Wednesday October 6, 2010 fileon Occupational Fraud and Abuse: 2010 Global Fraud Study. ® How many...

Wednesday, October 6, 2010

Internal Controls 101:Back To Basics

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Session Topics• Bookkeeping Time Line• Current Trends• A Practical Approach to Fraud• Hiring and Monitoring Employees• Sales, Cash Receipts and Collections• Credit Card Transactions• Purchases, Accounts Payable and Cash Disbursements• Credit Card / Debit Card Usage• Electronic Banking• Bank Statements, Cancelled Checks, Reconciliations• Financial Reporting

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Earliest years of basicbookkeeping

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Modernized - 1400s

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Early 1900s

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Modernized 1910s

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Early Computing

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1950s - Rolling Bookkeepers

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1960s and 1970s

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Computing 1970s

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Bookkeeping 1980s

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Modernization 1990s

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Bookkeeping 2000s

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Bookkeeping Today

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Basic Bookkeepingstill exist today

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1. Employees are stealing from their employers,likely more so today than ever.

2. Losses through employee theft is greater thanshoplifting or any other type of loss.

Facts

Who do you think is most likely to steal?

Crime Scene Crime Scene Crime Scene

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Startling Statistics• 1,843 frauds reported in the survey

• 86% were asset misappropriations

• Median loss for embezzlements was $150,000

• Reported by a tip was the highest detectionmethod at 40%, followed distantly byperformance of management review at 15%

Source: Association of Certified Fraud Examiners’ Report to the Nationson Occupational Fraud and Abuse: 2010 Global Fraud Study.

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• 39% of reported frauds with private companies

• 31% of reported frauds, under 100 employees

• Lack on internal controls reported at 37.8%

• Employees and Managers perpetrated 83% of allthe reported frauds

Startling Statistics

Source: Association of Certified Fraud Examiners’ Report to the Nationson Occupational Fraud and Abuse: 2010 Global Fraud Study.

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How many cases of employeeembezzlement ever appear in

the public?

1 in 9 casesand there is one in the media

pretty much every day!

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What are the financial pressureswithin employees?

EntitlementDesperation

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What was the mostcommon form of theft

from a business?

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What is nowthe mostcommon

form of theftfrom a

business?

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Conversion Method of Choice

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Rebates or refund checksreceived from a vendor

Accounts payable departments arenot immune to thefts of cash receipts

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Check These Out

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The Importance ofShredding

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Insider Threats

• Embezzlement Schemes

• Theft of Supplies

• Theft of Company Information

• Theft of Company Assets

• Unauthorized System Access®

Outside Threats• Theft of Proprietary Information

• Theft of Customers

• Customer Credit Card Theft

• Company Bank Account Theft

• Product Theft

• Vendor Schemes

• Unauthorized System Access®

Where can you obtain moreinformation about

preventing and detectingemployee embezzlement?

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HiringRecent statistics -

As many as 65% of resumes and jobapplications contain one or more“falsehoods” or omissionsAvoid potentially lengthy and costly

employment related legal issues

Know who you are hiring!

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Screen all new hires, especiallyindividuals who will handle your

money and finances

• Contact listed references

• Call all previous employers(would they re-hire the person?)

• Criminal check

• CREDIT CHECK (with their authorization)

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What To Look For ToDetermine If Someone Is

Embezzling Funds• Unusual Employee Behavior

• Unreconciled Accounts• Missing Documents

• Unexplained Differences• Unusual Employee Behavior

Know Your Personnel!

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• Noticeable personality changes in an employee

• Employee living beyond their means

• Employee never takes any time off or vacations

• Unreconciled payments / receipts

• Unexplained drop in cash flows (especially withincreases in sales and volume)

“Red Flags”

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• Unexplained rise in unpaid vendors

• Accts Receivable aging growing larger and older

• Undeposited customer payments

• Missing documents or sloppy recordkeeping

• Accounts out of balance or unreconciled

• Unauthorized access to computer files

More “Red Flags”

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• Living beyond ones means - 39%

• Financial difficulties - 34%

• Divorce / family issues - 17%

• Addiction problems - 13%

• Inadequate pay complaints - 7%

Source: Association of Certified Fraud Examiners’ Report to the Nationson Occupational Fraud and Abuse: 2010 Global Fraud Study.

