation Schemes • Skimming Schemes *Source: 2012 Report of the Nation - Association of Certified Fraud Examiners

8. The Cost of Fraud • The average organization loses 5% of its revenues to fraud annually • The median loss caused by occupational fraud cases is $147,000 • Most frauds last an average of 18 months before being detected *Source: 2012 Report of the Nation - Association of Certified Fraud Examiners

9. Why Fraud Occurs Three Criteria Needed For FraudTo Occur:

10. Why Fraud Occurs • Opportunity • Knowledge of weak internal controls • Accounting anomalies are not monitored • Lack of supervision • Unethical tone at the top • Employees believe they will not get caught • Motive • Pressure to perform • High personal debt • Family or peer pressure • Alcohol or drug problems • Gambling habits

11. Why Fraud Occurs • Ability to Rationalize Behavior • Employee believes he/she is not being adequately compensated • Employee believes the organization OWES him/her • Feeling of insufficient recognition for job performance • Personal need for money • Have the intent to repay the money

12. Profile of a Fraudster • 65% of men commit acts of fraud compared to 35% of women. • Average median loss caused by males is $200,000 vs $91,000 caused by females.

13. Top 10 Behavioral Red Flags • Employees living beyond their means • Financial difficulties • Control issues, unwillingness to share duties • Unusually close vendor/customer relationship • Wheeler dealer attitude • Divorce, family pressures • Irritability, suspiciousness or defensiveness • Addiction problems • Refusal to take vacations • Past employment related issues

14. How Fraud Occurs Payroll Fraud

15. What is Payroll Fraud? • Occupational fraud in which a person who works for an organization causes that organization to issue a payment by making false claims for compensation • Ghost Employee Schemes • Falsified Hours and Salary Schemes • Commission Schemes

16. Ghost Employee Schemes • A Ghost employee is someone on the payroll who does not actually work for the victim company • Fictitious person • Friend or relative • Accomplice

17. Ghost Employee Schemes • Adding the ghost to the payroll • Using names similar to real employees • Failing to take terminated employees off the payroll • Collecting timekeeping information • Fake timecards • Approval of timecards • Issuing the ghost’s paycheck • Delivery of the paycheck • Mailed to the employees address • Direct deposited

18. Preventing and Detecting Ghost Employee Schemes • Separate the hiring function from the payroll function • Personnel records maintained separate from payroll & timekeeping • Owners / Manager should verify all payroll changes • Conducting background and reference checks • Check payroll records against personnel records

19. Preventing and Detecting Ghost Employee Schemes • Periodically run computer reports for employees • Without SSNs • With no deductions - withholding taxes or insurance • With no physical address or telephone number • Compare payroll to schedules • Keep signed checks in a secure location • OFAC checks

20. Tests for Fraudulent Payroll Activity • Review employees who have significantly more overtime than similar employees • Trend analysis of budgeted vs. actual expenses • Run exception reports for employees who have had disproportionately large increases in wages • Verify payroll taxes equal federal return tax forms • Compare net payroll-to-payroll checks issued

21. Creating a Fraud Free Culture

22. Fraud Prevention - 4 Step Process • Hire ethical candidates • Perform assessments and/or conduct integrity interviews • Conduct Background Screenings on key personnel • Create a positive company culture • People won’t steal when they have a sense of ownership • Implement and asses internal controls • Implement and enforce anti fraud policies and procedures • Instill a system of checks and balances • Conduct Fraud Risk Assessments • Instill mechanism for reporting fraud • Implement a hotline and reward system

23. Fraud Prevention Best Practices • Create a “Perception of Control” • Educate employees on fraud • Have a Conflict of Interest & Code of Conduct Policy • Conduct surprise audits • Reconcile bank statements on a monthly basis • Separation of duties • “Inspect what you expect” • Protect your investment and insure for loss • “Crime Policy” or Fidelity Bond • “Cybercrime Insurance”

24. Fraud Prevention Best Practices • Set the “tone at the top” • Proper check signing authorizations • Review payroll records & vendor lists • Spot check expense reimbursements • Open the mail periodically • Remove computer and building access for terminated employees

25. Why Are Controls Important?

26. Why Are Controls Important?

27. “Trust But Verify” • Please leave your business card if interested in receiving: • Elements of Fraud • Fraud Prevention Checklist

28. Contact Information: Jacque James - President Asset Recovery Associates, LLC 2464 Taylor Rd, #115 Wildwood, MO 63011 Ph: 636-346-9273 Email: jjames@assetrecoverystl.com Website: www.assetrecoverystl.com Services Offered: Fraud Risk Assessment Fraud & HR Investigations Fraud Training & Awareness Programs Asset Investigations Pre-employment Integrity interviews Loss Prevention Consulting Judgment Enforcement Due Diligence Investigations Background Screenings