An Overview of Fraud Risk. Presented by: Rick Potocek CPA MBA CFE

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1 An Overview of Fraud Risk Presented by: Rick Potocek CPA MBA CFE

2 To raise awareness of: Who commits fraud and why Red flags to consider Simple steps to take to immediately reduce the risk of fraud

3 According to the Association of Certified Fraud Examiners, U.S. organizations lose an estimated 5% of annual revenues to fraud. As an example if applied to the NY State s budget of $132 billion ~ $6.6 billion in potential loss due to fraud.

4 Motivation Opportunity Rationalization

5 Overwhelming desire to appear wealthy Family needs (housing, medical, education, etc.) The addict (gambling, alcohol, drugs, sex) High personal debt Thrill-seeker (I bet I can beat the system and away with it)

6 Access to cash, assets or inventory Ability to conceal the act In a position where there are little o no separation of duties Minimal management oversight

7 Temporary solution to Financial Need It s just a loan. I ll pay it back as soon as this is over. Entitlement I m not getting paid enough for the work I do Higher Purpose I need this more than they do. Nobody will miss it Revenge So, they think they can take advantage of me!

8 What to look for to identify the possibility of fraud and the person/persons responsible. Employees Management

9 Lifestyle Changes Living beyond means Bragging about new purchases Carrying an unusual amount of cash Evidence of High Personal Debt Wage garnishments Calls from creditors or loan agencies Borrowing money from co-workers

10 Behavioral changes Easily annoyed Unreasonably upset when asked about something related to their work Territorial over their work Drugs, alcohol, gambling, absenteeism

11 Unusual Dedication to Work Working after hours or on weekends Unwilling to give up any workload Volunteering to take all customer complaint calls Refusing to take vacation or even promotion

12 Secretive Reluctant to provide info to oversight bodies e.g. auditors Dominate decision making Tend to bowl people over or rush Regularly overrides internal controls because Do it because I said so

13 Hires staff who lack experience, skills, talent or confidence (least likely to detect a fraud scheme or report the boss if detected) Frequent changes in professional relationships Changes in banks Changes in attorneys Changes in auditors

14 Stealing cash, inventory or assets Payments to fake companies Using entity monies for personal expenses Opening a secret bank account to deposit incoming checks Collusion and kickback schemes Over payment for goods or services received or payment for goods and services not received Payroll fraud ghost employees/contractors

15 Site to create Fake Invoices

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17 Looking again at the Elements in the Fraud Triangle - Motivation Opportunity Rationalization Opportunity is the element management can control

18 A fraud Risk Assessment Identifies all Possible Risks Measures the Likelihood of each Risk Prioritizes the Risks Responds to the Risks

19 Responding to the risks There are three risk responses: Accept the risk: do to the cost to mitigate, you may choose to do nothing about the risk but be extra vigilant Avoid the risk: Discontinue the business practice that causes the risk. Reduce the risk: Implement or adjust internal controls to address and reduce the identified risk

20 Background checks Employees and Vendors Create Ethics policies & Code of Conduct Separation of duties Limiting span of authority Job rotations Document what each position is responsible for and SOPs for accomplishing tasks Training re: ethics, Code of conduct and consequences of wrong doing. (no second chances, prosecution, etc.) Establish an independent Hotline

21 THE FBI SHUTTERBUG AN FBI AGENT DRUG SQUAD SUPERVISOR ROLES THE DICE COMPANY CELLPHONE ADMINISTRATOR RINGS UP BIG MONEY

22 Richard M. Potocek CPA MBA CFE Contact Information: Telephone: Website: