1. Hidden in Plain Sight:Discovering and Preventing Employee Dishonesty and Fraud Presented by: Mary OConnor, ASA, MRICS Partner, Dispute Advisory Services

2. Agenda Distinctions among fraud, embezzlement, theft and occupationaldishonesty Uniform Occupational Fraud Classification System Interesting statistics Common fraud schemes Conducting a fraud investigation Prevention systems 2 3. Distinctions AmongFraud, Embezzlement, Theft and OccupationalDishonestyFraud is a much larger legal concept specifically related to a criminalact as defined in the law. Fraud is both a civil and criminal matter inlitigation.Fraud has Four Elements: Material false statement Knowledge that the statement was false Reliance on the statement by the victim Damages3 4. Distinctions AmongFraud, Embezzlement, Theft and OccupationalDishonesty Embezzlement is theft committed by a person who is trusted.Theft is the act of stealing by a person who is unknown to the victim.Occupational fraud, also known as employee dishonesty, is the use of employment to commit fraud for personal enrichment throughdeliberate misuse of misapplication of employers resources and assets. 4 5. Uniform Occupational Fraud Classification System 5 6. Uniform Occupational Fraud Classification System 6 7. But my Auditor Gave a Clean Opinion An unqualified audit opinion does NOT mean that there is noemployee dishonesty occurring in the organization Employee dishonesty can be significant and the books can stillbalance SAS 99, professional skepticism and materiality7 8. Interesting Statistics Losses estimated at twice the annual budgetof the US Department of Defense Direct correlation between age of fraudsterand size of theft Direct correlation between job title of fraudsterand size of theft Overwhelmingly happens in small operations External auditors rarely identifyfraudulent activity8 9. Who is the Fraudster? Otherwise honest and responsible citizen Computes the likelihood of capture and believes it is worth the risk Tends to be middle-aged, of eithergender and well-regarded in theorganization9 10. Interesting StatisticsInitial Detection of Frauds10 11. Fraud Hot Spots Departments with Independent Sensitive information on desksSystems; Remote locations Insecure checks Cash and cash registers Mail handling Too many bank accounts Deposit handling Accounts Payable Deficient IT System; loose Voucher System controls on voids and restarts Reliance on part-timeemployees Stop payments; Outstandingchecks 11 12. Red Flags of Fraud/Occupational Dishonesty Independent IT Systems without proper interface Poor separation of duties; one person controls the accountingsystem Outdated IT system with inadequate security Poor internal controls- no one is really looking Over-reliance on certain employees Extravagant lifestyles Missing documents; special procedures 12 13. The Problem with Departmental SystemsBusinesses are composed of numerous sub-units and many are located remotely from the Central Administration. A manual interfacewith the departmental system and the Finance Office is a major red flagthat requires investigation.Manual InterfaceDept System General Accounting System13 14. The Problem with Department Systems Departments often run autonomously and many collect significantamounts of cash in total annually. However, the daily deposits to theFinance Department may be small and seemingly immaterial. Cashtheft can easily occur and the entitys books still balance. Note that theft can occur and the department system can be accurate. 14 15. Uniform Occupational Fraud Classification System 15 16. Common Fraud SchemesCorruption Conflicts of interest Schemes with and without vendor knowledge Bribery and kickbacks Bid rigging and Procurement Fraud Use of Shell Intermediary Companies Improper use of Minority Companies Multiple names for same Vendor Different rules for different Vendors Material Substitution Change Order Game16 17. Uniform Occupational Fraud Classification System 17 18. Common Fraud SchemesFinancial Statement Fraud Fictitious revenues Concealed liabilities Journal entry fraud Expenditures contrary to law or policy This is the focus of the external auditor 18 19. Uniform Occupational Fraud Classification System 19 20. Common Fraud SchemesSkimming and Lapping Recorded (lapping) and unrecorded (skimming) revenue Write-offs of receivables Voids and restarts Refunds Locus around cash 20 21. Common Fraud SchemesFraudulent Disbursements Billing: Shell companies; pass through entities Payroll: Ghost employees, falsified time record, failure to terminate Expense reimbursement Check tampering Bank reconciliations can miss the fraud Register disbursements: false voids, false refunds 21 22. Common Fraud SchemesInventory Misappropriation False acquisitions and transfers Simple theft Conversion to personal use22 23. Conducting the Investigation Why you need asystem in place for fraud incident investigationGoals to this Process are: To follow-up on all credible tips and complaints To follow-up on all management letter issues to fraud Form a response team that preserves the secrecy of the situation Avoid the Dick Tracy syndrome Create