Its Not About If, Its About When! Learning how to protect your organization.

Transcription

1 Learning how to protect your organization.

2 Presentation Overview Summary off FFraud S d St Statistics ti ti Definitions of Fraud How and Why Fraud Happens Fraud Prevention and Deterrence Steps to Reducing Risk Slide 2 of 49

3 IT DOESN T TAKE A BAD PERSON TO COMMIT A FRAUD! It takes the right person, at the right time under the right circumstances!

4 Summary of Fraud Statistics 2012 Global Fraud Survey Estimated that a typical organization loses 5% of annual revenues to fraud. 8% 81% of cases, fraudsters had one of typical behavioral red flags. Financial difficulties Living outside of ones means Control issue Close relationships with vendors Slide 4of 49

5 Summary of Fraud Statistics, cont Global l Fraud Survey 77% of frauds were committed in one of the following departments: t accounting, operations, sales, executive/upper management, and customer service/purchasing. Slide 5of 49

6 Summary of Fraud Statistics, cont Global l Fraud Survey More than 87% of fraudsters in the study had never been previously charged or convicted itd of a fraud related offense. 49% of victims recover NOTHING from the fraud. Slide 6of 49

7 What do you think of when you hear the word fraud?

8 What is Fraud? Black s Law Dictionary defines fraud as: all multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprise, trick, cunning or dissembling, and any unfair way by which another is cheated. Slide 8of 49

9 Webster s dictionary defines Fraud is the intentional ti perversion of truth th in order to induce another to part with something of value or to surrender a legal l right; an act of deceiving or misrepresenting. Slide 9of 49

10 What does that mean? Fraud is many things: Misrepresentation of material facts Concealment of material facts Bribery Conflicts of interest Theft of money or property Theft of trade secrets or intellectual l property Breach of fiduciary duty (2009 Fraud Examiners Manual, Law related to Fraud) Slide 10 of 49

11 Misrepresentation and concealment of facts Communicating facts with intent to deceive Hiding facts with intent t to deceive Slide 11 of 49

12 Bribery and conflicts of interest Giving i or receiving ii gifts as influence Relationships that can influence business decisions Family & Friends Vendors Slide 12 of 49

13 Breach of fiduciary duty It is your duty, as an employee or director of the organization, to keep that organization s best interests t in mind at all times. Slide 13 of 49

14 Fraud simply stated Lying Cheating Stealing Misleading Misrepresenting All with an intent to deceive Slide 14 of 49

15 What causes someone to commit fraud? The Fraud Triangle. Rationalization Motive Opportunity Slide 15 of 49

16 Motive (RED FLAGS) Work undercompensated, or underappreciated Substance or other addictions drugs, alcohol, and gambling Life pressures family illness, bills, and credit card debt, lifestyles Slide 16 of 49

17 Rationalization Embezzlement is small in comparison Sense of justification: entitlement Depersonalization: ation does not harm anyone Convincing themselves they will repay the organization later. Slide 17 of 49

18 Opportunity Conditions that t allow fraud to occur Poor internal controls or segregation of duties Bad examples by management (tone at the top) Weakness in application of controls and potential for overriding controls Slide 18 of 49

19 Real Life Perspective County Bank Nonprofits Slide 19 of 49

20 How and Why Fraud Happens What causes counties to be more vulnerable than other organizations? Elected Officials Equipment use & construction Good Ole boy, small town Slide 20 of 49

21 How and Why Fraud Happens, cont. Type of fraud most commonly committed is asset misappropriation: Revenue and cash receipts schemes Purchasing and cash disbursement schemes Payroll and employee expense reporting schemes Noncash asset misappropriations p Slide 21 of 49

22 How and Why Fraud Happens, cont. Revenue and cash receipt schemes: Cash Skimming taking cash directly from customer and pocketing it Cash Larceny taking cash right out of the register or cash box Slide 22 of 49

23 How and Why Fraud Happens, cont. Purchasing and cash disbursement schemes: Personal expenses made with company funds Misrepresentation of reimbursement expenses to get additional funds Improper use of grant funds for un allowed expenses. Slide 23 of 49

24 How and Why Fraud Happens, cont. Payroll and employee expense reporting schemes: False employees or abuse of payroll Employee credit card abuse. Slide 24 of 49

25 How and Why Fraud Happens, cont. Noncash asset misappropriation: i False receipts, invoices, or other documents to adjust the books False representation of facts to obtain funding via grants or loans. Slide 25 of 49

26 Fraud Prevention and Deterrence To prevent or deter fraud, remember six facts: High probability fraud does or will exist Real cost of a reported fraud is not just in terms of dollars lost People and circumstances change, these changes can increase risk of fraud Slide 26 of 49

27 Fraud Prevention and Deterrence To prevent or deter fraud, remember six facts, cont.: Internal controls play a critical role, but are only one facet of fraud prevention and detection. Reliance eaceon external audit is not enough. Everyone in the organization has a responsibility to prevent and detect fraud. Slide 27 of 49

