CPAs & ADVISORS
experience clarity //
SECRETS, CONSPIRACIES AND HIDDEN PATTERNS
Shauna Woody-Coussens, Managing Director-Forensics & Valuation Services
AGENDA
About occupational fraud
Common fraud schemes and related red flags
Cost-effective anti-fraud controls
Update on forensic analytics
2 // experience clarity
HARD COSTS OF OCCUPATIONAL FRAUD
Typical organization loses 5% of its annual revenue to fraud
Translates to a potential fraud loss of $750 billion for US (2013)
Median loss was $140,000 for all companies
One fifth of losses were over $1 million
Frauds lasted 18 months before being detected
50% of entities recover nothing
3 // experience clarity
SOFT COST OF OCCUPATIONAL FRAUD
Damage to companies go beyond dollars and cents
Reputation
Loss of public confidence
Damage to relationships
Sagging staff morale
Distraction from the mission
4 // experience clarity
FRAUD TRIANGLE
Perceived
pressure
facing
individual
Perceived
opportunity
to commit
fraud
Person’s rationalization
or integrity
5 // experience clarity
FRAUD TRIANGLE: PRESSURES
Common pressures:
Financial
Not being able to pay one’s debts
Business reversals
Belief that one’s job is in jeopardy
Emotional
Fear of loss of status
Difficulties in employer-employee relations
Narcissistic entitlement
Lifestyle
Status gaining
Drug/alcohol addiction
Gambling
6 // experience clarity
FRAUD TRIANGLE: OPPORTUNITY
Common opportunities:
Access to funds and/or inventory
Ability to process transactions
Weak internal controls
Ineffective monitoring by management
7 // experience clarity
FRAUD TRIANGLE: RATIONALE
Common rationales:
I’m only borrowing the money
I work harder than management/owner
They don’t pay me enough
They gave my promotion to someone else
Others in the organization are doing it
8 // experience clarity
PROFILE OF A TYPICAL FRAUDSTER
Male or female
36 to 45 years old
College educated
Works in finance function or finance-related role
Holds a senior management position
Employed by the company for more than 10 years
No prior fraud charges or convictions
9 // experience clarity
BEHAVIORAL RED FLAGS OF THE TYPICAL FRAUDSTER
Lifestyle seems excessive for income
Rarely takes vacation
Does not/will not produce records/information voluntarily or on request
Tends to shift blame and responsibility for errors
Surrounded by “favorites” or people who do not challenge them
Rumors/indications of personal bad habits/addictions/vices
Bullies or intimidates colleagues
Vendors/suppliers will only deal with this individual
Refuses or does not seek promotion
10 // experience clarity
BEHAVIORAL RED FLAGS OF THE TYPICAL FRAUDSTER
Volatile and melodramatic, arrogant, confrontational, threatening, or
aggressive when challenged
Is suspected to have over-extended personal finances
Cuts corners and bends rules
Seems unhappy at work or is poorly motivated
Accepts hospitality that is excessive or contrary to employers’ rules
Seems stressed and under pressure
Self-interested and concerned with own agenda
Micromanages some employees; keeps others at arm’s length
11 // experience clarity
VICTIM ORGANIZATIONS
12 // experience clarity
©2012 Association of Certified Fraud Examiners, Inc.
TOP OCCUPATIONAL FRAUD SCHEMES BY SIZE OF ORGANIZATION
13 // experience clarity
COMMON FRAUD SCHEMES AND
RED FLAGS
14 // experience clarity
BILLING FRAUD
15 // experience clarity
BILLING FRAUD
Any scheme in which a person causes his or her employer to issue a
payment by submitting invoices for fictitious goods or services, inflated
invoices or invoices for personal purchases
Employee creates a shell vendor company and bills employer for services not
actually rendered
Pass-through schemes through an intermediary vendor who provides no real
services or value
Pay and return schemes whereby an intentional overpayment of a legitimate
invoice gets returned and pocketed by employee
16 // experience clarity
POTENTIAL RED FLAGS FOR BILLING FRAUD SCHEMES
Invoices for unspecified consulting or other service
Unfamiliar vendors
Vendors with PO boxes
Vendor name consisting of initials
Rapid increases in purchases
Multiple monthly billings
Employee/vendor address match
Consecutively numbered invoices from a vendor
Repeated requests to expedite payments to particular vendors
Invoice for round dollar amounts
Delivery address other than institutional address
Excessive returns to vendors
17 // experience clarity
CORRUPTION
18 // experience clarity
CORRUPTION
Dishonest or fraudulent conduct by those in power, often involving bribery,
kickbacks or conflicts of interest
Improper and usually unlawful conduct intended to secure a benefit for
oneself or another
19 // experience clarity
JUNCTION CITY INVESTIGATION
Big Red One to bring troops to Ft. Riley, KS base
Lack of “rooftops” based on troop projections provided by military leaders
Housing boom resulted
Big D Development – David Freeman
Wanted exclusive rights to develop two housing developments with more than
500 lots for SFR, duplexes and condos
Development contracts were worth more than $12 million to Big D
Former Junction City Mayor/City Commissioner – Mick Wunder
Received $19,000 and requested the construction of a house in exchange for
securing necessary votes
