Fraud Prevention, Detection and Red Flags Budget, Accounting and - PowerPoint PPT Presentation

Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 Sarah Walker, CFE, Fraud Manager O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Agenda  Fraud statistics  Red flags  Case study reviews  Credit card best practices  Questions 2 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Fraud history Year Cases Amounts Year Cases Amounts 1989 31 $358,654 2004 47 $331,803 1990 15 $120,121 2005 57 $258,960 1991 15 $264,027 2006 33 $611,711 1992 20 $226,629 2007 24 $1,722,207 1993 18 $642,439 2008 35 $548,855 1994 30 $903,304 2009 53 $2,055,775 1995 37 $689,080 2010 75 $1,864,652 1996 48 $958,805 2011 50 $1,352,396 1997 33 $1,540,368 2012 64 $3,490,235 1998 31 $597,479 2013 59 $1,021,759 2014 64 $797,302 1999 42 $1,047,113 2015 34 $457,120 2000 30 $167,363 2016 42 $897,504 2001 68 $484,060 2017 74 $434,000 2002 56 $1,122,328 Totals 1,247 $27,219,443 2003 62 $2,253,394 3 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Red flags: Cash receipting  Deposits not made promptly  Mode of payment differences  Unusual adjustments  Concerns with cost of goods sold  Not posting payments to accounts promptly  Safe access not limited 4 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Red flags: Payments  Unusual vendors  Expenditures exceed budget  Purchases don’t make sense  Missing receipts/invoices  Unusual shipping addresses 5 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Red flags: Payroll  Excessive hours paid  Unusual amounts of overtime  Pay exceeds expectation  Changes made after approval  Leave cash-outs 6 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Red flags: General  Missing supporting records  Altered documents  Lack of review  Untimely bank reconciliations  Untimely financial reporting  Trusted employee!!! (without adequate monitoring) 7 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Study College Credit card July 1, 2009 – January 31, 2015 8 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study How was it detected?  The Procurement Department identified questionable activity during a review of transactions on a credit card issued to a department director.  When asked about the questionable activity, the director acknowledged making purchases for personal use. 9 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study What did we find?  Our investigation focused on the director’s credit card purchases from July 2009 through January 2015.  1,651 credit card transactions, totaling $163,675 10 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study What did we find?  1,094 unsupported transactions (issued five subpoenas)  701 misappropriated transactions, totaling $50,712  457 questionable transactions, totaling $46,169 11 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study What did we find? Purchases for:  Gift cards  Fitness activity trackers  Nutrient extracting blender  Make up and beauty products  Electronics and wireless connection charges  Cleaning supplies  Clothing 12 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study What did we find? Purchases for:  Watches and jewelry  Vacation related expenses  Household items  Items shipped to an out-of-state relative  Gifts  Shoes and other accessories 13 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study Where did the money go? How was the fraud concealed?  Mostly, it wasn’t  In some instances, lack of supporting records  Some purchases were from vendors that offered a wide variety of goods 14 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study Lessons learned: Control weaknesses  The Supervisor did not adequately review the Director’s credit card transactions.  Procurement and Accounting Departments were not adequately monitoring the review and approval of credit card transactions by individual departments to ensure that transactions were legitimate, reviewed and approved before the credit card bill was paid. 15 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study What happened to the employee?  She is no longer an employee.  We referred our report to the county prosecuting attorney’s office. 16 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study Were there any red flags?  Trusted employee with very little to no oversight  Unusual vendors  Purchases that didn’t make sense  Large volume of transactions/amounts  Purchases with an out-of- state “ship to” address  Lack of records 17 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Study School district credit card August 2008 – January 2015 18 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study Timeline:  1977: Subject starts with the District as a bus driver  2005: Moves into A/P Secretary role  2010: Payroll added to responsibilities  December 2014: High School Principal requests a copy of the District credit card statement 19 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study Our investigation identified: 20 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study Examples of personal purchases:  Pet supplies ($10,600)  Multiple vacations  Clothing  Shoes  Perfume 21 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study Examples of personal purchases:  Cosmetic services  Furniture  60-inch LED HD TV  Refrigerator (over $3,000) 22 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study Lessons learned: Control weaknesses  The review of expenditures was not sufficient to ensure all purchases were allowable, for a District purpose and in compliance with District expectations.  No supporting statements for credit card purchases were provided for review. 23 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Procurement and credit cards: Best practices 24 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

How to avoid credit/purchase card fraud? Develop a written policy  Allowable uses  Prohibited uses  No personal use  Responsibilities  Rewards/points use  What happens if policy is not followed  Have everyone with card responsibilities sign off on policy 25 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

How to avoid credit/purchase card fraud? Records  Require original, itemized receipts  Think about who will be responsible for retaining them  Where are they stored? Banking controls  Consider setting a monthly limit  Consider prohibiting certain vendor types  Ask if supervisors/Accounts Payable can have read-only access to credit card account 26 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

How to avoid credit/purchase card fraud? Review: Who is responsible for what?  Employee  Supervisor knowledgeable of activities  Accounts payable  100% detailed review  Documentation of review Step-back analysis  Who actually needs a card?  Is the volume of transactions necessary and reasonable?  Does the credit card holder ask for personal reimbursements? 27 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

How to avoid credit/purchase card fraud? Review: What do I look for?  Unusual vendors  Unusual or unallowable items  Large volume of transactions  Only the credit card slip, not the itemized receipt  Photocopies  Scanned documents  Missing receipts 28 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

How to avoid credit/purchase card fraud? Review: What do I look for?  Alterations — bank statement or supporting records  Supporting documents with missing information  Documentation that does not look professional  Invoices that are different than the others from the same vendor  “Ship to” addresses that don’t make sense 29 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study example 30 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study example 31 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study example 32 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study example 33 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study example 34 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

“State agencies and local governments shall immediately report to the state auditor’s office known or suspected loss of public funds or assets or other illegal activity. “ 35 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r