How to Protect Your Organization
from Fraud
Jake Dunton, CPA, CFE
jdunton@duntonandco.com
Objectives
1. Key Internal Control Concept!
2. Key factors that must occur before fraud
Occurs!
3. Fraud Prevention Check-up: Simple Test
What is Fraud?
• deliberate action by individual or entity to
cheat another, causing damage.
• intentional deception resulting in injury to
another. Fraud usually consists of a
misrepresentation, concealment, or
nondisclosure of a material fact, or at least
misleading conduct, devices, or contrivance.
Definition of Fraud (Continued)
• Deliberate and improper manipulation of the recording
of sales revenue and/or expenses (with a purpose of
making a company’s profit performance look better
than it actually is) is qualified as accounting fraud.
• Consumer fraud encompasses a wide range of
fraudulent and deceptive practices in the advertising,
marketing, sale, or provision of goods or services.
Consumer fraud occurs when a product or service does
not perform in the manner in which it was advertised
or represented to perform.
Definition of Fraud (Continued)
• lar·ce·ny: the wrongful taking and carrying
away of the personal goods of another from
his or her possession with intent to convert
them to the taker's own use.
Key Factors that Occurs for Fraud to
Occur
Need
All 3 Factors
Required
Opportunity
Justification
Fraud Triangle
•
Need: The employee is somehow motivated to commit a fraud. Economic
factors such as personal financial distress, substance abuse, gambling,
overspending, or other similar addictive behaviors may provide motivation. The
current national economic recession may serve to increase the incidence of such
financial motivations.
•
Opportunity: The employee has sufficient access to assets and information that
allows him or her to believe the fraud can be committed and also successfully
concealed.
•
Justification: The employee finds a way to rationalize the fraud, convincing
themselves that their actions are really justified. Such rationalizations can include
perceived injustices in compensation or promotions, the idea that they are simply
“borrowing” from the company and fully intend to return the assets at a future date,
or a belief that the company doesn’t really “need” the assets and won’t even realize
they are missing.
Key Concept _
Breaking The Flow and Control
• Opens the
Mail
• Makes the
Bank
Deposit
• Reconciles
the Bank
Account
Employee
A
Employee
Employee
A
Employee
A
A
• Posts the
receipts
Little Changes Make A Difference
• Opens the
Mail
• Makes the
Bank
Deposit
• Reconciles
the Bank
Account
Employee
A
Employee
Employee
B
Employee
B
A
• Posts the
receipts
Little Changes Make A Difference
• Opens the
Bank
Statement
• Reconciles the
Bank Account
• Reviews Online
Bank
Transactions
Executive
Director
Treasurer
Employee
A
Employee
B
• Posts the
receipts
The Following is from The Association
of Certified Fraud Examiners 2010
Report to the Nation
Fraud Detection :ACFE 2010 Report to
the Nation
Tip
40.2%
Management Review
15.4%
Internal Audit
13.9%
By Accident
8.3%
Account Reconciliation
6.1%
Document examination
5.2%
External Audit
4.6%
All others
6.2%
Fraud by Department
Accounting
24.3%
Operations
20.7%
Executive/Upper Management
13.9%
Sales
13.1%
Customer service
8.4%
Purchasing
4.3%
All Others (10)
15.3%
Perpetrators of Fraud
• Owners/ Executives losses were over three
times those of managers and over nine times
that of employee fraud.
• Owners and Executive fraud were the most
difficult to detect.
• 85% of fraudsters had never been previously
charged or convicted of fraud
Warning signs
•
•
•
•
•
•
•
Living beyond their means – 43% of the cases
Experiencing Financial difficulty – 36%
Unwillingness to share duties- 22.6%
Refusal to take vacations – 10.2%
Close assoc. with vendor/customer- 22.1%
Wheeler/Dealer attitude – 18.2%
Divorced/family problems – 17.4%
Median Loss
• Median Loss $160,000
• Approximately 25% had losses greater than
1 Millions dollars
Skimming Schemes
Skimming schemes include:
• Collecting cash, but not recording the sale
• Collecting cash, keeping a portion of the cash,
and underreporting the sale amount
• Collecting a customer’s payment, but not
crediting the amount to the customer’s account
• Collecting cash and holding it in a personal
interest-bearing account before depositing it into
the company account
– Cash Larceny Schemes
Cash larceny schemes include:
• Stealing cash at the point of sale or register
• Stealing cash receipts posted to sales and
receivable journals
• Stealing cash from bank deposits
Check Tampering Schemes
• Forged maker schemes involve forging an
authorized signature on a company check.