Admitted taking the money, but said it was for his wife’s medical bills and that
he gave Freeman sports memorabilia in exchange
20 // experience clarity
JUNCTION CITY INVESTIGATION
May 1, 2006 – Freeman issued a $5,000 check to Wunder’s wife
“Loan for medical bills”
May 6, 2006 – Freeman brags to business partners that he has a city
commissioner in his pocket and can get anything approved
July 6, 2006 – Freeman issued a $5,000 check to Wunder
“Loan repayment”
July 27 and September 8, 2006 – City Commission approved development
agreements with Big D
City Commission later approved payments in excess of $12 million for the
benefit of Big D
Late 2006 – City to renovate the historic Opera House
Wunder delivered winning bid for a promise of $15,000
Freeman’s admin delivered $9,000 check to Wunder at an interstate rest stop
21 // experience clarity
RED FLAGS FOR CORRUPTION
Off-book fraud, so very hard to detect
Payments often do not go through the organization’s accounting
records
Payments often paid in cash
By-passing normal contracting procedures
Missing documents or records regarding meetings or decisions
Unexpected or illogical decisions accepting projects or contracts
Unfavorable contracts or terms
22 // experience clarity
RED FLAGS FOR CORRUPTION
Look for “behavioral” red flags
Too close a relationship between employee and vendor
Private meetings
Unexplained preferences for a particular vendor
Acceptance of lavish gifts/trips
Pressure for payments to be made urgently or ahead of schedule
Credit problems
Addition problems (gambling)
23 // experience clarity
CHECK TAMPERING
24 // experience clarity
CHECK TAMPERING
Any scheme in which a person steals his or her employer’s funds by
intercepting, forging or altering a check drawn on one of the organization’s
bank accounts
Employee steals blank company checks and makes them out to himself, an
accomplice or cash
Employee increases the amount of an expense reimbursement check after
signature
Employee steal an outgoing check to a vendor and deposits it into his or her
own account
25 // experience clarity
FORGED MAKER
Maker = person who signs the check
Most common type of check tampering
Look for check #’s out of sequence (taken from bottom)
Look for duplicate check numbers
26 // experience clarity
FORGED ENDORSEMENTS
Perpetrator steals an outgoing company check intended for a 3rd party and
forges the endorsement of the intended payee
Deposits into bank account
27 // experience clarity
ALTERED PAYEE
Perpetrator steals an outgoing company check intended for a 3rd party and
alters the payee
Insert fraudster or accomplice name
Perpetrator steals an incoming check and alters the payee
Insert fraudster or accomplice name
28 // experience clarity
AUTHORIZED MAKER
Person with authority to write checks makes out a fraudulent check for
their own benefit
Most difficult to defend against
Internal controls (if in place) are often overridden by using influence,
authority or intimidation
29 // experience clarity
FEB 26, 2014, 7:35AM CST
FORMER BOOKKEEPER FACES $543K EMBEZZLEMENT CHARGE
KANSAS CITY BUSINESS JOURNAL
Susan Elise Prophet, who was a bookkeeper for Dorfman Plumbing Supply Co., is
accused of embezzling more than $543,000 between December 2012 and August
2013.
According to the indictment, Prophet wrote 105 unauthorized checks that she used
to purchase vehicles, furniture, electronics and other items. She is charged with 16
counts, including wire fraud, bank fraud, money laundering and identity theft.
The case is being prosecuted by the U.S. Attorney's Office for the Western District of
Missouri. It was investigated by the FBI and the Kansas City Police Department
Kansas City-based Dorfman Plumbing Supply was acquired late last year by
Ferguson Enterprises Inc. of Newport News, Va., The Kansas City Star reports
RED FLAGS FOR CHECK TAMPERING
Altered bank statements
Voided checks do not match physical copies of checks
Altered check register
Altered check disbursement journal
Altered cancelled checks
Checks endorsed by employee or dual endorsements
31 // experience clarity
SKIMMING THE REVENUE CYCLE
32 // experience clarity
SKIMMING THE REVENUE CYCLE
Employee pockets the payment from a customer/other and does not
record the charge
Stealing payments on accounts receivable and covering them up with
adjustments or write-offs
Lapping
Customer A pays on account and employee pockets the payment. Customer B
pays on account and employee records the payment by Customer B on
Customer A’s account. This goes on until the employee is caught or covers up
the fraud, usually through an adjustment or write-off
33 // experience clarity
RED FLAGS FOR SKIMMING SCHEMES
Employees who do not take vacation
Employees who do not like others to perform their duties
Missing register tapes or other records
Consistent differences in register receipts to cash on hand
34 // experience clarity
EXPENSE REIMBURSEMENT/CREDIT
CARDS
35 // experience clarity
EXPENSE REIMBURSEMENT/CREDIT CARDS
Any scheme in which an employee makes a claim for reimbursement or
fictitious or inflated business expenses
Employee files fraudulent expense report, claiming personal travel, nonexistent
meals, etc.
