An Overview of Fraud Risk

Presented by: Rick Potocek CPA MBA CFE

To raise awareness of:

◦Who commits fraud and why

◦Red flags to consider

◦Simple steps to take to immediately reduce the risk of fraud

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According to the Association of Certified

Fraud Examiners, U.S. organizations lose an estimated 5% of annual revenues to fraud. As an example if applied to the NY State’s 2011-12 budget of $132 billion ~ $6.6 billion in potential loss due to fraud.

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Motivation Opportunity

Rationalization

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◦Overwhelming desire to appear wealthy

◦ Family needs (housing, medical, education, etc.)

◦ The addict (gambling, alcohol, drugs, sex)

◦High personal debt

◦ Thrill-seeker (I bet I can beat the system and away with it)

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• Access to cash, assets or inventory • Ability to conceal the act

• In a position where there are little o no

separation of duties

• Minimal management oversight

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• Temporary solution to Financial Need ◦ It’s just a loan. I’ll pay it back as soon as this is over.

• Entitlement ◦ I’m not getting paid enough for the work I do

• Higher Purpose ◦ I need this more than they do. Nobody will miss it

• Revenge ◦ So, they think they can take advantage of me!

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What to look for to identify the possibility of fraud and the person/persons responsible.

• Employees

• Management

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Lifestyle Changes

Living beyond means

Bragging about new purchases

Carrying an unusual amount of cash

Evidence of High Personal Debt

Wage garnishments

Calls from creditors or loan agencies

Borrowing money from co-workers

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Behavioral changes

Easily annoyed

Unreasonably upset when asked about something related to their work

Territorial over their work

Drugs, alcohol, gambling, absenteeism

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Unusual “Dedication” to Work ◦Working after hours or on weekends

◦Unwilling to give up any workload

◦Volunteering to take all customer complaint calls

◦Refusing to take vacation or even promotion

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Secretive Reluctant to provide info to oversight bodies – e.g. auditors

Dominate decision making Tend to bowl people over or rush

Regularly overrides internal controls because “Do it because I said so”

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Hires staff who lack experience, skills, talent or confidence (least likely to detect a fraud scheme or report “the boss” if detected)

Frequent changes in professional

relationships Changes in banks Changes in attorneys Changes in auditors

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• Stealing cash, inventory or assets

• Payments to fake companies

• Using entity monies for personal expenses

• Opening a “secret” bank account to deposit incoming checks

• Collusion and kickback schemes • Over payment for goods or services received or

payment for goods and services not received

• Payroll fraud – ghost employees/Contractors

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Site to create Fake Invoices http://expenseasteak.com

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Looking again at the Elements in the Fraud Triangle -

•Motivation

•Opportunity

•Rationalization

Opportunity is the element management can control

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A fraud Risk Assessment

◦ Identifies all Possible Risks

◦Measures the Likelihood of each Risk

◦Prioritizes the Risks

◦Responds to the Risks

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Responding to the risks There are three risk responses: ◦ Accept the risk: do to the cost to mitigate, you may

choose to do nothing about the risk but be extra vigilant

◦ Avoid the risk: Discontinue the business practice that causes the risk.

◦ Reduce the risk: Implement or adjust internal controls to address and reduce the identified risk

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◦ Background checks – Employees and Vendors ◦ Create Ethics policies & Code of Conduct ◦ Separation of duties ◦ Limiting span of authority ◦ Job rotations ◦ Document what each position is responsible for and

SOPs for accomplishing tasks ◦ Training re: ethics, Code of conduct and

consequences of wrong doing. (no second chances, prosecution, etc.) ◦ Establish an independent Hotline

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◦ THE FBI “SHUTTERBUG”

◦ AN FBI AGENT DRUG SQUAD SUPERVISOR “ROLES THE DICE”

◦ COMPANY CELLPHONE ADMINISTRATOR “RINGS UP” BIG MONEY

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Richard M. Potocek CPA MBA CFE Contact Information: Telephone: 202-747-7767 E-mail: rick.potocek@greystoneadvisoryllc.com Website: www.greystoneadvisoryllc.com

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