28 Fraud Prevention and Deterrence Realize that t fraud can t be 100% prevented Know and assess the existence of the motives, opportunities and rationalization that may be in or organization. Perform annual fraud risk assessments Start by assessing internal controls Slide 28 of 49

29 Fraud Prevention and Deterrence Internal Controls is a broad concept: Timely, accurate financial reporting Safeguarding gof assets Compliance with laws and regulations Efficient utilization of organization resources Includes check signers, managements ethics Checks and balances Segregation g of duties Slide 29 of 49

30 Fraud Prevention and Deterrence Financial i controls relate lt to policies i and procedures over specific transaction cycles: Recording revenue Collecting payments (from donors, members, customers, etc.) Purchasing Slide 30 of 49

31 Fraud Prevention and Deterrence Financial i controls relate lt to policies i and procedures over specific transaction cycles, cont.: Disbursing of funds Processing payroll Administering grant funded programs Slide 31 of 49

32 Fraud Prevention and Deterrence Financial i controls relate lt to policies i and procedures over specific transaction cycles, cont.: Periodic reconciliations of individual account bl balances (bank accounts, loans, etc.) Slide 32 of 49

33 Fraud Prevention and Deterrence Objectives of financial controls in fighting fraud, are as follows: Minimize the real or perceived opportunities to commit fraud Make it difficult tor impossible etoco conceal cea a fraud (identify them quickly) Preventive and Detective Controls Slide 33 of 49

34 Fraud Prevention and Deterrence Preventive Controls: Locking filing cabinets Use of passwords to prevent access to software Approval of timesheets before paychecks are written Slide 34 of 49

35 Steps to reducing your risk Financial i Controls over Revenue and Cash Receipts: Immediate stamp of endorsement with account name and number prevents from being deposited into another account. Timely depositing of all funds Slide 35 of 49

36 Steps to reducing your risk Financial i Controls over Revenue and Cash Receipts, cont.: If not deposited everyday, lock up un deposited funds overnight. Slide 36 of 49

37 Steps to reducing your risk Financial Controls over Revenue and Cash Receipts, cont.: Permanent record of all funds received with date, payer name, amounts, form of payment and description, such as cash receipt log. Reconciliation of cash receipt log to deposits. Reconciliation of cash receipts to revenue accts. Slide 37 of 49

38 Steps to reducing your risk Financial Controls over Revenue and Cash Receipts, cont.: Have dual controls Meaning two people are present at the time the receipts are opened and recorded in the log, and both account for the receipts Not counting after receipts have already been recorded. Slide 38 of 49

39 Steps to reducing your risk Financial i Controls over Revenue and Cash Receipts, cont.: Segregation of duties Individual responsible for processing and recording receipts should not be completing the deposit and physically depositing funds. Slide 39 of 49

40 Steps to reducing your risk Financial Controls purchasing and disbursement schemes: Segregation of duties Purchase request Purchase authorization Receiving ii Accounts payable recording Approval of vendor invoices Slide 40 of 49

41 Steps to reducing your risk Financial i Controls purchasing and disbursement schemes: Use of pre numbered checks must periodically review ledger to skipped check numbers. Prohibit signing i of checks in advance Limit or forbid use of signature stamps Slide 41 of 49

42 Steps to reducing your risk Financial i Controls purchasing and disbursement schemes: Maintain control over unused checks Requiring dual signatures on checks? Reconciling bank statement monthly Properly void checks Slide 42 of 49

43 Steps to reducing your risk Financial Controls purchasing and disbursement schemes: Control issuance of credit card, require receipts for all expenses, establish credit limits, review credit cards frequently Review vendor payment history Review endorsement on canceled checks Slide 43 of 49

44 Steps to reducing your risk Don t stick your head in the sand Don t wait until a fraud happens to decide to act. Remember, it doesn t take a bad person to committee a fraud. It takes the right person, at the right time, with the right circumstances. Slide 44 of 49

45 Slide 45 of 49

46 Lori Herrick, CPA, CFE, CICA 14 years of public accounting experience Established SAFRline, a 24 hour fraud hotline to report concerns within organizations Extensive experience in tax preparation for individuals, corporations and partnerships Practice emphasis in audits for nonprofits, governmental entities and private companies Memberships in TSCPA, AICPA, TASBO, TANO and ACFE Currently the Director of Financial Aid for McMurry University Slide 46 of 49

47 References ACFE Report R t tto the th Nations N ti 2012 Global Fraud Study Fraud and Abuse in Nonprofit Organizations A guide to Prevention and detection. Gerard M. Zack Slide 47 of 49

48 References IInternal t l Controls C t l Guidance G id ffor Private, Government, Nonprofit Entities Lynford Graham Slide 48 of 49

49 References Fraud F d Examiners E i Manual M l ACFE Slide 49 of 49