Fraud Prevention, Detection and Red Flags

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1 Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 Sarah Walker, CFE, Fraud Manager

2 Agenda Fraud statistics Red flags Case study reviews Credit card best practices Questions 2

3 Fraud history Year Cases Amounts $358, $120, $264, $226, $642, $903, $689, $958, $1,540, $597, $1,047, $167, $484, $1,122, $2,253,394 Year Cases Amounts $331, $258, $611, $1,722, $548, $2,055, $1,864, $1,352, $3,490, $1,021, $797, $457, $897, $434,000 Totals 1,247 $27,219,443 3

4 Red flags: Cash receipting Deposits not made promptly Mode of payment differences Unusual adjustments Concerns with cost of goods sold Not posting payments to accounts promptly Safe access not limited 4

5 Red flags: Payments Unusual vendors Expenditures exceed budget Purchases don t make sense Missing receipts/invoices Unusual shipping addresses 5

6 Red flags: Payroll Excessive hours paid Unusual amounts of overtime Pay exceeds expectation Changes made after approval Leave cash-outs 6

7 Red flags: General Missing supporting records Altered documents Lack of review Untimely bank reconciliations Untimely financial reporting Trusted employee!!! (without adequate monitoring) 7

8 Study College Credit card July 1, 2009 January 31,

9 Case study How was it detected? The Procurement Department identified questionable activity during a review of transactions on a credit card issued to a department director. When asked about the questionable activity, the director acknowledged making purchases for personal use. 9

10 Case study What did we find? Our investigation focused on the director s credit card purchases from July 2009 through January ,651 credit card transactions, totaling $163,675 10

11 Case study What did we find? 1,094 unsupported transactions (issued five subpoenas) 701 misappropriated transactions, totaling $50, questionable transactions, totaling $46,169 11

12 Case study What did we find? Purchases for: Gift cards Fitness activity trackers Nutrient extracting blender Make up and beauty products Electronics and wireless connection charges Cleaning supplies Clothing 12

13 Case study What did we find? Purchases for: Watches and jewelry Vacation related expenses Household items Items shipped to an out-of-state relative Gifts Shoes and other accessories 13

14 Case study Where did the money go? How was the fraud concealed? Mostly, it wasn t In some instances, lack of supporting records Some purchases were from vendors that offered a wide variety of goods 14

15 Case study Lessons learned: Control weaknesses The Supervisor did not adequately review the Director s credit card transactions. Procurement and Accounting Departments were not adequately monitoring the review and approval of credit card transactions by individual departments to ensure that transactions were legitimate, reviewed and approved before the credit card bill was paid. 15

16 Case study What happened to the employee? She is no longer an employee. We referred our report to the county prosecuting attorney s office. 16

17 Case study Were there any red flags? Trusted employee with very little to no oversight Unusual vendors Purchases that didn t make sense Large volume of transactions/amounts Purchases with an out-of-state ship to address Lack of records 17

18 Study School district credit card August 2008 January

19 Case study Timeline: 1977: Subject starts with the District as a bus driver 2005: Moves into A/P Secretary role 2010: Payroll added to responsibilities December 2014: High School Principal requests a copy of the District credit card statement 19

20 Case study Our investigation identified: 20

21 Case study Examples of personal purchases: Pet supplies ($10,600) Multiple vacations Clothing Shoes Perfume 21

22 Case study Examples of personal purchases: Cosmetic services Furniture 60-inch LED HD TV Refrigerator (over $3,000) 22

23 Case study Lessons learned: Control weaknesses The review of expenditures was not sufficient to ensure all purchases were allowable, for a District purpose and in compliance with District expectations. No supporting statements for credit card purchases were provided for review. 23

24 Procurement and credit cards: Best practices 24

25 How to avoid credit/purchase card fraud? Develop a written policy Allowable uses Prohibited uses No personal use Responsibilities Rewards/points use What happens if policy is not followed Have everyone with card responsibilities sign off on policy 25

26 How to avoid credit/purchase card fraud? Records Require original, itemized receipts Think about who will be responsible for retaining them Where are they stored? Banking controls Consider setting a monthly limit Consider prohibiting certain vendor types Ask if supervisors/accounts Payable can have read-only access to credit card account 26

27 How to avoid credit/purchase card fraud? Review: Who is responsible for what? Employee Supervisor knowledgeable of activities Accounts payable 100% detailed review Documentation of review Step-back analysis Who actually needs a card? Is the volume of transactions necessary and reasonable? Does the credit card holder ask for personal reimbursements? 27

28 How to avoid credit/purchase card fraud? Review: What do I look for? Unusual vendors Unusual or unallowable items Large volume of transactions Only the credit card slip, not the itemized receipt Photocopies Scanned documents Missing receipts 28

29 How to avoid credit/purchase card fraud? Review: What do I look for? Alterations bank statement or supporting records Supporting documents with missing information Documentation that does not look professional Invoices that are different than the others from the same vendor Ship to addresses that don t make sense 29

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35 State agencies and local governments shall immediately report to the state auditor s office known or suspected loss of public funds or assets or other illegal activity. 35

36 Fraud happens What to do if it happens to you: Fill out a report on the Web at Investigations Fraud Program Report a Suspected Fraud (RCW ). It takes only a few minutes! 36

37 Questions? 37

38 Contacts Sarah Walker, CFE Fraud Manager (509) Stephanie Sullivan Assistant Fraud Manager (509) Sadie Armijo, CFE Assistant Director of Local Audit (360)