Fraud In Our Midst, The Acfe 2010

Charles E. Boyd, CPA, CFE Yeager & Boyd, LLC 5501 Hwy 280 Birmingham, Alabama [email protected]

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Fraud in our midst, the Fraud in our midst, the ACFE 2010 report to the ACFE 2010 report to the

NationNation

Presented by Charles E. Boyd Presented by Charles E. Boyd CPA, CFECPA, CFE

Yeager & Boyd, LLCYeager & Boyd, LLC


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One fourth of the fraud in this One fourth of the fraud in this Report caused at least $1 million in Report caused at least $1 million in

losseslosses

This report is based on data compiled from This report is based on data compiled from a study of 1843 cases of occupational a study of 1843 cases of occupational fraud that occurred worldwide between fraud that occurred worldwide between January 2008 and December 2009. All January 2008 and December 2009. All information was provided by the Certified information was provided by the Certified Fraud Examiners who investigated those Fraud Examiners who investigated those cases. cases.


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Typical organizations lose 5% of Typical organizations lose 5% of their annual revenue to fraudtheir annual revenue to fraud

Applied to the estimated 2009 Gross Applied to the estimated 2009 Gross World Product, this figure translates World Product, this figure translates

to a potential total fraud loss of more to a potential total fraud loss of more than $2.9 trillionthan $2.9 trillion

The various frauds lasted a median The various frauds lasted a median of 18 months before being detectedof 18 months before being detected


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Small Businesses are especially Small Businesses are especially vulnerable to Fraudvulnerable to Fraud

The median loss suffered by The median loss suffered by organizations with fewer than 100 organizations with fewer than 100

employees is employees is

$200,000$200,000


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Asset Misappropriation SchemesAsset Misappropriation Schemes

The most common form of fraud The most common form of fraud representing 90% of cases is asset representing 90% of cases is asset misappropriation.misappropriation.

Corruption schemes follow comprising just Corruption schemes follow comprising just under 1/3 of cases and causing a median under 1/3 of cases and causing a median loss of $250,000loss of $250,000

Financial statement fraud schemes were on the Financial statement fraud schemes were on the opposite end of the spectrum in both regards. opposite end of the spectrum in both regards. These cases made up less than 5% of the frauds These cases made up less than 5% of the frauds in this study, but caused a median loss of more in this study, but caused a median loss of more than $4 million – by far the most costly category.than $4 million – by far the most costly category.


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80% of the Fraud in this study was 80% of the Fraud in this study was committed by individuals in one of committed by individuals in one of

six departmentssix departments

AccountingAccounting OperationsOperations SalesSales Executive/Upper ManagementExecutive/Upper Management Customer ServiceCustomer Service PurchasingPurchasing


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Occupational Fraud DefinitionOccupational Fraud Definition

The use of one’s occupation for The use of one’s occupation for personal enrichment through the personal enrichment through the

deliberate misuse or misapplication deliberate misuse or misapplication of the employing organization’s of the employing organization’s

resources or assetsresources or assets


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Occupational FraudsOccupational Frauds

Occupational frauds are much more likely to Occupational frauds are much more likely to be detected by tip than by any other means. be detected by tip than by any other means.

Small organizations are disproportionately Small organizations are disproportionately victimized by occupational fraud. These victimized by occupational fraud. These organizations are typically lacking in anti-organizations are typically lacking in anti-fraud controls compared to their larger fraud controls compared to their larger counterparts which makes them particularly counterparts which makes them particularly vulnerable to fraud.vulnerable to fraud.


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Occupational Fraud SchemesOccupational Fraud Schemes

Occupational fraud schemes can be as Occupational fraud schemes can be as simple as :simple as :

Pilferage of company suppliesPilferage of company supplies Manipulation of time sheetsManipulation of time sheets Or as complex as sophisticated Or as complex as sophisticated

financial statement fraudsfinancial statement frauds


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Three Major Factors contribute to Three Major Factors contribute to Fraud by EmployeesFraud by Employees

Inadequate employee screeningInadequate employee screening Resume FraudResume Fraud Negligent HiringNegligent Hiring

Limited controlsLimited controls Privacy concerns internal & external Privacy concerns internal & external SS numbers SS numbers Trade SecretsTrade Secrets

TOO much TrustTOO much Trust Negligent supervisionNegligent supervision


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Behavioral Red FlagsBehavioral Red Flags Living Beyond means (43% of cases)Living Beyond means (43% of cases) Financial difficulties (36% of cases)Financial difficulties (36% of cases) Wheeler-dealer attitudeWheeler-dealer attitude Control issues, unwillingness to share dutiesControl issues, unwillingness to share duties Divorce/Family ProblemsDivorce/Family Problems Unusually close association with vendor/customerUnusually close association with vendor/customer Irritability, suspiciousness or defensivenessIrritability, suspiciousness or defensiveness Addiction problemsAddiction problems Past legal problemsPast legal problems Past employment –related problemsPast employment –related problems Complaining about inadequate payComplaining about inadequate pay Refusal to take vacationsRefusal to take vacations Excessive pressure from within organizationExcessive pressure from within organization Instability in life circumstancesInstability in life circumstances Complaining about lack of authorityComplaining about lack of authority


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Employee Education isEmployee Education is the Foundation of Prevention the Foundation of Prevention

Staff members are an organization’s Staff members are an organization’s top fraud detection method, top fraud detection method, employees must be trained in what employees must be trained in what constitutes fraud, how it hurts constitutes fraud, how it hurts everyone in the company and how to everyone in the company and how to report any questionable activity.report any questionable activity.

