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RED FLAGS OFOCCUPATIONAL FRAUD Caroline Burnell, CFE,
CGFM
CAROLINE BURNELL Fraud Investigator 25 years experience in auditing and fraud investigations
SOURCES:
State of New York, Office of State Comptroller, Red Flags for Fraud http://www.osc.state.ny.us/localgov/pubs/red_flags_fraud.pdfAccessed January 8, 2014.
Wells, Joseph T; Corporate Fraud Handbook Prevention and Detection, 3rd Edition. 2011
RED FLAGSDefined
RED FLAGS
A set of circumstances that are unusual in nature or vary from the normal activity.
RED FLAGS
Do not ignore a red flag!
Studies of fraud cases consistently show that red flags were present, but either weren’t recognized or were recognized but not acted upon by anyone.
RED FLAGS
The investigation should be done by a responsible person who is unlikely to be committing the fraud if one is occurring.
Sometimes an error is just an error. [email protected]
t
FRAUDAnd Its Perpetrators
KEY POINTSRequired Conditions:
PERPETRATORS Past Employment-Related Problems Unusually Close Association with Vendor/Customer
Wheeler-Dealer Attitude Irritability, Suspiciousness or Defensiveness
Control Issues, Unwillingness to Share Duties
Refusal to Take Vacations Complained About Inadequate PayComplained About Lack of Authority
PERPETRATORS Excessive Pressure from Within Organization
Excessive Family/Peer Pressure for SuccessFinancial DifficultiesAddiction ProblemsDivorce/Family ProblemsPast Legal Problems
Source: ACFE 2012 Report to the Nations
WAR STORY
WAR STORYRED FLAGS
Legal PressurePast TheftFinancial Pressure
Similar looking invoices
Sequentially numbered invoices
Same address / telephone number
No email or web address
Executive Directive submitted an invoice from one of his companies for payment of an item that was never delivered.
Checks payable to companies endorsed by Executive Director and/or his family
BILLING SCHEMES
SHELL COMPANIES
Shell companies are fictitious entities created for the sole purpose of committing fraud by shielding identities of the perpetrator and/or hiding money.
SHELL COMPANIESNo phone number No e-mail or web address No physical address No company logo No contact informationNo federal identification number
FALSE INVOICES
Running unsanctioned invoices through the accounts payable system.
May be done with vendor collusion.
FALSE INVOICESInvoices cannot be traced to shipments.
Multiple payments to single vendor on the same date.
Pattern of purchases just below review level.
Unusually quick turnaround of invoices.
Payment to multiple vendors for same product.
FALSE INVOICES
Expenses increase dramatically.
Unexplained rise in cost of goods sold.
Unexplained decrease in gross/net profits.
Excessive materials orders.
Goods not purchased at optimal point.
High level approval of a low level transaction
CHECK TAMPERING
CHECK TAMPERING
Preparing a check for one’s own benefit
Intercepting a check intended for a third party and converting the check for one’s own benefit.
Payee
Maker
Endorsement
Check Tampering:
• Forged Maker Schemes
• Authorized Maker Schemes
• Concealed Check Schemes
• Intercepted Check Schemes
CHECK TAMPERING
Missing checks.
Voided checks
Bank accounts that are not reconciled on a timely basis.
Sudden activity in dormant bank accounts
CHECK TAMPERING
Significant increase in payments to one vendor
Duplicate payments
Payments without supporting documentation
Accounting records that disagree with the supporting documentation
CHECK TAMPERINGChecks to employees, in excess of the # and $ amount of normal payroll checks.
Vendor & customer complaints regarding nonpayment.
QUESTIONS