No Fraud Left BehindFraud Risks and Prevention

(Info gathered from the Association of Certified Fraud Examiners)

Runyon Kersteen Ouellette

No Fraud Left Behind Types of fraud Red flags Controls to help prevent fraud Specific cases

The Fraud Triangle

Motivation

Opportunity

Pressure

Types of Fraud Corruption Fraudulent financial statements Asset misappropriation

Corruption Schemes in which employees use their

influence in business transactions in a way that violates their duty to their employers in order to obtain a benefit for themselves or someone else

Corruption Conflict of interest Bribery (i.e. kickbacks, bid rigging) Illegal gratuities Economic extortion

Fraudulent Financial Statements Involves the intentional misstatement or

omission of material information from the entity’s financial reports

Referred to as “cooking the books” Often involves reporting fictitious revenues or

concealment of expenses or liabilities in order to make entity appear more profitable than it really is

Fraudulent Financial Statements Least commonly reported type of

occupational fraud Cause considerably more damage than frauds

in the other two categories

Asset Misappropriation Employee steals or misuses an entity’s

resources This is the most commonly reported fraud The least costly of the three categories of

fraud

Asset Misappropriation Cash receipts Cash disbursements Non-cash (physical assets)

Schemes Involving Cash Receipts Skimming – cash is stolen before it is

recorded on the entity’s books Employee accepts payment but does not record

the transaction Larceny – cash is stolen after it is recorded on

the entity’s books Employee steals cash from daily receipts before

they can be deposited in the bank

Schemes Involving Cash Disbursements Billing – causing entity to issue a payment by

submitting invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases Employee creates shell company and bills

employer for nonexistent services Employee purchases personal items and submits

invoices to employer for payment

Schemes Involving Cash Disbursements Check Tampering – stealing funds by forging

or altering checks or stealing legitimately issued checks to other payees Employee steals blank company checks, makes

them out to self or an accomplice Employee steals outgoing check to a vendor and

deposits into own account

Schemes Involving Cash Disbursements Expense Reimbursements – claims for

reimbursement of fictitious or inflated business expenses Employee files fraudulent expense reports,

claiming personal travel or nonexistent expenses

Schemes Involving Cash Disbursements Payroll – causing entity to issue a payment by

making false claims for compensation Employee claims overtime for hours not worked Employee adds ghost employees to the payroll

Schemes Involving Cash Disbursements Cash Register Disbursements – false entries

entered onto cash register to conceal the fraudulent removal of cash Employee fraudulently voids a sale on cash

register and steals the cash

Cash on Hand Misappropriation Any scheme in which the employee

misappropriates cash kept on hand at the entity’s premises Employee steals cash from a vault or cash box

Non-Cash Misappropriation Any scheme in which the employee steals or

misuses non-cash assets of the entity Employee steals inventory Employee steals or misuses confidential customer

financial information

Protecting Yourself Ask “What’s the worst thing that can

happen?” Become familiar with typical warning signs

or “red flags” First priority is to prevent fraud Second priority is to detect fraud once it

occurs

Red Flags in the Organization High employee turnover in key areas Lack of segregation of duties Lack of controls or enforcement of controls Inattention to detail, sloppiness,

inexperienced personnel Decentralized activities not closely monitored Management inattention, disregard, or blind

faith in employees

Red Flags for Employees Employees living beyond their means Employees with financial difficulties Employees with control issues Refusal to take vacations, accept a promotion,

delegate tasks or share duties Defensive, suspicious, or irritable attitude Complaining about pay, lack of authority

Red Flags for Employees Unstable life situations (e.g. divorce) Addiction or legal problems Unusually close relationship with vendors Other changes in behavior (showing up late,

lapse in performance)

Red Flags for Management Not forthcoming with information Excessive year-end transactions Journal entries or transactions that don’t make

sense Increased write-offs of receivables Cash shortages

Red Flags for Cash Receipts Large deposits in transit Cash is not deposited in a timely manner Bank reconciliations aren’t timely, aren’t

done at all, or don’t match records Large, numerous errors in cash accounts Bank deposits vary from records

Red Flags for Cash Disbursements Very old, outstanding checks Checks issued out of sequence Unexpected checks clearing Manual checks, typed checks, checks made

out to cash Large number or amount of reimbursements

to one employee Photocopied, missing or altered documents

Red Flags for Cash Disbursements Invoices for unspecified or poorly defined

services Unfamiliar vendors Company names that consist of only initials Vendors with only P.O. Box addresses Rapidly increasing purchases from one

vendor Vendor address matches employee address

What Can You Do? Set the tone at the top Assess what areas contain risks Have policies and procedures in place Ensure that duties are segregated and other

internal controls are in place Proper oversight Timely reconciliations of accounting records

Decentralized Risk Areas Student activity funds School lunch, where there is a separate

checking account maintained Booster clubs if under control of the School

(using School ID number)

Policies and Procedures Should cover the following (at a minimum)

Actual bank accounts Procedures for receipts Procedures for deposits Procedures for disbursements and check writing Record maintenance Bank reconciliations Periodic reporting

Internal Auditing Annual audits are only done once a year Internal audits can be done periodically

throughout the year and on a surprise basis Someone from central office becomes

familiar with the process and can be the point person

Gives perception that these accounts are being monitored

Student Activity Funds What to look at

Bank reconciliations (Do they reconcile? Are they done timely?)

Deposits (Are they made timely? Are they accurate?)

Disbursements (Do they have proper approval and supporting documentation?)

Student Activity Funds What to look at

Cancelled checks (Anything unusual? Any made out to employee in charge of the account? Checks made out to cash?)

Account balances (Are there any with negative balances? How will these be funded?)

Case #1 Personal Reimbursements Professional skepticism-no blind faith in

employees Insist receipts get turned in on a timely

manner (e.g. receipts that aren’t turned in within 2 weeks will not be reimbursed; no exceptions!)

Case #2 Paying Personal Bills Review accounts payable warrants and

supporting documentation Ensure all disbursements have proper

approval notated

Case #3 School Activity Funds Dual signatures on checks or check signing

authority granted to principal only Have another employee perform the bank

reconciliations Require approval before checks are signed

(e.g. check vouchers)

Case #4 Tuition Billing Segregate cash receipts from preparing

deposits Management review of billings/receivables

for outstanding items Program policy-checks made out to the

program only