• Forged endorsement schemes consist of forging
the signature endorsement of an intended
recipient of a company check.
• Altered payee schemes involve changing the
payee designation on the check to the
perpetrator or an accomplice.
• Authorized maker schemes occur when
employees with signature authority write
fraudulent checks for their own benefit.
Payroll Schemes
• Ghost employee schemes occur when a
person not employed by the company is on
the payroll.
• Overpayment schemes occur when a company
pays an employee based on falsified hours or
rates.
• Commission schemes occur when the amount
of sales made or the rate of commission is
fraudulently inflated.
Module 2- Management/Key Employee Assessment
Yes
Is the board of directors composed of mainly officers of the
company or related individuals?
Comments:
Is there and independent audit committee?
Comments:
Has there been high turnover of managers and members of the
board of directors?
Comments:
Have an unusually high number of key employees left the
company recently?
Comments:
Is the company involved in any litigation?
Comments:
Does the company have offshore activities or bank accounts?
Comments:
Do any of the senior managers have offshore bank accounts or
business interests?
Comments:
Are any key employees experiencing financial pressures, such
as debts, gambling, medical bills, or divorce?
Comments:
No
Not
Applicable
Module 2- Management/Key Employee Assessment
Yes
Do any key employees appear to be living beyond their means?
Comments:
Do any key employees have civil judgments or bankruptcies on
record?
Comments:
Do any key employees have a criminal conviction?
Comments:
Do one or two key employees appear to dominate the
company?
Comments:
Do any key employees have friends or relatives reporting
directly to them?
Comments:
Do any of the key employees appear to have a close
association with a vendor?
Comments:
Do any key employees have outside business interests that
might conflict with their duties at the company?
Comments:
Do any key employees own a portion of any company that
does business with this company?
Comments:
No
Not
Applicable
Module 2- Management/Key Employee Assessment
Yes
Has any key employee failed to take vacation?
Comments:
Do any key employees have a significant amount of their net worth
invested in the company?
Comments:
Does the company have unusually high debts?
Comments:
Is key employee compensation primarily based on company
performance?
Comments:
Is there an incentive to use inappropriate means to minimize
earnings for tax reasons?
Comments:
Is there excessive pressure to increase the company’s stock price?
Comments:
Has the company recently experienced large operating or investment
losses?
Comments:
Does the organization have sufficient working capital?
Comments:
No
Not
Applicable
Module 2- Management/Key Employee Assessment
Yes
Does the organization have sufficient credit?
Comments:
Is the organization under pressure to report favorable earnings?
Comments:
Does the company depend heavily on only a limited number of
products or customers?
Comments:
Has the company experienced difficulty in collecting receivables?
Comments:
Has the company recently expanded rapidly into new business or
product lines?
Comments:
Has the company experienced a reduction in sales volume?
Comments:
Does the company have strong competitors that are
outperforming?
Comments:
Is the company under pressure to sell or merge with another
company?
Comments:
No
Not
Applicable
Module 2- Management/Key Employee Assessment
Yes
Does the company change auditors often?
Comments:
Does the company delay or avoid supplying auditors with the
information necessary to complete the audits?
Comments:
Does the company have problems with regulatory agencies?
Comments:
Does the company have poor accounting records?
Comments:
Does the accounting department appear to be inadequately
staffed?
Comments:
Does the organization fail to disclose questionable or unusual
accounting practices?
Comments:
Does the company have a number of large year-end or unusual
transactions?
Comments:
Does the organization lack an adequate internal audit staff?
Comments:
No
Not
Applicable
Module 2- Management/Key Employee Assessment
Yes
Does the organization lack an internal control system or does it
fail to enforce the existing internal controls?
Comments:
No
Not
Applicable
Anti-Fraud Controls
Create a perception - employee may be caught
• External audit
• Code of Conduct – tone at the top
• Management review
• Fraud training
• Job rotation/mandatory vacation
• Separation of duties
• The most trusted employee
Summary
1. Minimize control of any employee –
Key concept
2. Fraud Triangle – do not provide the
opportunity, cannot control the
employee’s need or justification
3. Board of Directors and Management
set the tone for fraud prevention
Association of Certified Fraud
Examiners
Questions
Jake Dunton, CPA, CFE
Indianapolis, IN
jdunton@duntonandco.com
317-842-6325
Thank you!