Fraud Happens….but it doesn’t have to. A Simple Perspective on how to Protect You and Your Organization David Mol, CPA Redpath and Company, Ltd 1
Agenda • Introduction • Internal Controls – the textbook version • ACFE Report to the Nations • Real Life Examples • Solutions 2
Introduction • Introductions – Speaker – Class Participants 3
Internal Controls • So what’s the big deal about internal controls? – Safeguarding assets – Provide reliable data 4
COSO • Committee Of Sponsoring Organizations of the Treadway Commission – “Joint initiative of five private sector organizations dedicated to providing thought leadership through development of frameworks and guidance on enterprise risk management, internal control and fraud deterrence.” 5
COSO 6
COSO • Documents issued by COSO – 1992 – Internal Control – Integrated Framework – 2006 – Internal Control over Financial Reporting – Guidance for Smaller Public Companies 7
U.S. Government Accountability Office • GAO’s Green Book – Standards for Internal Control in the Federal Government 8
GAO’s Components of Internal Control 9
COSO’s Integrated Framework Principles 10
Internal Controls • Internal controls and financial audits – Auditor is required to report on internal control – Report discloses deficiencies in internal controls when “the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis” . – Misstatements may be caused by error or fraud. 11
Internal Controls • Assessing the risk of error – Changes in operating environment – Inherent risk – Control risk 12
Internal Controls • Assessing the risk of fraud – Definition of fraud • “The use of one’s occupation for personal enrichment through deliberate misuse or misapplication of the employing organizations resources or assets.” 13
Fraud • Common types of fraud – Misappropriation of assets – Fraudulent financial reporting – Corruption 14
Fraud • Misappropriation of Assets – Theft of cash on hand – Theft of cash receipts – Fraudulent disbursements – Inventory and other assets 15
Fraud • Fraudulent Financial Reporting – Grant reporting – Regulatory reporting – Improper asset valuation – Budgetary concerns 16
Fraud • Corruption – Conflicts of interest – Bribery – Economic extortion 17
The Fraud Triangle Incentive or pressure Opportunity Rationalization/attitude 18
The Fraud Triangle • Pressure – Motive or incentive which provides a reason to commit fraud (debts from gambling, unemployment, medical costs) • Rationalization – Justifying the action (I’ll pay it back later, I don’t get paid what I’m worth, nobody will miss the money) • Opportunity – The circumstance within the organization that allows the fraud to occur (ineffective internal controls, lack of segregation of duties) 19
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What Type of Fraud is Committed? 21
How long do fraud schemes last? 22
Top 8 Fraud Concealment Methods 23
Top 8 Fraud Concealment Methods 24
How is Fraud Detected? 25
Who Reports Fraud? 26
Who is Victimized by Fraud? 27
What Levels of Government? 28
Most Common Schemes 29
Internal Control Weaknesses 30
Real Life Examples • “Just Horsing Around” • “Milking an Illicit Opportunity” • “the Gambling Addiction” • “The Gambling Addiction – part II” • “The Car Hobby” • “How Things Get Done” 31
“Just Horsing Around” 32
“Just Horsing Around” • $54 million embezzled from City of Dixon over a 22 year period. • Opened a secret bank account named RSCDA (Reserve Sewer Capital Development Account) • It was assumed she either inherited wealth or her horse breeding business was profitable. • Discovered by City Clerk while on an extended vacation. • Sentenced to 20 years in federal prison. 33
“Just Horsing Around” Sentenced to 20 years in federal prison. 34
“Milking an Illicit Opportunity” 35
“Land O’Fakes” • $1.035 million embezzled from Land O’ Lakes over a 5 year period by a/p supervisor. • Daughter was set up as a vendor. • Created fake invoice and authorized payments (489). • Forged daughter’s signature and cashed the checks to support gambling habit. • Co-worker suspected something was wrong. • Sentenced to more than two years in prison. 36
“The Gambling Addiction” 37
“The Gambling Addiction” • $792,829 embezzled from a New Mexico Water and Sewage Works Association over a 2 year period. • Used Association’s credit card to obtain cash advances and initiates charges at casinos. • Also paid off personal credit card through online transfers from the Association’s payroll account. 38
“The Gambling Addiction” • 75 transactions ranging from $416 to $15,746 • Whitaker resigned prior to the start of the fiscal year audit after allegedly admitting “financial wrongdoing”. • On May 2, 2018, Lori Whitaker pleaded guilty to one count of wire fraud. 39
“The Gambling Addiction – Part II” • $500,000 embezzled from a Fairfax MN business over a 5 year period. • Paid off personal credit card through online transfers from the business’ bank account. • Linsmeier was an authorized signatory and had authority to sign and issue checks. 40
“The Gambling Addiction – Part II” • Attempted to conceal her embezzlement by creating false entries in the general ledger to make it look like the money had been used for legitimate business expenses. • Used the funds for online gambling. • On May 9, 2018, Theresa Linsmeier was charged with 3 counts of wire fraud and 5 counts of filing false tax returns. 41
“The Car Hobby” 42
“The Car Hobby” • $1.163 million embezzled from North Central Stamping & Manufacturing over a 26 year period. • Controller opened a secret bank account in the name of NCSM without the company’s knowledge or authorization. 43
“The Car Hobby” • Controller deposited payments made by customers into the fraudulent bank account. • Used the money to fund his hobby of buying and restoring old automobiles. • On August 18, 2017 John Burwood pleaded guilty to 1 count of mail fraud and 1 count of filing a false tax return. • Sentenced to 33 months in federal prison. 44
“How Things Get Done” 45
“How Things Get Done” • Former City of Plymouth Facilities Supervisor allegedly solicited and received bribes and kickbacks for awarding contracts. • Received cash and non-cash bribes such as kitchen appliances, installation of new carpet, concrete driveway, extensive landscaping and electrical work worth $58,532. 46
“How Things Get Done” • Taggart instructed contractors to submit a second, fake quote to give the appearance that he complied with state statute and city policy regarding competitive bidding. • Taggart encouraged contractors to inflate their bids to cover the cost of the kickbacks and bribes. • On April 24, 2018, Ronnie Taggart was charged with 1 count of wire fraud. 47
The Fraud Triangle Incentive or pressure Opportunity Rationalization/attitude 48
Red Flags 49
Red Flags 50
Internal Controls • What can be done about money sneaking out the door? Security vs. Inconvenience 51
Internal Controls • Ghost vendor warning signs • Vendors with PO Box addresses • Vendors listed as initials • Excessive voided or missing checks 52
Internal Controls • What can be done about money sneaking out the door? – A/P Checks • Manual signing of checks over a dollar threshold • Positive pay • Controls over adding new vendors • No “one time” vendors • Physically contact new vendors to ensure they exist 53
Internal Controls • What can be done about money sneaking out the door? – Payroll • Periodic payroll system report on pay rate changes • Contact each employee to ensure there are no “ghosts” • Test payroll by comparing payroll records to personnel files 54
Internal Controls • What can be done about money sneaking out the door? – ACH and wire transfers • Separate ability to initiate a wire and approve a wire • ACH detective controls 55
Internal Controls • What can be done about money sneaking out the door? – Other • Meet with representatives of the bank to ensure that all signers are authorized and there are no unauthorized accounts • Journal entry approvals 56
Internal Controls • What about fraudulent financial reporting? • What about corruption? 57
Questions? 58
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