Stop Fraud in Your Office. Presented by: Margaret A. (Peggy) McGarrity, Esq., CPA

Transcription

1 Stop Fraud in Your Office Presented by: Margaret A. (Peggy) McGarrity, Esq., CPA 1

2 White-Collar Crime EDWIN H. SUTHERLAND 1939 First defined white-collar crime Criminal acts of corporations Individuals in corporate capacity Theory of differential association Crime is learned Not genetic Learned from intimate personal groups Honest and dishonest employees and be infected 2

3 Fraud Triangle DONALD CRESSEY ( ) Doctorate student at Indiana University Working on his PHD in criminology Determined embezzlers = trust violators Interviewed 200 convicted embezzlers Theory became known as the fraud triangle 3

4 Fraud Triangle CRESSEY S THEORY Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-sharable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons which their conceptions of themselves as users of the entrusted funds or property. 4

5 Fraud Triangle 5

6 Fraud Triangle The Need Factor Direct need Stealing to resolve a desperate financial problem Driven by compulsions such as drugs, alcohol, gambling and extramarital affair Indirect need Typically business owner s or executives Need to keep the company afloat Meet loan covenants Bank fraud, check fraud, invoice scams, etc. 6

7 Fraud Triangle The Need Factor Cont. Non-sharable Problems Violation of ascribed obligations Problems resulting from personal failure Business reversals Physical isolation Status gaining Employer-employee relations 7

8 Fraud Triangle The Rationalization Factor Personal code overrides moral or ethical code Employee talk themselves into the action What statistics show: 5%-10% would never steal 5%-10% are always scheming 80%-90% subjected to situational fraud 8

9 Fraud Triangle The Opportunity Factor Perception that there is a low probability of getting caught Poor internal controls Good internal controls can eliminate or mitigate the opportunity factor 9

10 Fraud Square W. STEVE ALBRECHT 1940 s U.S. Analyzed 212 actual frauds Developed Red Flags Personal characteristics Organizational environment Fraud Scale 10

11 Fraud Square Situational Pressures Immediate problems with environment Usually debts/losses Perceived Opportunities Poor controls Personal Integrity Individual code of behavior 11

12 Fraud Square 12

13 Internal Control Alerts Safeguarding Assets Are blank check stocks and signature stamps secured? Do you restrictively endorse all checks when received? Do you deposit your cash and checks daily? Do you maintain and monitor a list of property subject to theft? Do you maintain physical controls over inventories, shipping and receiving areas? 13

14 Internal Control Alerts Segregation of Duties Is the person handling cash also responsible for recording the cash? Is the person ordering materials also responsible for receiving? Are two or fewer persons responsible for the accounting function? Is your review of the financial statements sporadic? Is your review of the financial journals sporadic? 14

15 Internal Control Alerts Bank Reconciliation Do you review cancelled checks and endorsements monthly? Do you compare payroll checks with employee records? Do you question funds transferred between bank accounts? Are bank reconciliations prepared on a timely basis? Do you verify reconciling items? 15

16 Internal Control Alerts Supporting Documentation Do you ever sign blank checks? Do you ever sign checks without reviewing invoices, etc? Have funds ever been transferred between accounts without verification? Do you ever sign checks for new vendors without knowing or verifying their name and association with your company? 16

17 Internal Control Alerts Knowing your employees Are any of your employees possessive of their work records and reluctant to share their tasks? Are any of your employees apprehensive about vacations and time off, while always being the first in the office and the last out? Are any of your employees living beyond their means, or in personal financial difficulty? 17

18 Internal Control Alerts Knowing your employees Cont. Do any employees have a possible substance abuse problem? Do you hire employees without checking references? Do you permit accounting personnel to work longer than a year without taking a vacation? Do you have any accounting staff or key personnel who have not been secured with a fidelity bond? 18

19 Fraud Mitigation Association of Certified Fraud Examiners: Association for Financial Professionals Federal Bureau of Investigations Office of the State Attorney of Florida 19

