2012 Conference on Teaching and Learning in Accounting (CTLA) Presented by:

Small Business Fraud Awareness, Prevention and Detection—Hands on Consultation with Tangible Results 2012 Conference on Teaching and Learning in Accounting (CTLA) Presented by: Robert J. Kollar and Valerie C. Williams

Small Business Fraud Awareness, Prevention and Detection • Based on results of a grant funded by the Institute for Fraud Prevention (IFP) which was intended to: • Help small businesses better understand fraud • Build awareness of the types of fraud affecting small businesses • Quantify impacts of the potential frauds • Provide techniques to prevent, detect and deter fraud • Involve students in a service-learning consulting project.

Grant Deliverables • Results of fraud risk self assessment survey • Student consultant reports from companies service learning projects • Company follow up reports • Presentations at SBDC conferences • Presentations via select media outlets

Survey • Development of questions • 20 questions • Questions focused on: • Organization demographics • Fraud awareness • Fraud occurrences

Survey • Distribution of the survey • Home page of Duquesne University School of Business web site for one year http://www.surveymonkey.com/duquesnefraudsurvey • Duquesne’s SBDC email and data base contacts >400 companies • Survey link at the Western PA Small Manufacturer's Council • Email distribution to University of Pittsburgh’s Executive Education Center • Chamber of Commerce phone calls • Noted on various radio shows • SBDC Entrepreneur conferences • Distributed at national training seminar for Meals-on-Wheels chapter executives • Urban Redevelopment Authority of Pittsburgh – 100 companies

Survey – Consulting Projects • Companies which volunteered for fraud risk assessment via the survey were screened • Nine companies initially identified • Three companies ultimately chosen

Survey Results - Demographics • 82 responses received: • 60% of the responses from organizations with revenues of $250K - $1 million • 57% had less than 10 employees • 51% identified as being in the service industry • 24% were in a non-profit organization • 74% were the CEO, President or Owner • 51% indicated they were a victim of a fraudulent act

Theft of Assets – most common

What was the value of the fraud?

How was the fraud discovered?

Survey Results • 54% indicated that they were exposed to fraud; 21% believed it was a possibility • Areas with greatest potential for fraud: • 53% cash receipts • 50% inventory • 36% employee expense reimbursement

Fraud Prevention Techniques

Interest in Fraud Training

Company Fraud Risk Assessment Tool • ACFE fraud prevention check up publication • ACFE small business fraud prevention manual • Joseph Wells, Fraud Examination, 3rd edition • Faculty members’ experience

Developed a Company Fraud Risk Assessment Tool • General Demographics • Sales and Cash Receipts • Purchasing and Cash Disbursement • Payroll • Employee expense reimbursement • Reporting and Monitoring • Miscellaneous

Scoring of Self-Assessment Tool • Total score > 50 points – The company has strong controls. • Score between 49 and 10 – Controls can be improved and there is fraud risk. • Score < 9 or negative – Fraud risk is high. Inventory and cash could be at risk for theft. Financial statements could be misstated.

Fraud Awareness Media Outlets • Radio Show • Interviewed twice on The American Entrepreneur show • Interviewed twice by JoAnn Forrester, Empress of Biz Talkcast host; podcast posted at www.Talkshoe.com • SBDC seminars • Booth promoting survey and business owner’s questions • Duquesne University issued a press release • Contacted local Chambers of Commerce

Student Consulting Projects • Organizations’ Profiles • One $5 million privately held manufacturer of soaps and lotions • One $3.5 million non-profit organization providing rental units to families • One $2.0 million privately held recreation and sports training complex

Consulting Projects Process • Faculty led training session on use of the assessment tool • Coordination of schedules • Initial visit to organizations’ locations • Meeting with management • Tour of facilities • Observation of processes • Review of policies • Review of financial statements (1 out of 3) • Interviews

Consulting Projects Process • Student teams analyzed initial findings and developed follow up questions • Follow up visit • First draft of findings and recommendations

Expanded Phase – One Company • Due to red flags identified, including: • Poor cash flow • Employee termination • Personal information known by terminated employee • Lack of reconciliations • Control of deposits by terminated employee • $6K loan to the company by the terminated employee • Expanded procedures performed by graduate students in the Advanced Forensic Techniques course

Steps Performed – Expanded Phase • Review of journal entries impacting bad debt expense and revenue • Reconciliation of incoming cash receipts to bank deposits • Comparison of credit card payments to accounts payable payments reviewing for duplicate payments • Review for duplicate A/P payments • Search for additional bank accounts

Results • Approximately $100K of revenue was reversed through debits to revenue accounts • An additional bank account was detected • Additional UCC filing under the company’s name but with different officers other than the owners • No duplicate disbursements were detected

Expended Hours • 90 student hours • 110 faculty hours

General Conclusions/Lessons Learned • Difficulty obtaining companies to volunteer for the project • Restaurant industry • Business owners awareness of fraud risk • “…just have to trust the employees.” • Respondents that expressed interest in fraud training was 27% • The survey results indicated 51% had experienced fraud; 17% said they were unsure; 53% indicated that they were exposed to a fraud risk; 21% said they were possibly exposed to a fraud risk

General Conclusions/Lessons Learned • Student comments • Enjoyed the site visits and was good application of concepts • Graduate students appreciated the ability to utilize academic classroom techniques in the field • Difficulty in schedule coordination with students, faculty and businesses • Difficulty coordinating academic semester deadlines with the workflow of the assessments and investigations

Contact information Bob Kollar, MBA, CPA, CGMA Director, Master of Accountancy Program Palumbo-Donahue School of Business Duquesne University 600 Forbes Avenue Pittsburgh, PA 15282 412-396-4906 or kollar@duq.edu OR Val Williams, MBA, CPA, CIA, CHFP, CFE, CFF Assistant Professor of Accounting Palumbo-Donahue School of Business Duquesne University 600 Forbes Avenue Pittsburgh, PA 15282 412-396-5700 or trott@duq.edu

2012 Conference on Teaching and Learning in Accounting (CTLA) Presented by: