Eric Kinsherf, CPA MMAAA Conference June 12, 2018
Ag e nda Overview What is Fraud? How does Fraud happen? How to Detect and Prevent Fraud Summarize
Ob je c tive s Gain better Understanding of Fraud Risk Illustrate examples Understand process of Conducting a Fraud Risk Assessment
WHAT I S F RAUD?
MUNI CI PAL F ra ud Ca se s MASSACHUSETTS ALLEGED BIGGEST MUNICIPAL EMBEZZLER IN MUNICIPAL THEFT UNITED STATES HISTORY Source: http://www.telegram.com/article/20160102/NEWS/160109825 Source:
Wha t is F ra ud? Association of Certified Fraud Examiners definition of Occupational Fraud: “The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of employing organization’s resources or assets.”
3 MAI N F RAUD CAT E GORI E S Asset Misappropriation Corruption Financial Statement Fraud • Theft of Cash • Bribes • Intentionally misrepresenting the • Skimming • Conflicts of Interest values such as: • Theft of Inventory or • Illegal Gratuities • Revenue Assets • Economic Extortion • Expenditures • Fraudulent Disbursements thru • Assets Invoices, Payroll, • Liabilities Expense Reports, Voids, • Equity Refunds, Check • Improper Disclosures Tampering
89% o f ACF E Ca se s invo lve d Asse t Misa ppro pria tio n. 89% A Case can have a mix of all 3 Categories 38% 10% Percentage of Cases Asset Misappropration Corruption Financial Statement Fraud Source: 2018 ACFE Report
E XAMPL E S OF F RAUD
3 F ra ud Ca te g o ry with E xa mple s o f F ra ud Source: 2018 ACFE Report
ACF E Unite d Sta te s F ra ud Sc he me Sta tistic s Asset Misappropriation Is the Largest Category! Source: 2018 ACFE Report
Co mmo n F ra ud T he me s Smaller Organization typically have fewer anti-fraud controls which increase the risk of fraud. Median duration of a fraud scheme is 16 months . Internal Control weaknesses were responsible for over 50% of Fraud! Only 4% of fraudsters had a prior conviction . Majority of Victim organizations recovered nothing . Source: 2018 ACFE Report
HOW DOE S I T HAPPE N?
F RAUD T RI ANGL E I will pay it back and no one RATIONALIZATION will notice. No one will get hurt. I’m underpaid and deserve more money. Weak Internal Controls - Signs checks, records all transactions, and reconciles the bank statements. Unable to Pay Personal Bills OPPORTUNITY INCENTIVE
HOW DI D I T HAPPE N?
City o f Dixo n Ca se Worked at the City of Dixon for 21 years before setting up a secret bank account . Took Money for 20 years before discovered . Source: JOURNAL OF FORENSIC AND INVESTIGATIVE ACCOUNTING VOL 7, ISSUE 1 JAN – JUNE 2015
F RAUD T RI ANGL E RITA’S RATIONALIZATION RATIONALIZATION? WE CAN ONLY SPECULATE RITA CONTROLLED the WHOLE CASH PROCESS PASSION FOR RAISING FROM PICKING UP THE AND SHOWING QUARTER MAIL TO BANK HORSES WHICH IS VERY RECONCILIATIONS EXPENSIVE! OPPORTUNITY INCENTIVE
F ra ud Risk a t the City o f Dixo n No Segregation of Duties. One person controlled the process. Rita picked up the mail, made all deposits, updated the journals and ledgers, prepared and signed checks, moved investment monies, and did the bank reconciliations. Rita had no supervisor and earned complete trust from the Mayor, Council, and Colleagues. Unqualified Audit opinions were given each year. Source: JOURNAL OF FORENSIC AND INVESTIGATIVE ACCOUNTING VOL 7, ISSUE 1 JAN – JUNE 2015
WHAT DI D RI T A DO? •All Bank Transfers •Drafted Checks from Other Accounts & Checks Payable to Imprinted Wrote Treasurer and NO OPENED A with RSCDA Checks for INTERNAL Deposited in RSCDA SECRET CONTROLS RSCDA ACCOUNT Account c/o her Personal BANK ACCT RITA COULD •Created Fictitious Rita Expenses. Projects and Crundwell Invoices • Complete control of the cash process Source: JOURNAL OF FORENSIC AND INVESTIGATIVE ACCOUNTING VOL 7, ISSUE 1 JAN – JUNE 2015
I ssue s with the Audito rs Lack of Independence Noted Material Weaknesses but no enhanced audit procedures done and no audit report on Internal Controls over Financial Reporting Other Issues Source: JOURNAL OF FORENSIC AND INVESTIGATIVE ACCOUNTING VOL 7, ISSUE 1 JAN – JUNE 2015
HOW WAS I T DI SCOVE RE D?
VACAT I ON RITA TOOK A 12 WEEK VACATION CITY CLERK ASSUMED RESPONSIBILITY AND CONTACTED BANK FOR A ROUTINE REQUEST OF ALL BANK STATEMENTS Source: JOURNAL OF FORENSIC AND INVESTIGATIVE ACCOUNTING VOL 7, ISSUE 1 JAN – JUNE 2015
HOW T O PRE VE NT F RAUD
UNDE RST ANDI NG F RAUDST E RS
Unde rsta nd wha t F ra udste r Do Ranking of Top 8 Concealment methods used by Fraudster What Internal Controls do you 1. Created Fraudulent Physical Documents have in place to 2. Altered Physical Documents prevent these 3. Created Fraudulent Transactions in the Accounting System concealment 4. Altered Transactions in the Accounting System methods from 5. Altered Electronic Documents and Files happening? 6. Destroyed Physical Documents 7. Created Fraudulent Electronic Documents or Files Who is reviewing the documents or 8. Created Fraudulent Journal Entries transactions to ensure that they are legitimate? Source: 2018 ACFE Report
E mplo ye e Re d F la g s o f F ra ud Unexplained increases in wealth Living beyond their means Close employee association with vendor etc.. Personal Issues such as legal, financial, substance abuse Never takes a vacation Unwilling to share duties Lack of transparency Financial decisions made by one person Source: 2018 ACFE Report
UNDE RST ANDI NG I NT E RNAL CONT ROL S
I NT E RNAL CONT ROL S Accounting term , is a process for assuring achievement of an organization's objectives in operational effectiveness and efficiency, reliable financial reporting , and compliance with laws, regulations and policies. Why Important? Reduce Risk of Asset Loss Ensure Accurate and Complete Information Reliable Financial Reporting Compliance with Laws, Regulations and Policies
E VAL UAT E I NT E RNAL CONT ROL S AND UNDE RST AND RE D F L AGS
City o f Dixo n do Afte rwa rds? INTERNAL CONTROL CHANGES REDUCED BANK ACCOUNTS TO ONE BANK ACCOUNT NO PAPER CHECKS ALLOWED SEGREGATION OF DUTIES INDEPENDENT PANEL TO OVERSEE FINANICAL REPORTING (CPA, BANKER, ATTORNEY) ANNUAL AUDITED FINANICAL STATEMENT PRESENTED TO CITY COUNCIL AND POSTED ON WEBSITE Source: JOURNAL OF FORENSIC AND INVESTIGATIVE ACCOUNTING VOL 7, ISSUE 1 JAN – JUNE 2015
E XAMPL E : DI SBURSE ME NT S
Disb urse me nt Re d F la g s Altered or Incomplete Supporting Documentation Invoices from same vendor look different Unexplained increases in expenses Vendors with no physical addresses or no W9 Employees picking up vendor checks No Segregation of Duty – one person sets up vendor, entering invoices, approving the warrant, printing and mailing checks.
E xa mple : Disb urse me nt I nte rna l Co ntro ls Follow Chapter 30B Procurement Laws. Purchase Order Approval Process. W9 to ensure valid vendor. Also Google, Research, Call the Vendor. Invoices are signed off by the department head. Review Invoices to ensure not fraudulent, excessive or unlawful. Segregation of Duties: Review the process who has too much control. Train staff on the importance of Internal Controls and Fraud Prevention. Keep check stock in a locked and secured area. Do not allow hand written checks. Signed vendor checks should not be returned to those who authorized the payment. Restrict Check signer access to accounting records, cash receipts, bank reconciliations. Restrict access to the vendor master file. Department Heads review Expenditure Reports Accounting, Town Manager review Expenditure Reports. Review the Vendors annually. Inactivate Old Vendors. Compare Employee Addresses to Vendor Addresses. If something doesn’t feel right, investigate further.
Unde rsta nd the De te c tio n Me tho ds
De te c tio n Me tho ds TOP 3 are 68% of how Frauds were Detected! 1. TIPS 40% 2. INTERNAL AUDIT 15% 3. MANAGEMENT REVIEW 13% Source: 2018 ACFE Report
DE T E CT I ON - # 1 T I PS
MOST COMMON I NI T I AL DE T E CT I ON ME T HODS TIPS ARE THE WHAT DO YOU MOST HAVE IN PLACE COMMON SO PEOPLE CAN METHOD OF REPORT DETECTION SUSPICIOUS OR FRAUDLENT BEHAVIOR? TIPS CAN COME FROM CUSTOMERS, VENDORS, ANONYMOUS, ETC.. Source: 2018 ACFE Report
E xa mple s o f F ra ud Ho tline We b site s
Do yo u ha ve : Do Employees know what to do 1. Fraud Policy if they suspect Fraud? Do Employees feel safe 2. Whistleblower Policy reporting Fraud? Biggest fear is retaliation. Don’t assume Employees know what to do. Don’t let Policies just sit in the book. Make sure the Policies are communicated and reviewed with staff on an ongoing basis. Source: 2018 ACFE Report
DE T E CT I ON – # 2 I NT E RNAL AUDI T S
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