The “F” Word:
Fraud
Presented by:
Donna Mayes, CPA
Course Objective
Understand different fraud schemes
and how they impact businesses
Identify “red flags” that can be
indicators of fraud
Learn methods and internal controls
to help reduce fraud risk
Statistics
5% of annual revenue is lost to fraud
90% of the cases involve asset
misappropriation
Typically takes 2 years to detect
Average loss was $145,000
Small organizations are hit harder
77% of frauds committed by accounting,
operations, sales, upper mgmt, customer
service, purchasing and finance.
Fraud Nightmares
Internal frauds
• Forged invoices
• Remote locations
External frauds
• Check washing
• Ransoms
Fraud Triangle
Incentive/Pressure
FRAUD
Opportunity
Rationalization/
Attitude
Fraud Triangle
Incentive/Pressure
• Be alert
Rationalization/Attitude
• Pay employees well
• Be fair
• Be alert
Opportunity
Prevention/Detection
Prevention is better option
• Segregated bank accounts
Detection is final defense
• Documentation
Tips for Assessing
Risk of Fraud
Fraud assessment should be done at
least annually (or when
circumstances merit)
Red flags
Evaluate each transaction cycle
Evaluate Each
Transaction Cycle
Cash receipts, cash disbursements,
investment transactions, payroll,
purchases of property and equipment
Review policies and procedures
Best prevention is segregation of
duties
Designing Effective
Internal Controls
Custody – physical access to cash,
checks, inventory, other assets
Recordkeeping – data entry and other
means to record the data into the
accounting system
Approval/review – authorization for
transactions to occur
Designing Effective
Internal Controls
Receipts cycle
• Open mail, make a prelist of all checks
received, copies of checks made, make
deposit
• Receipts entered into accounting software
from copies
• Validated deposit slip compared to prelist and
to amounts recorded in general ledger
• Bank reconciliation completed
Designing Effective
Internal Controls
Disbursements cycle
• Check request/invoice is authorized
• Payable is recorded into accounting software
and a check is generated
• Check is signed
• Bank reconciliation completed timely
Designing Effective
Internal Controls
Payroll cycle
• Approval of hiring, salary changes, time
sheets
• New employees added to system; salary
changes made in system; payroll processed;
checks and/or direct deposit prepared
• Checks signed
• Direct deposit uploaded to bank
• Bank reconciliation completed
Tone at the Top
Example is being set – good or bad
Be above board & transparent
If ever a gray area – err on the side of the
business.
Follow the rules – don’t ask for exceptions
Don’t abuse company benefits
Inform employees of expectations &
consequences
Tone at the Top
Tone at the Middle
Steps to take
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Be more visible
Conduct surprise audits
Let employees know that you are watching
Create perception of detection
Ask questions about the procedures they are
performing
• Review software access periodically
Remote Locations
Be more visible
Insist on internal controls
Perform analytical procedures
Review sign-in sheets/other reports
Rotate staff and/or duties
Keep log of errors
Limit amount of receipts collected
Electronic Transactions
Direct deposit
Wire transfers
Transfers between bank/investment
accounts
Credit Cards
Analyze the reason for using credit
cards
Do financial background checks
Valid reason for employee to have
card
Insist on accountability
Consequences for abuse
Credit Cards
Internal controls
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Employee reconciles statement with receipts
Original detailed receipts turned in
Who, what, when, where, business purpose
Approval of expenses
Accounting dept. reviews expenses
Corporate credit card
Chaotic Situations
Change in personnel
Expansion/contraction of services
Loss of upper management/key
personnel
Move
Downturn/upturn in economy
Questions