20 Fraud Examples Former Broward County Sheriff Ken Jenne, a onetime possible contender for governor, spent 10 months in jail, lost his $134,500 FRS pension and had been suspended for 5 years from the practice of law for his fraud scheme. He pled guilty to tax evasion and mail fraud. He admitted accepting more than $151,625 in improper payments and services from Sheriff s Office contractors. 20

21 Fraud Examples Sheriff Jenne was NOT a sworn law enforcement officer. This was a public corruption case, but fraud could certainly have been involved. An audit at Broward Sheriff s Office determined that there was not a loss to the Sheriff s Office. That may have been since this crime caught relatively early. 21

22 Fraud Examples SUBSEQUENT STEPS TAKEN Review completed in Broward County Sheriff s Office after this case came to light. Because this kickback scheme involved only the Sheriff, there were no changes implemented in internal controls. The Broward Sheriff s Office bids most purchases over $50,000 that provides a level of protection relative to kick-backs. 22

23 Fraud Examples Bristol Sheriff Marshall Honaker in the early 90 s committed suicide after his fraud was discovered. He had been president of the National Sheriff s Association. He allegedly stole $377,700 in jail revenue to buy a house, two vehicles and other property. This was a crime of opportunity inmate housing money received was simply diverted money to the Sheriff s personal checking account. 23

24 Fraud Examples Auditors had been unable to obtain the contracts governing inmate housing reimbursements. The Federal Inmate housing checks were made out to the Sheriff. An IRS agent noticed that the Sheriff was living beyond his means. Sheriff indicated this had been an inheritance. Sheriff donated money to senior and other groups, and was Elected as LEO of the Year. Current Sheriff indicates that there is still a stain on the reputation of the Sheriff s Office in Bristol. 24

25 Fraud Examples SUBSEQUENT STEPS TAKEN The State Auditor of Public Accounts now assists auditors in obtaining records/contracts. Significant education is now provided to elected Sheriffs in Virginia. There is greater audit awareness and deference to auditor requests. There is additional external review of all contracts. 25

26 Fraud Examples Okaloosa County Sheriff Charlie Morris is presently serving a prison sentence for a kickback scheme/$100,000+. The scheme also involved the Finance Director and the IT Director. Employees were paid large bonuses that were paid and then kicked back to Sheriff. Scheme continued at least 5 years & employees were aware of this. 26

27 Fraud Examples SUBSEQUENT STEPS TAKEN Comprehensive Forensic Examination was prepared by auditors. Numerous internal controls strengthened. Procedures set up on bonuses to coincide with evaluations Whistleblower hotline established Manual payroll entries discouraged Payroll reconciliations prepared by a member of management independent of payroll function Awareness of collusion issues/risks. 27

28 Fraud Examples 32 Year Escambia Sheriff s Office employee, Cathy Lister, stole $1.4 Million over ten years. Lister worked in the finance unit diverting cash seized during drug investigations. Lister made large cash deposits at her local credit union. SARS alert NOT shared with the Sheriff s Office. No one compared evidence unit receipts to the bank deposits until the fraud was discovered. 28

29 Fraud Examples Lister complained directly to the Sheriff when the Finance Director wanted to change her duties. She was a long time trusted employee, who started her career in the Comptroller s Office. She was caught because she stole the deposit on the day she retired. She had kept two sets of receipts. Lister told investigators she did not understand why it took so long to be caught. 29

30 Agency Response SUBSEQUENT STEPS TAKEN Background checks are now required. (not required when Ms. Lister began work.) Cameras were placed in finance. Additional segregation of duties. Rotation of job assignments. Evidence receipts matched to bank deposits. 30

31 Agency Response After frauds are discovered, steps are generally taken to strengthen internal controls. After such significant losses that cannot be recovered, those steps are TOO LATE. That is why audits and strong internal controls are critical. Knowledge and the study of fraud assist in defeating perpetrators. 31

32 Finance Officer * Reminder * Please Remember: NO Agency is Immune to Fraud! 32

33 QUESTIONS? 33