No Fraud Left Behind

1. No Fraud Left Behind Fraud Risks and Prevention (Info gathered from the Association of Certified Fraud Examiners) Runyon Kersteen Ouellette

2. No Fraud Left Behind • Types of fraud • Red flags • Controls to help prevent fraud • Specific cases

3. Opportunity Motivation Pressure The Fraud Triangle

4. Types of Fraud • Corruption • Fraudulent financial statements • Asset misappropriation

5. Corruption • Schemes in which employees use their influence in business transactions in a way that violates their duty to their employers in order to obtain a benefit for themselves or someone else

6. Corruption • Conflict of interest • Bribery (i.e. kickbacks, bid rigging) • Illegal gratuities • Economic extortion

7. Fraudulent Financial Statements • Involves the intentional misstatement or omission of material information from the entity’s financial reports • Referred to as “cooking the books” • Often involves reporting fictitious revenues or concealment of expenses or liabilities in order to make entity appear more profitable than it really is

8. Fraudulent Financial Statements • Least commonly reported type of occupational fraud • Cause considerably more damage than frauds in the other two categories

9. Asset Misappropriation • Employee steals or misuses an entity’s resources • This is the most commonly reported fraud • The least costly of the three categories of fraud

10. Asset Misappropriation • Cash receipts • Cash disbursements • Non-cash (physical assets)

11. Schemes Involving Cash Receipts • Skimming – cash is stolen before it is recorded on the entity’s books • Employee accepts payment but does not record the transaction • Larceny – cash is stolen after it is recorded on the entity’s books • Employee steals cash from daily receipts before they can be deposited in the bank

12. Schemes Involving Cash Disbursements • Billing – causing entity to issue a payment by submitting invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases • Employee creates shell company and bills employer for nonexistent services • Employee purchases personal items and submits invoices to employer for payment

13. Schemes Involving Cash Disbursements • Check Tampering – stealing funds by forging or altering checks or stealing legitimately issued checks to other payees • Employee steals blank company checks, makes them out to self or an accomplice • Employee steals outgoing check to a vendor and deposits into own account

14. Schemes Involving Cash Disbursements • Expense Reimbursements – claims for reimbursement of fictitious or inflated business expenses • Employee files fraudulent expense reports, claiming personal travel or nonexistent expenses

15. Schemes Involving Cash Disbursements • Payroll – causing entity to issue a payment by making false claims for compensation • Employee claims overtime for hours not worked • Employee adds ghost employees to the payroll

16. Schemes Involving Cash Disbursements • Cash Register Disbursements – false entries entered onto cash register to conceal the fraudulent removal of cash • Employee fraudulently voids a sale on cash register and steals the cash

17. Cash on Hand Misappropriation • Any scheme in which the employee misappropriates cash kept on hand at the entity’s premises • Employee steals cash from a vault or cash box

18. Non-Cash Misappropriation • Any scheme in which the employee steals or misuses non-cash assets of the entity • Employee steals inventory • Employee steals or misuses confidential customer financial information

22. Protecting Yourself • Ask “What’s the worst thing that can happen?” • Become familiar with typical warning signs or “red flags” • First priority is to prevent fraud • Second priority is to detect fraud once it occurs

23. Red Flags in the Organization • High employee turnover in key areas • Lack of segregation of duties • Lack of controls or enforcement of controls • Inattention to detail, sloppiness, inexperienced personnel • Decentralized activities not closely monitored • Management inattention, disregard, or blind faith in employees

24. Red Flags for Employees • Employees living beyond their means • Employees with financial difficulties • Employees with control issues • Refusal to take vacations, accept a promotion, delegate tasks or share duties • Defensive, suspicious, or irritable attitude • Complaining about pay, lack of authority

25. Red Flags for Employees • Unstable life situations (e.g. divorce) • Addiction or legal problems • Unusually close relationship with vendors • Other changes in behavior (showing up late, lapse in performance)

26. Red Flags for Management • Not forthcoming with information • Excessive year-end transactions • Journal entries or transactions that don’t make sense • Increased write-offs of receivables • Cash shortages

27. Red Flags for Cash Receipts • Large deposits in transit • Cash is not deposited in a timely manner • Bank reconciliations aren’t timely, aren’t done at all, or don’t match records • Large, numerous errors in cash accounts • Bank deposits vary from records

28. Red Flags for Cash Disbursements • Very old, outstanding checks • Checks issued out of sequence • Unexpected checks clearing • Manual checks, typed checks, checks made out to cash • Large number or amount of reimbursements to one employee • Photocopied, missing or altered documents

29. Red Flags for Cash Disbursements • Invoices for unspecified or poorly defined services • Unfamiliar vendors • Company names that consist of only initials • Vendors with only P.O. Box addresses • Rapidly increasing purchases from one vendor • Vendor address matches employee address

31. What Can You Do? • Set the tone at the top • Assess what areas contain risks • Have policies and procedures in place • Ensure that duties are segregated and other internal controls are in place • Proper oversight • Timely reconciliations of accounting records

34. Decentralized Risk Areas • Student activity funds • School lunch, where there is a separate checking account maintained • Booster clubs if under control of the School (using School ID number)

35. Policies and Procedures • Should cover the following (at a minimum) • Actual bank accounts • Procedures for receipts • Procedures for deposits • Procedures for disbursements and check writing • Record maintenance • Bank reconciliations • Periodic reporting

36. Internal Auditing • Annual audits are only done once a year • Internal audits can be done periodically throughout the year and on a surprise basis • Someone from central office becomes familiar with the process and can be the point person • Gives perception that these accounts are being monitored

37. Student Activity Funds • What to look at • Bank reconciliations (Do they reconcile? Are they done timely?) • Deposits (Are they made timely? Are they accurate?) • Disbursements (Do they have proper approval and supporting documentation?)

38. Student Activity Funds • What to look at • Cancelled checks (Anything unusual? Any made out to employee in charge of the account? Checks made out to cash?) • Account balances (Are there any with negative balances? How will these be funded?)

39. Case #1 Personal Reimbursements • Professional skepticism-no blind faith in employees • Insist receipts get turned in on a timely manner (e.g. receipts that aren’t turned in within 2 weeks will not be reimbursed; no exceptions!)

40. Case #2 Paying Personal Bills • Review accounts payable warrants and supporting documentation • Ensure all disbursements have proper approval notated

41. Case #3 School Activity Funds • Dual signatures on checks or check signing authority granted to principal only • Have another employee perform the bank reconciliations • Require approval before checks are signed (e.g. check vouchers)

42. Case #4 Tuition Billing • Segregate cash receipts from preparing deposits • Management review of billings/receivables for outstanding items • Program policy-checks made out to the program only