Employee purchases personal items and submits and invoice to employer for
payment
Employee purchases goods/services for inappropriate uses and charges to
employer for payment
36 // experience clarity
ON-GOING INVESTIGATION
Corporate AMEX
Summary statement for 12 cards
Each cardholder given their section and asked to provide original receipts
All receipts reconciled to summary statement by CFO
Everyone’s receipts in good order, except…..
37 // experience clarity
CFO’S AMEX CHARGES
Palm Beach Tan – 3 charges totaling $118.13
Turbotax Software – 2 charges totaling $113.50
Ticketmaster – 2 charges totaling $687.41
University of Cinncinati Tuition – 2 charges totaling $2,935.90
Delta Airlines - $514.44
Car repair expenses - $937.34
Gasoline – 64 purchases totaling $2,597.45
Local lunches for one – 27 charges totaling $394.30
USAA Life Insurnance Premiums - $1,372.11
2CO.com - $7,000 (payment processor for online businesses)
38 // experience clarity
WHAT DID COMPANY KNOW ABOUT CFO?
Resume indicated
Seasoned financial professional with significant experience in a CFO capacity
Effective communicator with strong leadership skills
CFO/Treasurer experience at two other manufacturing companies (9 years)
Vice President of a financial planning firm (6 years)
Developed $20 million book of business from scratch
CPA with Series 7, 63 and 65 Securities Licenses
CFO had interviewed well and was very personable
Hired because management liked that he had previous CFO experience in
manufacturing industry
39 // experience clarity
WHAT WE DISCOVERED ABOUT CFO
Resume
Most recent job on resume (2007-2009) was a CFO-To-Go Consulting Services
Secretary of State website indicated the CFO was the owner of this company
Internet Searches
CFO was divorced in 2007
CFO had judgments against him (2010 and 2012) for non-payment of credit
card bills and back taxes
Wages were being garnished, but management was unaware
Interview of co-worker
CFO had some sort of relationship issues with ex-wife and oldest son
CFO prided himself of appearing to be a workaholic
CFO had a real need to be liked
40 // experience clarity
WHAT WE DISCOVERED ABOUT CFO
Email review
CFO not able to pay for half of oldest son’s college costs-ex-wife continually
threatening legal action
CFO had signed away his parental rights during the “period of insanity”
CFO took deductions on tax returns for children when he wasn’t entitled to
CFO had had a serious drug problem which cost him his previous CFO position
and his marriage
CFO’s girlfriend currently had a serious drug problem
41 // experience clarity
IN CONCLUSION
From 2010 through April 2014, CFO “borrowed” over $100,000
CFO had paid back about $43,000
“Borrowings” generally coincided with timing of emails from ex-wife or
oldest son
CFO appeared to use corporate credit card for small purchases of meals,
food and gasoline for personal car in the week before a pay date
42 // experience clarity
RED FLAGS FOR EXPENSE REIMBURSEMENT /CREDIT CARD SCHEMES
Purchases that do not appear to be business related
Original documents supporting expenses missing
Receipts are altered
Many receipts from the same vendor
Submitted receipts are consecutively numbered
Expenses in round dollar amounts
Expenses just below receipt submission threshold
Expensive business lunch/dinner expenses without names/organizations of
attendees and business purpose noted
Excessive use of taxis on business trips
43 // experience clarity
INTERNAL CONTROLS
44 // experience clarity
MOST COMMON REASON OCCUPATIONAL FRAUD OCCURS
One person is given complete control of the financial process without any
oversight or monitoring from the supervisor or department head.