Startling Statistics

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• Control issues / unwilling to share duties - 19%

• Unusual close relationship with customer orvendor - 15%

• Irritability, suspiciousness or defensive - 13.6%

• Refusal to take vacations - 6.8%

Source: Association of Certified Fraud Examiners’ Report to the Nationson Occupational Fraud and Abuse: 2010 Global Fraud Study.

Startling Statistics

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Know Your Employees!

What Else?• What’s going on in their lives?

• Where do they spend their nights andweekends?

• Living extravagantly?

• Never taking any vacation time?

Facebook / MySpace

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Opportunity Rationalization

Financial Pressure

The Fraud Triangle

A “Recipe”for

Embezzlement

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What can you do?

to the extent you can

Financial Pressure

RationalizationOpportunity

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• Create and maintain a culture of honesty and high ethics

• Evaluate the risks of fraud, and implement risk mitigation.

• Develop an appropriate oversight process®

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Embezzlement Concerns• Cash Receipts

• Credit Card Payments

• Cash Disbursements

• Credit Card Charges/Purchases

• Employee Reimbursements

• Payroll

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• Sales

• Collections

• Adjustments

• Aging Report

Revenue Cycle

• Sales Returns

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Cash Receipts• Who collects payments?

• Who makes the deposits?

• Who reconciles the receipts,deposits and postings?

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• Utilizing a Lockbox?

• Who has access to payments?

• Who has access to posting?

• Adjustments/Credit Memos

• Tracking and Monitoring?

Customer Payments

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$ Received

$ Posted$ Deposited

Critical Control:Reconciling Payments

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Remote Deposit Capture

What controls were implemented?®

Mr. Benedict Arnold123 Embezzlement Way, #2

Norwich, CT 06000

Time Sensitive - Please Open Immediately

Please note our

NEW remittance

address

Who mails outyour invoices and statements?

What return address is used?

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The Importance of Trending

Sample Medical PracticeAccounts Receivable Analysis

January 2000 - December 2000

Sample Practice Monthly A/R Roll Analysis

Jan-00 0 0 0 0 0

Feb-00 0 114,025 103% 1,104 30% 2,541 70% 110,380

Mar-00 110,380 128,471 62% 14,651 48% 16,118 52% 208,082

Apr-00 208,082 115,906 52% 43,686 43% 57,500 57% 222,801

May-00 222,801 90,688 41% 43,449 47% 49,884 53% 220,156

Jun-00 220,156 124,101 77% 80,802 44% 102,271 56% 161,184

Jul-00 161,184 107,044 56% 29,795 40% 45,615 60% 192,818

Aug-00 192,818 140,463 52% 31,619 51% 30,750 49% 270,912

Sep-00 270,912 106,351 57% 61,019 32% 130,454 68% 185,790

Oct-00 185,790 144,535 78% 63,861 44% 80,798 56% 185,666

Nov-00 185,666 121,304 51% 29,476 43% 38,851 57% 238,643

Dec-00 238,643 169,620 74% 86,350 48% 92,391 52% 229,522

Jan-01 #DIV/0! 0

Feb-01 #DIV/0! 0

Mar-01 #DIV/0! 0

Apr-01 #DIV/0! 0

May-01 #DIV/0! 0

YTD Average 44,165 43% 202,360

123,864 #DIV/0! 58,834 57%

Number of Months Reported 11

Beginning

AR Balance

Adjustments

(% Charges)

Collections

(% Charges)

Ending

AR Balance

Charges

(% ending AR)

Charges, Collections & Adjustments

0

50,000

100,000

150,000

200,000

Jan-00 Feb-00 Mar-00 Apr-00 May-00 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01

Adjustments

Collections

Charges

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Sample Medical PracticeAccounts Receivable Analysis

For the Period July, 2002 - July, 2003

Sample Practice Aging Trend Analysis

31-60 61-90 91-120 Over 120 Total

Current Days Days Days Days A/R

2002 July 1,485,575 34% 506,953 11% 330,438 7% 240,076 5% 1,859,998 42% 4,423,040

August 1,285,235 33% 549,302 14% 322,611 8% 229,110 6% 1,511,496 39% 3,897,754

September 1,285,095 31% 550,901 13% 423,825 10% 263,352 6% 1,588,626 39% 4,111,799

October 1,555,296 35% 565,903 13% 418,187 9% 239,625 5% 1,665,642 37% 4,444,653

November 1,284,770 31% 591,773 14% 464,716 11% 333,284 8% 1,504,583 36% 4,179,126

