Fraud…
The Other “F” Word
Presented by:
Jeffrey Mallan, CPA, CFF, CFE
Mallan & Associates, Inc.
Table of Contents
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Fraud Facts
Fraud in the News
Fraud Triangle
Internal Controls
Red Flags
Antifraud Programs
Fraud Facts
All frauds fall into one of three categories
Frequency / Median Loss
• Asset misappropriations – 85.4% / $130K
• Corruption –
• Fraudulent statements –
36.8% / $200K
9.0% / $1.0M
SOURCE: ACFE 2014 Report to the Nation on Occupation Fraud and Abuse.
Fraud Facts
Frequency / Median Loss
Asset misappropriations
2010
2012
2014
86.3% / $135K
86.7% / $120K
85.4% / $130K
Corruption
2010
2012
2014
32.8% / $250K
33.4% / $250K
36.8% / $200K
Fraudulent statements
2010
2012
2014
4.8% / $4.1M
7.6% / $1.0M
9.0% / $1.0M
SOURCE: ACFE 2010, 2012 & 2014 Report to the Nation on Occupation Fraud and
Abuse.
Detection of Fraud Schemes
Detection Method by Size of Victim Organization
SOURCE: ACFE 2014 Report to the Nation on Occupation Fraud and Abuse.
Median Months of Detection
2010
2012
18 Months
SOURCE: ACFE 2014 Report to the Nation on Occupation Fraud and Abuse.
2014
FRAUD
IN THE NEWS
Frauds in California
• Trustin Technology, Inc. in Irvine – $16M
embezzled by CFO
• Quality Woodworks, Inc. in Escondido –
$9.9M embezzled by bookkeeper
• Gulfstream Aerospace in Long Beach –
$8.5M embezzled by finance director
• Putnum Lexus in Redwood City - $835K
embezzled by general manager
California Embezzlements
Reported In 2014
Type of Entity
For-Profit
Amount
Embezzled
Number of
Embezzlements
$ 15,933,895
16
Government
552,881
2
Not-for-Profit
7,261,000
12
Individual
1,000,000
1
$ 24,747,776
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Total
California Embezzlements
Reported In 2014
2014 - Summary By Industry
Aerospace - 1
Religious - 2
Communications - 1
Not-for-Profit - 8
Education - 2
Construction - 3
Trusts & Estates - 1
Auto - 1
Medical - 3
Real Estate - 1
Government - 2
Retail - 1
Wine - 1
Clothing - 1
Banking - 1
Energy - 1
Food - 1
-
2,000
4,000
6,000
8,000
10,000
Thousands
Embezzlements Reported
Wine Country
• Whitehall Lane Winery (2015) – $650K+
embezzled by Bookkeeper - 5 years
• Rutherford Wine Co (2014) – $341K+
embezzled by AR Clerk - 3 years
• Wine Tasting Network (2013) – $900K+
embezzled by Vice Pres - 3 years
What Do They Have In Common?
Christina Robbins
Lenore Gotelli
Barry Minkow
Leslie Gibbs/Janous
Sharen Goff
Other Serial Embezzlers
• Kathryn Britto-Florence, 51, of Walnut
Creek
– Embezzled $1M+ from 3 companies
• Lina Hinds, 39, of Concord
– Embezzled $500K+ from 3 companies
• Marvin Caukin, 66, of Calabasas
– Embezzled $10.9M from 2 companies
Why Do Serial Embezzlers Exist?
• Embezzlers Not Prosecuted
• Prosecution?
– Civil vs. Criminal
• Background Checks Not Performed
• Poor Internal Controls
Fraud is Likely to Happen
When…
All the following exist:
• Motive
• Rationalization
• Opportunity
Known as the “Fraud Triangle”
The Fraud Triangle
Motive
Opportunity
Rationalization
The Fraud Triangle
Motive
Opportunity
Rationalization
Which of the three (3) types of
fraud factors or “pressures” is the
#1 reason behind workplace fraud
and abuse?
• Answer
OPPORTUNITY!
Internal Control
A process that provides assurance on the:
•Effectiveness and efficiency of operations
•Reliability of financial reporting
•Compliance with laws and regulations
•Safeguarding of assets
Internal Control
Can:
–
–
Reduce the opportunity for fraud to occur
Increase the likelihood of detecting fraud
Can’t:
–
Guarantee that fraud will be eliminated
Elements of Internal Control
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Control environment
Risk assessment
Control activities
Information and communication
Monitoring
Control Weaknesses that
Contributed to Fraud - 2014
SOURCE: ACFE 2014 Report to the Nation on Occupation Fraud and Abuse.
RED FLAGS
Red Flags
• Borrowing money from co-workers
• Financial difficulties - creditors/collectors
appearing at work
• Gambling debts/habits
• Unexplained cash flow problems,
especially in times of increased sales
• Bragging about significant new
purchases
Red Flags
• Providing unreasonable responses to
questions
• Easily annoyed at reasonable
questioning
• Refusing vacations or promotions for fear
of detection
• Incomplete or untimely bank
reconciliations
• High personnel turnover / low morale
Red Flags
• Living beyond means/ addiction problems
• Control issues, unwillingness to share
duties
• Unusually close association with
vendor/customer
• “Wheeler-Dealer” attitude
• Divorce/family problems
Red Flags
• Arrest of Controller on charges of
“patronizing a prostitute”
General Internal Control
Suggestions
• Require mandatory vacations
• Separate check preparing from check
signing
• Document proper segregation of duties
– Should be adhered to
• Require original documents for all bills
• Changes in vendor/customer information
should be verified
General Internal Control
Suggestions
• Independent review of bank reconciliations
• Reconcile all balance sheet accounts on a
scheduled basis
• Routinely compare check payees and the
payees on the cash disbursement journal
• Maintain documents that provide an audit
trail
• No time to monitor?
– Use of outside internal control consultants
Examples of Antifraud Programs
and Controls – Larger Companies
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Active Board
Active audit committee
Internal audit
Corporate governance structure
Corporate culture
– Tone at the top
– Code of conduct
– Corporate communications re expectations
and consequences
– Hotline for reporting ethical or legal concerns
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Antifraud Programs and Controls
– Smaller Companies
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Active Owner
Corporate culture (See previous slide)
Financial acumen of owner
Independent review of bank
reconciliations
• Screening applicants (less likely to occur
in smaller companies)
• Segregation of duties
• One person shop (e.g., controller does
everything)
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Questions?
Contact Info
Mallan & Associates, Inc.
Jeff Mallan, CPA, CFF, CFE
forensiccpa@mallanassociates.com
Thank You
Members of the following
Association of Certified
Fraud Examiners
North Bay Alliance of
Certified Fraud
Examiners
American Institute of CPA's
California Society of CPA's