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Special Investigative Unit. Speaker: Lindsey Perry, CPA, CFE Special Investigative Unit Senior. Fraud Prevention Outline. Office Background Current Trends and Statistics Fraud Prevention Measures Case Examples Questions . Office of the Auditor General. A.R.S. gives OAG authority
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Special Investigative Unit Speaker: Lindsey Perry, CPA, CFE Special Investigative Unit Senior
Fraud Prevention Outline • Office Background • Current Trends and Statistics • Fraud Prevention Measures • Case Examples • Questions
Office of the Auditor General • A.R.S. gives OAG authority • Legislative agency • Audit and oversight of state entities • Up to 200 reports annually
Special Investigative Unit • Established 1988 • Staff credentials: CFE, CPA • Fraud, waste, and abuse of public monies • Conduct investigations • Issue reports • Assist law enforcement agencies • Serve as a resource for other divisions and governmental entities
The Investigation Process • Allegations • Citizens • Audit Teams • L.E. Referrals Reject Unit Investigation Initial Review Outsource Public Report Criminal Report Complaint Process Grand Jury Indictment Court System
Survey Respondents • October 2009 • 1,843 responses • 87 questions • More than half fraud examiners or internal auditors • 12% accountants • 7% law enforcement
The Cost of Occupational Fraud • Average organization = 5% revenues lost to fraud • $2.9 trillion globally • Estimate only (opinions of anti-fraud professionals)
Perpetrators • Strong correlation between position of authority and losses caused by fraud • The higher the position, the longer to detect the fraud • Much higher median losses
The Fraud Triangle Opportunity Rationalization Pressure
Simple Fraud Prevention Measures • Internal Controls and Procedures • Hiring good employees
Fraud Prevention in Hiring • Statements on job applications or contracts • Background checks
Reference checks (phone) • Did your district sign a separation agreement with Mr. X? “termination agreement” “release agreement” “settlement agreement” • Would you recommend Mr. X for this position? • Was Mr. X involuntarily released from his position? • Did Mr. X resign?
Simple Fraud Prevention Measures • Internal Controls • Hiring good employees • Pre-numbering; carbon copies
Case Example:City Police Department Administrative Assistant
Police Department • Old Police Chief retired • New Police Chief • Ordered internal audits • Compared impound fees received to impound fees deposited • Missing $7,350 • Report left on chief’s desk Friday • Suspect confessed Monday
Police Department • Referred from County Attorney • PD conducted limited investigation • Referred to our office for objectivity
Suspect • Administrative assistant • Worked for PD about 7 years • Various administrative duties • Team player; highly trusted • “Employee of the Quarter”
Police Department • Cash receipts: • Background checks • Fingerprint cards • Copies of reports • Bond payments • Impound fees
Cash Collection Process • No cash registers • Cashier collects payment • Cashier issues manual receipt • Cashier puts payment in sealed envelope with copy of receipt, in locked drop box • The next morning, admin assistant: • Opens box /envelopes • Prepares deposit • Takes deposit to city finance
Stays in Book Deposit Customer
Stays in Book Deposit
Receipt Book City Ledger 3/4/2007 Received from: Thelma $150 Ted $150 Total: $300 3/4/07101 Louise $150 3/4/07100 Thelma $150 3/4/07102 Bill $150 3/4/07 103 Ted $150
Receipt Book 3/4/07101 Louise $150 3/4/07100 Thelma $150 $300 Stolen 3/4/07102 Bill $150 3/4/07 103 Ted $150
Conclusion • Total embezzled: $10,546 • Grand Jury Indicted on 3 felony counts: theft, misuse, and fraudulent schemes • Plea Agreement: one count theft, one count attempted fraudulent schemes
Simple Fraud Prevention Measures • Internal Controls • Hiring good employees • Pre-numbering; carbon copies • Segregation of Duties • Job Rotation
Suspect Information • Graduated from district high school • Hired as secretary • Assisted Business Manager with accounts payable and invoice processing • Promoted to Student Activities Secretary 2 years later
Suspect’s Responsibilities • Prepared Cash Boxes • Collected Receipts • Made Bank Deposits • Approved & Issued Checks • Monthly Bank Reconciliations • Monthly Board Reports
How Theft Was Discovered • No call, no show • $7,900 in desk drawer - 10 month old checks! - $1,343 lost from stale dated checks • Confession & Resignation • $11,000 Repaid by Suspect
Determining Theft Amount • Missing deposit records • Missing Student Activities files • Incomplete recordkeeping
Board Report vs. Bank Statement 2/9/06 Bank Balance $21,761 Difference 15,530 Less: $ in Desk 7,899 Recorded Theft Amount $7,631
Resolution • Indicted on Fraud Schemes, Theft, Misuse of Public Monies, Tampering with Public Record • Pled Guilty to Fraud Schemes & Tampering • 4 years Supervised Probation • 400 Hours of Community Service • $1,343 Restitution in addition to the $11,000 already paid back (stale dated checks)
Internal Control Solutions • Biggest issue: lack of segregation of duties and supervision • At a minimum: cash-handling separate from recording • Could have assigned business manager to reconcile bank account • Could have assigned other employees (AP clerk, secretary) a portion of the duties • Prepare deposit • Record receipts
Simple Fraud Prevention Measures • Deterrence • Employee Education and Training (Recurring)
Simple Fraud Prevention Measures • Deterrence • Employee Education and Training (Recurring) • Fraud Awareness Policies