December 1,150,570 28% 502,017 12% 421,168 10% 446,195 11% 1,653,126 40% 4,173,076

2003 January 1,563,831 34% 383,470 8% 357,905 8% 344,882 7% 2,016,012 43% 4,666,100

February 1,402,471 29% 596,857 13% 226,219 5% 322,946 7% 2,225,220 47% 4,773,713

March 1,412,763 30% 554,077 12% 357,108 7% 199,631 4% 2,251,959 47% 4,775,538

April 1,399,999 30% 421,674 9% 309,634 7% 262,745 6% 2,298,263 49% 4,692,315

May 1,370,028 30% 441,656 10% 233,778 5% 240,806 5% 2,275,138 50% 4,561,406

June 1,351,571 30% 453,657 10% 253,774 6% 187,375 4% 2,325,238 51% 4,571,615

July 1,441,556 30% 619,969 13% 276,644 6% 200,190 4% 2,251,929 47% 4,790,288

YTD Average 1,383,751 338,154 1,955,941

518,324 270,017

Aging Trend Analysis 2002-2003

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

4500000

5000000

5500000

July August September October November December January February March April May June July

Current

31-60

61-90

91-120

Over 120

The Importance of Trending

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Retail Sales &Cash Receipts Procedures

What controls canbe implemented for“retail” businesses?

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“Cash” Basis Businesses

The biggest challengefor these businesses

will be how to controlthe “Cash” activity

Very challenging tohave effective controls

due to resources

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RetailersRegisters, scanning and check-out

Refunds, returns and store credit

Sales controls

Inventory controls

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Credit Card Payments

• Who has access to process credit cardpayments from customers?

• Who reviews the credit card activity?

• How are your customers’ credit cardinformation protected?

• Who processes credits or refunds?

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Merchant Statements

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• Vendor acceptance

• Due diligence

• Credit limits

• Overrides

• Changing existing vendors

• Policies regarding vendor relations

Purchasing Cycle

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Vendors

Returns?

Credits?

Overpayments?

Cash receipts thefts withinaccounts payable

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Vendor Returns and Refunds

• Who prepares the requests?

• What is required to support eachrefund request?

• Who approves the refunds?

• How are these tracked?®

Cash Disbursements

Who has access to checks?

Who signs the checks?

Who processes checks once signed?

How secure is your check information?

How secure is your checksigning process?

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• What are your compensation structures?

• Who adds, changes andterminates employeeson the payroll system?

• How are your owners, employees andcontractors paid?

Payroll Administration

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Time Tracking

How are employees paid?

How do you track their days and timeworked?

Where are the weaknesses?

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Payroll ProcessingWho handles your payroll processing?

Who reviews it?

Who is being paid onyour payroll?

Net versus Gross

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Credit Card Purchases

• Who has access to credit cards?

• Who reviews and approves the creditcard activity for each cardholder?

• Do you have written policies governingcredit card usage?

• Do you require receipts for all purchases?

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Employee Expense Reimbursements

What are your policies?

Do you require original supporting receipts?

How can you be beaten?

Who reviews, and who approves requests?

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Electronic Banking• Who has access to on-line banking?

• What level of access for each user?

• Read-only for non-authorized signers?

• Any sharing of user id’s or access?

• Any electronic payments?

• Can new accounts or vendorsbe added?

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Bank Statements

• Who receives and reviews them?

• Cancelled check images?

• Who reconciles the accounts?

• Who reviews the reconciliations?

• Mailed or received electronically?

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Financial Reporting• Are standard reports run regularly?

• Any independent review?

• Are the final reports saved?

• What reports should be generated?

• Any outside review?

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Theft of Proprietary Information

• Customer Lists

• Vendor Lists

• Employee Lists

• Trade Secrets

• Patents

• Designs

• Contracts

• Bidding Information

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USB Drives

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Threats by Insidersand Outsiders

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Your primary goalshould be…

avoid this scenario!

Crime Scene Do Not Cross Crime Scene Do Not Cross

Crime Scene Do Not Cross Crime Scene Do Not Cross

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forensic accounting services, LLC 2389 main street glastonbury, ct 06033 (860) 659-6550 fasllc@sbcglobal.net stephen a. pedneault

Enjoy the rest of the sessionsWednesday, October 6, 2010

Internal Controls 101:Back To Basics

Fraud-Related Readings:

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Piecing TogetherFinancial Puzzles®