Simply signing does not = oversight
45 // experience clarity
PRIMARY INTERNAL CONTROL WEAKNESSES
46 // experience clarity
EFFECTIVENESS OF INTERNAL CONTROLS
Median Loss Based on Presence of Anti-Fraud Controls
Control
Management review
Employee support programs
Hotline
Fraud training for managers/executives
External audit of ICOFR
Fraud training for employees
Anti-Fraud policy
Formal Fraud Risk Assessments
Internal audit/FE department
Job rotation/mandatory vacations
Surprise audits
Rewards for whistleblowers
Code of conduct
Independent audit committee
Management certification of F/S
External audit of F/S
47 // experience clarity
% of Cases
Implemented
60.5%
57.5%
54.0%
47.4%
67.5%
46.8%
46.6%
35.5%
68.4%
16.7%
32.2%
9.4%
78.0%
59.8%
68.5%
80.1%
Control in Place
$100,000
$100,000
$100,000
$100,000
$120,000
$100,000
$100,000
$100,000
$120,000
$100,000
$100,000
$100,000
$120,000
$125,000
$138,000
$140,000
Control Not in Place
$185,000
$180,000
$180,000
$158,000
$187,000
$155,000
$150,000
$150,000
$180,000
$150,000
$150,000
$145,000
$164,000
$150,000
$164,000
$145,000
% Reduction
45.9%
44.4%
44.4%
36.7%
35.8%
35.5%
33.3%
33.3%
33.3%
33.3%
33.3%
31.0%
26.8%
16.7%
15.9%
3.4%
COST EFFECTIVE ANTI-FRAUD
CONTROLS
48 // experience clarity
MOST COST EFFECTIVE ANTI-FRAUD CONTROL MECHANISM
Fraud hotlines
Occupational fraud more likely to be detected by a tip than by any other
method
Fraud hotlines help detect fraud
12 months faster
Median loss 44% less
49 // experience clarity
DETECTION OF FRAUD SCHEMES
50 // experience clarity
IMPACT OF FRAUD HOTLINES
51 // experience clarity
SOURCE OF TIPS
52 // experience clarity
2ND MOST COST EFFECTIVE ANTI-FRAUD CONTROL MECHANISM
Employee fraud awareness training
Makes employees your “eyes and ears” with regard to fraud prevention and
detection
Appropriate topics
Employees’ roles within the internal control framework
Who commits fraud and why
Common fraud schemes in their industry/function/role
Red flags to recognize common fraud schemes
What to do when employees encounter red flags
53 // experience clarity
3RD MOST COST EFFECTIVE ANTI-FRAUD CONTROL MECHANISM
Proper tone at the top
Lead by example
Establish a code of ethics and conduct
Establish a fraud policy
Carefully screen job applicants
Assign proper authority and responsibility
Mandate fraud and ethics training for staff
Implement effective disciplinary measures
Implement a confidential hotline
Establish a “no retaliation” policy
Follow through with reports of misconduct and promote effective internal
controls
54 // experience clarity
FORENSIC ANALYTICS
55 // experience clarity
FORENSIC DATA MINING
“Use of sophisticated procedures and technologies to identify concealed patterns in
financial, nonfinancial and textual data that would not otherwise be detectable due to
the size and complexity of the data.”
WHAT’S THE BIG DEAL?
Sampling doesn’t reveal patterns & trends
“Big Data” – too much data for manual analysis
System weaknesses lead to fraud - data mining finds them
Suspicious activity is a 96.5% match to normal
SIMPLE EXCEL-BASED EXAMPLE
Tool Used: Excel, ACL, IDEA
Functions: Simple sorting
A LITTLE MORE COMPLICATED
Automated web crawlers do not detect
“presence” of name against outside
data sources.
Cross Reference Against:
 Postal contractors database
 Correctional facilities database
 High-risk ZIP codes
 Unexpected / unusual addresses
The UPS Store
1221 East Kearney
Springfield, MO
GEOCODING
MORE GEOCODING
“Vinny’s
Salvage
Yard”
GEOSPATIAL ANALYSIS (VISUAL)
INVOICE ALTERATIONS
GROWTH OF UNSTRUCTURED DATA
LATENT SEMANTICS
To: Vendor Rep
From: Employee
--------------------------------------------Thank you for the “gift” – I’m so
excited! It looks great in my
driveway! I can’t wait to take it
out on the open road! My
neighbors are soooo jealous!
LATENT SEMANTICS
To: Employee
From: Vendor Rep
--------------------------------------------Think nothing of it, you deserve a
treat every now and then for all
you’ve done for us.
EMOTIONAL TONE OF OVERALL DEPARTMENT
67 // experience clarity
SAYING IT WITHOUT SAYING IT
Putin Presidential Address, December
2013
“together with our
partners we
managed to steer the course of
events away from war”
“extensive
bloodshed”
“conflict”
“external military
intervention”
“dramatic
situation”
“resorting to
forceful actions”
“crisis”
THANK YOU
FOR MORE INFORMATION // For a complete list of our offices
and subsidiaries, visit bkd.com or contact:
Shauna Woody-Coussens, CFE // Managing Director
swoodycoussens@bkd.com // 816.701.0250