1/3/2013. Months. Other $75,000. Government $81,000. Non-Profit $100,000. Dollars. Public Company $127,000. Private Company $200,000

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1 In its 2008 Report to the Nation, Occupational Fraud and Abuse, the Association of Certified Fraud Examiners (ACFE) - reported losses of 7% of revenue or $994 billion of US Gross Domestic Product lost to fraud, translated to $4,500 per employee. The 2012 Report estimates losses at 5%. The report is based on 1,388 reported cases of fraud and abuse: The median loss of $140,000 per incident. More than 1/5 of the frauds exceeded $1,000,000. A 2002 study says 1 out of 5 Americans were personally aware of fraud in the workplace. Almost half of the 617 employees in this study said that the employers could do more to prevent fraud. What we know about fraud we learned from people who got caught. Percent Banking / Financial Service Governement Manufacturing Healthcare 2.8 Education 3.1 Retail Insurance Professional Servics Religious or Charatable Service (Other) Construction Oil and Gas Telecommunications Technology Other 1

2 Register Disbursement Non-Cash Larceny Corruption Cash on Hand Skimming Billing Financial Statement Fraud Expense Reimbursements Check Tampering Payroll Months Other $75,000 Government $81,000 Non-Profit Public Company $100,000 $127,000 Dollars Private Company $200, , , , , ,000 21% 32% # of Employees <100 1,000-9, , % 19% 2

3 # of Employees <100 $147, $150, ,000-9,999 $100,000 Dollars 10,000+ $140, , , , ,000 Percent Lack of Internal Controls Override of Internal Controls Lack of Management Review Poor Tone at the Top Lack of Competent Personnel in Oversight Positions Lack of Independent Checks / Audits Lack of Employee Fraud Education Lack of Clear Lines of Authority Lack of Reporting Mechanism 2010 ACFE Control % of Cases #Months # Months Control Percent Implemented Control not in Place Reduction in Place Job Rotation/Mandatory Vacation Rewards for Whistleblowers Surprise Audits Code of Conduct Anti-Fraud Policy External Audit of ICOFR Formal Fraud Risk Assessments Fraud Training for Employees Fraud Training for Managers/Execs Hotline Mgmt Certification of F/S Independent Audit Committee Internal Audit/FE Department Management Review Employee Support Programs External Audit of F/S

4 Control % of Cases Implemented Control in Place Control not in Place Percent Reduction Management Review 60.5 $100,000 $185, Employee Support Programs 57.5 $100,000 $180, Hotline 54.0 $100,000 $180, Fraud Training for Managers/Execs 47.4 $100,000 $158, External Audit of ICOFR 67.5 $120,000 $187, Fraud Training for Employees 46.8 $100, $155, Anti-Fraud Policy 46.6 $100,000 $150, Formal Fraud Risk Assessments 35.5 $100,000 $150, Internal Audit/FE Department 68.4 $120,000 $180, Job Rotation/Mandatory Vacation 16.7 $100,000 $150, Surprise Audits 32.2 $100,000 $150, Rewards for Whistleblowers 9.4 $100,000 $145, Code of Conduct 78.0 $120,000 $164, Independent Audit Committee 59.8 $125,000 $150, Mgmt Certification of F/S 68.5 $138,000 $164, External Audit of F/S 80.1 $140,000 $145, % 1% 7% Never Punished or Terminated Previously Terminated Previously Punished Other 84% 1% 6% 6% Never Charged or Convicted Prior Pi Convictions iti Charged but not Convicted Other 87% 4

5 6% 25% 42% Less than 1 Year 1 to 5 Years 6 to 10 Years More than 10 Years 27% <1 Year $25,000 1 to 5 Years $100,000 6 to 10 Years $200,000 Dollars More than 10 Years $229, , , , , ,000 ACFE s 2012 study on fraud analyzed 1,388 cases of fraud: 42% perpetrated by employees with median loss of $60,000 37% perpetrated by managers with median loss of $180,000 17% perpetrated by executives/owners with median loss of $573,000 Median Loss by those: 5.8% were< 26 years old $25, % were $50, % were $100, % were $150, % were $183, % were $200, % were $600, % were $232, % were over 60 $250,000 5

6 Median Length of Time: 18 months before fraud is detected 13% lasted 5 years or more 3.4% detected within a month 2002 ACFE Intent Motive to commit fraud Opportunity Concealment of the fraud Rationalization of the fraud Internal from inside of the work environment An employee feeling undercompensated A subordinate being subjected to harassment or abuse by a supervisor A worker feeling unfairly treated A high work volume = feeling of job pressure A sense that promotions are based on politics not hard work 6

7 External Outside the work environment A substance abuse problem Extreme financial stress Health problems Gambling problems Pressure to achieve a certain lifestyle Basically robbing Peter to pay Paul Customer pays bill usually cash is taken Subsequent customer payment is credited to post to first customers account Usually steal cash It s easier to use than a check Can not be trace once it is spent Deposit slips may agree to posted receipts Credit issued to subsequent customer s account Living Beyond Means Financial Difficulty Unwilling to Share Close Vendor Wheeler Dealer Divorce / Family Suspicious / Defensive Addiction Problems Refuse Vacations Past Employment Inadequate Pay Excess Pressure Within Asset Misappropriation Corruption FS Fraud 2010 ACFE 7

8 Weaknesses in the design of financial controls Weaknesses in the application of financial controls Potential for overriding financial controls Failure to require clerical check of math and pricing accuracy of vendor invoices prior to approval of payment Failure to require that bank reconciliations be performed by someone who does not have the responsibility for preparing, signing, or recording checks A supervisor providing rubber stamp approvals on timesheets submitted by employees ees An AP clerk failing to verify that a vendor invoice has not already been paid when preparing a payment to that vendor 8