Organizations that have anti-fraud Organizations that have anti-fraud training for employees and managers training for employees and managers experience lower fraud lossesexperience lower fraud losses


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Thieves Outside The DoorThieves Outside The DoorSmall businesses are vulnerable in several Small businesses are vulnerable in several

key areaskey areas Check FraudCheck Fraud

Major CauseMajor Cause - Development of laser - Development of laser printers & desktop printingprinters & desktop printingMajor CauseMajor Cause - Identity crooks realize how - Identity crooks realize how easy it is to get a completely fictitious IDeasy it is to get a completely fictitious ID

•Obtain Credit CardsObtain Credit Cards•Buy property, Incur debtBuy property, Incur debt•Get passports, open off-shore Get passports, open off-shore accountsaccounts•Open Bank AccountsOpen Bank Accounts


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Conclusions and Conclusions and RecommendationsRecommendations

Though some of the findings differ Though some of the findings differ slightly from region to region most of slightly from region to region most of

the trends in fraud schemes, the trends in fraud schemes, perpetrator characteristics and anti-perpetrator characteristics and anti-fraud controls are similar regardless fraud controls are similar regardless

of where the fraud occurredof where the fraud occurred


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Components of effective fraud Components of effective fraud prevention and detection systemsprevention and detection systems

Fraud reporting mechanisms are a critical Fraud reporting mechanisms are a critical component of an effective fraud component of an effective fraud prevention and detection system. prevention and detection system.

Organizations should implement hotlines Organizations should implement hotlines to receive tips from both internal and to receive tips from both internal and external sources. Such reporting external sources. Such reporting mechanisms should allow anonymity and mechanisms should allow anonymity and confidentiality and employees should be confidentiality and employees should be encouraged to report suspicious activity encouraged to report suspicious activity without fear of reprisal.without fear of reprisal.


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Do not rely on auditsDo not rely on audits

Organizations tend to over-rely on audits. Organizations tend to over-rely on audits. External audits were the control External audits were the control mechanism most widely used by the mechanism most widely used by the victims in this survey, but they ranked victims in this survey, but they ranked comparatively poorly in both detecting comparatively poorly in both detecting fraud and limiting losses due to fraud. fraud and limiting losses due to fraud.

Audits are clearly important and can have Audits are clearly important and can have a strong preventative effect on fraudulent a strong preventative effect on fraudulent behavior, but they should not be relied behavior, but they should not be relied upon exclusively for fraud detection.upon exclusively for fraud detection.


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Fraud Prevention Check UpFraud Prevention Check Up

Fraud can be a catastrophic risk, taking a Fraud Prevention Fraud can be a catastrophic risk, taking a Fraud Prevention Check-up can save your company from disaster. Check-up can save your company from disaster.

~If you do not proactively identify and manage your fraud risks, ~If you do not proactively identify and manage your fraud risks, they could put you out of business almost overnight. they could put you out of business almost overnight.

~Even if you survive a major fraud, it can damage your ~Even if you survive a major fraud, it can damage your reputation so badly that you can no longer succeed reputation so badly that you can no longer succeed independently.independently.

~A Fraud Prevention Check-Up can pinpoint opportunities to ~A Fraud Prevention Check-Up can pinpoint opportunities to save you money.save you money.

~If your organization is not identifying and tackling its fraud ~If your organization is not identifying and tackling its fraud costs, it is vulnerable to competitors who lower costs by costs, it is vulnerable to competitors who lower costs by doing so.doing so.

~Fraud is now so common that it’s occurrence is no longer ~Fraud is now so common that it’s occurrence is no longer remarkable, only in its scale.remarkable, only in its scale.


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The Check UpThe Check Up

The Check UpThe Check Up should ideally be a collaboration should ideally be a collaboration between a Certified Fraud Examiner and between a Certified Fraud Examiner and people within your organization who have people within your organization who have extensive knowledge about it’s operations.extensive knowledge about it’s operations.

A brief fraud prevention check-up provides a A brief fraud prevention check-up provides a broad idea of your organizations broad idea of your organizations performance with respect to fraud performance with respect to fraud prevention.prevention.


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Advise, Educate, Stay AlertAdvise, Educate, Stay Alert

First line of defense is a Certified First line of defense is a Certified Fraud Examiner who can advise Fraud Examiner who can advise

business owners about fraud business owners about fraud prevention and detection prevention and detection

techniquestechniques


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Fraud PreventionFraud Prevention

It’s It’s YOURYOUR Money Money

Keep itKeep it

Documents

Fraud In Our Midst, The Acfe 2010