Overview of misappropriation fraud, CPA responsibilities in relation to fraud, fraud investigative methods, common red flags, simple preventive controls for small business
- 1. DetectingMisappropriation Frauds Dr. Raymond S. Kulzick,
CPA, CFE, FCPA, CDFA 305.812.4998 [email protected]
2. Detecting Misappropriation Frauds
- Dr. Raymond S. Kulzick, CPA, CFE, FCPA, CDFA
- Information in this presentation is believed to be reliable at
the time of the presentation; but the authors do not assume any
responsibility for its use and it should not be relied upon as
authoritative.
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 3. Ray
Kulzick Kulzick Consulting, PA
- Data Analysis for Litigation
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 4.
Overview
- Common symptoms in small business
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 5. 2008
Kroll/Economist Report
- In past 3 years 85% of firms had fraud
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- 26% management conflict of interest
- Large firms average loss = $ 23 million
- Small Firms average loss = $ 5.5 million
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 6. Large
firms perceived causes of increased fraud
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- 28% entry into new markets
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- 26% greater inter-firm collaboration
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 7. ACFE
2008 Report
- Average loss was 7% of revenue
- 89% involved asset misappropriations
- Average loss for small business was $200,000
- Average scheme duration = 24 months
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 8. ACFE
2008 Report Types of Small Business Fraud
- 16% Expense reimbursement
- 15% Non-cash misappropriation
- Note: Many schemes involved multiple types of fraud
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 9.
Responsibilities of CPAs External Audits, Reviews, Compilations
- SAS 99 Fraud in a FS Audit
- SAS 103-112 Risk-based Audits & Internal Controls
- SSARS 10, 11 & 12 Reviews and Compilations
- ISA 240 Fraud in a FS Audit
- SOX 404 & PCAOB AS 5 Internal Controls
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 10.
Responsibilities of CPAs External Audits, Reviews, Compilations
- If find fraud during an attest engagement that requires further
investigation
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- AICPA Rule 101 Independence
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- AU 317 Illegal acts by clients
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- AU 333 Management representations
- Attest engagements include
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- Audits, Reviews, Prospective Financials
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- In conformance with SAS or SSARS
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 11.
Responsibilities of CPAs Other types of engagements
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- IIA PA 1210.A2-1 & -2 Auditors responsibilities relating to
fraud
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- IIA PA 2120.A1-1 Assessing & reporting on control
processes
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- 1/2009 revisions require assess potential for occurrence and
how organization handles risks
- Public perceptions and malpractice
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- CAMICO survey showed 64% of the public believes that CPAs are
required to find ALL fraud in an audit.
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 12. Small
vs Large Companies Differences Impacting Fraud
- Overlapping/unclear job responsibilities
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 13. The
Fraud Triangle Copyright 2007-2009 - R. S. Kulzick October 24, 2009
PRESSURE OPPORTUNITY RATIONALIZATION 14. Known vs Unknown Fraud
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- Search for symptoms based on specific types of fraud
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- Search for common symptoms not necessarily related to a
specific type of fraud
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 15.
Detection Known Fraud Approach
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- SAS 99 requires this approach
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- Forensic and proactive audits
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- Identify symptoms based on risk
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- Use of CAATTs recommended
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 16.
Detection Unknown Fraud Approach
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- Initial stage or supplementary in audits
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- Fraud ratio/variance analysis
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- Use of CAATTs recommended
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 17. Some
Common Small Business Fraud Symptoms - General
- Tolerance of petty thefts
- Lack of or override of controls
- High pressure environment
- Complaints or lack of complaint tracking
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 18. Some
Common Small Business Fraud Symptoms - Individuals
- Financial pressures on key individuals
- No vacations in key positions
- Employees complain about low pay or chaotic environment
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 19. Some
Common Small Business Fraud Symptoms - Records
- Books & records out of balance
- Transactions not entered timely
- Journal entries at or near year-end
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 20. Some
Common Small Business Fraud Symptoms - Specific
- Credit memos or A/R write-offs
- Debit memos or A/Pay adjustments
- Bank reconciliations not done, not in balance or containing
stale items
- New, major vendors or customers
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 21. Some
Common Small Business Fraud Symptoms - Analysis
- Significant changes evident in horizontal, vertical or ratio
analysis
- Unexplained increased borrowing
- Subsidiary ledgers not in balance with general ledgers
- Payroll taxes dont balance with salaries
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 22. Some
Simple Controls For a Small Business
- Pre-number & reconcile forms
- Screen prospective employees
- Segregate cash-related functions as much as possible
- Implement controls over checks
- Match invoices with checks
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 23. Some
Simple Controls For a Small Business
- Periodically review Accounts Receivable and Accounts
Payable
- Receive unopened bank and credit card statements
- Approve all Journal Entries
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 24.
Conclusions
- Fraud is a major problem in organizations
- CPAs are expected to detect it
- Tools and approaches are available
- Skepticism and common sense are essential
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 25.
Questions?
- Thanks for your attention.
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 26. Ray
Kulzick Kulzick Consulting, PA
- Data Analysis for Litigation
Copyright 2007-2009 - R. S. Kulzick October 24, 2009