a plan that allows the organization to work together in the future23 24. Conducting the InvestigationGoals (Continued) Preserve the evidence especially the computer record Deal with the administrative leave and other employment issues Deal with employee morale issues; manage emotions Keep the place going!!!! Work for restitution, insurance claim preparation and possiblecriminal referral Learn from mistakes of the past and fix the problems Communicate effectively to stakeholders 24 25. Reasons to Call in a Forensics TeamKnow the Endgame Its not only to prosecute! Preserve the relationship of audit team and staff Preserve management relationship with staff Tasks for the forensics team Surveillance Proof Security of computer evidence Interviewing Insurance Claim/Restitution Police/States Attorney Support 25 26. A System to Prevent Employee DishonestyFirst and Foremost: Secure the IT System Passwords and encryption Laptops and cell phones Clean desk policy One system among departments Sufficient firewalls to prevent hacking 26 27. A System to Prevent Employee DishonestyCreate a Tone at the Top Clear policy and procedures Clear policy of punishment for malfeasance Lead by example Training, training, training Employee background checks and hiring practices 27 28. A System to Prevent Employee DishonestyInstall an Effective Whistle-Blowing System Anonymous No reprisals Off site answering service Must follow-up on tips28 29. A System to Prevent Employee DishonestyInternal Control System Separation of duties Authorizations; look at limits Computer passwords Independent and surprise checks Separation of Treasury and Accounting functions Think through each system Where are the holes? Rotate and Cross-Train Look at how checks and cash functions are handled 29 30. A System to Prevent Employee DishonestyAlert Vendors and Install Strict Controls Contract language to include right of audit Master vendor file Review addresses and relationships Physical verification Statistical analysis 30 31. A System to Prevent Employee DishonestySecure the Physical Assets of the Organization Clean Desk Policy IT policy related to laptops, desktops, phones, iPads Checks!!!!!! No passwords on computer screens!!!! Secure receiving dock Semi-annual inventory of major assets 31 32. Questions? Questions? 33. About Sikich Sikich is an accounting, advisory, technology andmanaged services firm with eight offices in fourstates and with clients throughout the United Statesand internationally. A reputation for professional$70M in projected revenue in 2012excellence, unsurpassed client service, and timelyand cost effective service delivery. 7,000 business clients We employ more than 400 people including 68partners, all of whom devote their careers to a7,500 individual clientsfocused area. 153,882 square feet to serve clients Accounting Today ranks the Firm 47th nationallyamong the Top 100 Accounting Firms and 12thin the Top 100 Value Added Resellers (VAR). 400+ total personnel May 1, 2012 was our 30th anniversary.68 partners In 1998, Sikich began expanding through merging8 offices in 4 stateswith firms already successful in target areas andhiring talent and developing service areas fromscratch. 1 collaborative and positive culture 34. Honors & RecognitionsAccounting Technology #47 in Accounting Todays Top 1% of all ERP solution2012 Top 100 Accountingpartners in the worldFirms 2012 Microsoft Dynamics Inner INSIDE Public Accountings CircleTop 50 Accounting Firms in 2012 Microsoft Dynamics2012 Presidents Club INSIDE Public Accountings #12 on Accounting Todays TopAll-Star Firms in 2012 100 VARs in 2012 #13 on Bob Scotts Top 100 VAR List for 2012 35. Tracing Our Roots201230th Anniversary$80,000,000$70,000,0002008-2011$60,000,000Merges with 4 CPA firms and1998 solidifies$50,000,000position in theTop 50 withMerges with Intelligent Computer$40,000,0001982 Solutions LLC and starts its more than 375employees technology practice Sikich Gardner & Co. was$30,000,000 formed; takes up residence in Aurora and Springfield$20,000,000$10,000,000 $0 35 36. The Sikich Service Areas Audit, Accounting & Tax Advisory Financial Reporting Business Valuation Accounting Services Dispute Advisory Tax Planning Flex-Staff Solutions Human Resources Graphic Design & Marketing TechnologyManaged Services Accounting & ERP Software Outsourced Accounting CRM Software Managed IT IT Infrastructure Outsourced Human Resources Cloud & Hosting Solutions Outsourced Marketing Strategic IT Planning Communication & Collaboration IT Consulting 37. Industry Expertise, Tailored Approach Agriculture Construction Deep industry experience and Government longevity. Healthcare Higher EducationCross sectional teams Non Profitwith a depth and breadth Manufacturing & Distributionof experience to handlethe complete solution. Professional Services Real Estate RetailSolution centric and product agnostic. 38. Contact InformationMary OConnor, ASA, MRICS Sean HastingsPartner, Valuation and Dispute Advisory Services Director, Business DevelopmentSikich LLPSikich LLP T: 312.648.6652 T: 630.210.3055 M: 708.646.8737Email: shastings@sikich.comEmail: moconnor@sikich.com 38