Not If But When…
Me, I'm dishonest. And a dishonest man, you can always trust to be dishonest. Honestly, it's the honest ones you want to watch out for, because you can never predict when they're going to do something incredibly stupid. Pirates of the Caribbean: The Curse of the Black Pearl (2003)
40% of employees are Capab apable le of being dishonest given the right circumstances
The intentional misrepresentation or omission of a material existing fact for the purpose of inducing another to act or rely upon, which results in injury or loss .
ACFE estimates 5% of annual revenues are lost to occupational fraud Average Loss: Global - $145,000 U.S. - $100,000 22% of fraud cases > $1 million Average fraud lasts 18 months before detection An ACFE study showed only 5% of fraudsters had a prior conviction
of all frauds are due from misappropriation of assets of dealership employees have criminal records
Typically comes from a significant financial need . Examples of Motivation: ◦ Drug/Alcohol addition ◦ Gambling addiction ◦ Medical bills ◦ Extramarital affair ◦ Living beyond means, maintain lifestyle ◦ Greed
The justification of a person who commits fraud. Common rationalizations: 1. Borrowing (with intention of paying back) 2. Fear of loss (home or lifestyle) 3. Job dissatisfaction or feeling underappreciated 4. Family emergency or hardship 5. Lack of integrity of top executives
The ability of the person to commit a fraud. Directly connected to the control environment: Opportunity is created by: ◦ Weak internal controls ◦ Lack of management oversight ◦ Use of one’s position and authority ◦ Failure to establish adequate procedures to detect fraudulent activity
Opportunity is the only element of the fraud triangle which an organization CAN control! “ Inspect ” what you “ expect ” “Trust is not an internal control”
Misappropriation of Assets Fraudulent Statements Bribery and Corruption
Check Substitution Wire Fraud Lapping Receivables Kickbacks Check Fraud Manipulation of Compensation Plans
Dummy Vendors Dummy Employees Parts Theft
General Manger > $150,000 ◦ Wholesale Vehicles ◦ Check Fraud ◦ Payroll Fraud Office Manager > $85,000 ◦ Cash Receipts Officer Manager > $60,000 ◦ Check Fraud ◦ Unpaid Employee Receivables ◦ Cash Receipts
Cash Sales Clerk > $75,000 ◦ Cash Receipts Parts Manager > $100,000 ◦ Parts Theft Personal Assistant > $925,000 ◦ Check Fraud
Lack of segregation of duties - separate custody of asset from ability to post to accounting ◦ Cash Sales/Cashiering Function Lack of Management Integrity Compensation Plans Messy set of books can easily conceal fraud Online Parts Sales
If people think they are being watched, they are less likely to steal.
Review bank reconciliations for large or unusual items ◦ Clear deposits in transit Consistent review of schedule Open bank statement ◦ Review cancelled checks ◦ Review bank statements for large or unusual EFT withdrawals Positive Pay Cash sales – should zero out
Schedule cash sales account Review customer deposits schedule Aged receivables New and Used Physical Inventory – Reconcile to general ledger Annual parts physical Monthly parts reconciliation ◦ Should be a pick up of 2% to 3%
Exceptions report (service) Open RO Report Voided RO/Invoice Report Pending Invoice Report Review adjustments to WIP Review expense trends Approved vendor list Mandatory 2 weeks vacation
Review the payroll register ◦ Recalculate Bonus and Commissions Employee dishonesty insurance > $500,000 Criminal background checks Reference checks Periodic internal audits
F&I Compliance Fraud Investigation/Forensic Audit Parts Inventory Analysis and Reconciliation Departmental Internal Audits Training Cash Audits Warranty Parts Reimbursement Internal Control Review For more information, please visit: http://ocd.com/internal-audit-services.html
Frank O’Brien, CPA, CIA, CFE Director of Internal Audit and Fraud Investigation O’Connor & Drew, P.C. 25 Braintree Hill Office Park, Suite 102 Braintree, MA 02184 (617) 471-1120 fobrien@ocd.com Today’s Slides will also be available for download at: http://www.ocd.com/special-alerts.html
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