9 Collusion between two or more employees in can render key financial controls worthless because the parties are cooperating in the fraud. Fraudulently documenting a control procedure that hasn t actually been performed Median Loss One Perpetrator $100,000 Median Loss Two or More $366,000 Altering Documents Destroying documents Fabricating phony supporting documentation Forging a signature Lying to coworkers (and auditors) Maintaining silence Maintaining a duplicate set of accounting records Forcing account reconciliations Recording bogus journal entries to move fraud from one account to another Recording additional entries to establish a complicated trail of activity Never taking vacation or sick leave Restricting access to files using personal locks Assessment What are your organization s potential risks? Reduction Establish policies to prevent or detect fraud Transfer The use of insurance to transfer financial risks Acceptance What level of financial exposure are you willing to risk? 9

10 Skimming A little off the top Lapping Schemes Robbing Peter to pay Paul Write-Offs of Accounts Receivable Unauthorized Credits Unrecorded Sales User Fees Theft of Donated Merchandise The theft of cash before it is recorded in the accounting system Off the books scheme Benefit to skimmer it that the organization does not know it ever had the money Rung up as no sale No receipt given Missing receipt numbers Usually small dollar amounts many times 10

11 Post sign If casher fails to give you a receipt How often have you seen the sign Review no sales Toll collector collecting toll ring up as EV Parking attendant collect and waive through Check for missing receipt numbers Gas station 153, 154, 156, 157 Analytical reviews Attendance up concessions down Video Surveillance limit perceived opportunity Basically robbing Peter to pay Paul Customer pays bill usually cash is taken Subsequent customer payment is credited to post to first customers account Usually steal cash It s easier to use than a check Can not be trace once it is spent Deposit slips may agree to posted receipts Credit issued to subsequent customer s account People who receive cash can not post credits Mandatory vacations / rotate job assignment Reconcile payments posted to bank deposits 11

12 Theft of cash after it is recorded on the books Take cash from cash register Usually under immediate financial pressure Rationalize by saying they were borrowing Usually short sighted no attempt to conceal Usually easy to detect No Receipt Issued Store copy is different than customer copy Call Customers with Satisfaction Survey Perform Trend Analysis Discounts, Coupons, Over rings Recalculate Revenue 100 people * $5.00 per admission = $ in Receipts Gross Profit drops Do not secure deposit Left unattended in desk drawer overnight Don t seal the bag Person simply pyremoved cash Entrust the deposit to the wrong person Pastor cashed checks at a check cashing location 12

13 All other things equal a fraudster will steal cash and not checks Unless you record serial numbers all bills are the same It may be difficult to convert checks Set up false company account Similar named business ABC Company vs. ABC Corporation Alter name of Payee on check Direct Disbursements Billing Schemes Fraudulent Classification of Personal Expenditures as Business Expenses Rf Refund Sh Schemes Financial Assistance Schemes Check Tampering Electronic Funds Transfer Schemes Undisclosed Conflicts of Interest Kickbacks and Vendors Bribery Fraud in the Bidding Process Shell Company Exist on paper only Created just for the scheme May not provide any services You may be there only customer May provide items at inflated prices Pass through Getting Approval Self approval Rubber Stamp supervisor Collusion 13

14 Implement purchase approval process Remove Rubber Stamper s authority Shell companies typically bill for services People who approve a large number of services Typically approved faster than average bill They get walked through the system Over Billing Shell company purchases items and sells them to victim at higher price. Pay and Return Company overpays its invoice and asks for refund or check to be sent to them. The Fraudster then deposits check in their own account An undisclosed payment by a vendor to an employee in the purchasing department Vendor pays employee to exercise influence over purchasing gprocess giving g vendor an unfair advantage Hard to detect attacked from two directions Vendor Purchasing Dept 14

15 Purchase supplies for use in their own business Ship to separate location Altered Invoices Falsify Purchase Orders Pay personal expenses Credit Card Met-Ed vs. PP&L Day Care Collectables Payroll Schemes Padding Time Cards Ghost Employees Employee Expense Reporting Schemes Overstated Mileage Overstated Business Expenses Recording Personal Expenses Have co-worker punch you in Leave and have co-worker punch you out Have someone punch you in and out Free vacation day Unapproved over time New systems Swipe ID cards Finger print 15

16 An employee on the organization s payroll that does not actually work for the organization A friend or relative of perpetrator Four parts to scheme Ghost must be added to payroll Time and wage information must be entered Paycheck must be issued Check must be delivered to perpetrator Fictitious Sales Write up sales early to make bonus at period end Insurance agent $1.25 commission per $1.00 in premiums paid Record mileage for reimbursement when actually used a company vehicle Overstate mileage From Office to A and Return then Office to B and Return actually from Office to A then B then Returned 16

17 Claiming personal expenses Take a friend out to dinner say it was business Overstate business expenses Paid $100 claimed $400 Fictitious expense reimbursement Dinner paid by another company Claimed reimbursement but paid with company credit card Exchange company paid first class airline ticket for coach ticket pocket difference Forged Maker Scheme Forged Check Signer Forged Endorsement Schemes Altered Payee Schemes Pay to IRS becomes MRS. Smith Erasable Ink Concealed Check Schemes Prepare an extra check for fraudster Authorized Maker Schemes Prepares and signs checks for themselves Property and Equipment Schemes Borrow Steal Personal Use of Organization Assets and Other Resources Inventory Schemes Excessive Shrinkage 17

18 Fraudulent Billings by Vendors Charging inflated prices Billing for goods or services not delivered Duplicate billings (which are similar to the preceding fraud) Substituting lower-quality goods than what was agreed upon 18