What is Fraud?
MRWA 35th Annual Conference
December 9, 2015
Nick Henry, CPA
Horton, McFarland & Veysey, LLC
PO Box 543
Ellsworth, ME 04605
207-667-5529
nick@hmvcpas.com
Presentation Outline
 Fraud Definition
 Abuse
 Fraud Triangle
 Types and Examples of Fraud
 Fraud in Maine
 ACFE Report
Presentation Outline - Continued
 Preventing Fraud
 Comprehensive Control System
 Internal Controls – General
 Internal Controls – Specific
 Trustee Involvement
 Audit Process
Fraud Definition
 The act of obtaining something of value through willful
misrepresentation.
 Abuse = Behavior that is deficient or improper when
compared with behavior that a prudent person would
consider reasonable.
Abuse - Examples
 Indian Tribe Casino
 Creating Unneeded Overtime
 Requesting Staff Perform Personal Errands
 Extravagant or Expensive Travel Choices
 Extravagant or Expensive Vendor Selections
 Superintendent / Board Chair Weekly Lunches
Fraud Triangle
 Factors that Cause Someone to Commit Fraud
Types and Examples of Fraud
 Larceny / Embezzlement
 Stealing money after it has been recorded on the books.
 Skimming
 Stealing money before it has been recorded on the books.
 Shell Companies
 Checks issued to a fake company with a valid sounding name.
 Personal Purchases
Types and Examples of Fraud
 Payroll Schemes:
 Issuing Fake Paychecks / Bonuses
 Inflated or Unauthorized Pay Increases
 Inflated Hours Worked
 Not Contributing To Health Insurance
 Employee Reimbursements
 Check Tampering:
 Preparing Check for Own Benefit
 Intercepting Check for Third-Party
Types and Examples of Fraud
 Inventory & Equipment Theft
 Credit Card Personal Purchases
 Gas Card Personal Purchases
 Fraudulent Financial Statements
 Asset & Revenue Overstatements
 Fictitious Revenues
 Fraudulent Nonfinancial Statements
Fraud in Maine
 Veterans of Foreign Wars Post 8835 & Ladies Auxiliary
 Winslow
$9,000
 Travel Soccer Club
 Winslow
$15,000
 High School Wrestling Booster Club
 Winslow
$10,000
 United Mid-Coast Charities
 Camden
$4,600,000
Fraud in Maine
 Passamaquoddy Tribe
 Pleasant Point
$25,000
 Brooklin Boat Yard
 Brooklin
$700,000
 Winthrop United Methodist Church
 Winthrop
$10,000
 Maine Tourism Association
 Hallowell
$116,000
ACFE Report
 Association of Certified Fraud Examiners
 2014 Global Fraud Study
 Summary of Findings:
 Typical organization losses 5% of revenue per year to fraud
 Median detection time = 18 months
 Men & women; all ages; managers & employees
 Majority of fraudsters are first-time offenders
 External audits are not an effective control
Fraud Detection
 Tip
42%
 Management Review
16%
 Internal Audit
14%
 By Accident
7%
 Account Reconciliation
7%
 Document Examination
4%
 External Audit
3%
 Surveillance / Monitoring
2%
 Notified by Law Enforcement
2%
 IT Controls
1%
 Confession
1%
 Other
1%
Behavioral Red Flags
 Living Beyond Means
44%
 Financial Difficulties
33%
 Unusually Close Association with Vendor / Customer
22%
 Control Issues, Unwillingness to Share Duties
21%
 “Wheeler-Dealer” Attitude
18%
 Divorce / Family Problems
17%
 Irritability, Suspiciousness or Defensiveness
15%
 Addiction Problems
12%
 Complained About Inadequate Pay
9%
 Past Employment-Related Problems
9%
 Refusal to Take Vacations
9%
Control Weaknesses
 Primary Internal Control Weaknesses Observed By CFEs
 Lack of Internal Controls
32%
 Lack of Management Review
20%
 Override of Existing Controls
19%
 Poor Tone at the Top
8%
 Lack of Competent Personnel in Oversight Roles
7%
 Other
5%
 Lack of Independent Checks
4%
 Lack of Employee Fraud Education
3%
 Lack of Clear Line of Authority
1%
 Lack of Reporting Mechanism
1%
Preventing Fraud
 Ethics Policy
 Policy Communication & Training
 Hotline
 Whistle-Blower Protection
 Employee Screening
 Risk Assessment – “what could go wrong?”
 Implement Controls
Comprehensive Control System
 Financial Controls
 Management Oversight & Behavior
 Nonfinancial Systems
Internal Controls - General
 Authorize
 Reconcile
 Segregate Duties
 Safeguard
 Support Documentation
Internal Controls - Specific
 Mail Opening – Not The Bookkeeper
 Receipts Listing When Mail Is Opened
 Invoices Approved Before Payment
 Dual Signatures on Checks
 Bank Transfer Approval
 Capital Asset Purchase Approval
 Opening Bank Statement
 Bank Reconciliations
 Bank Statement & Reconciliation Review
Internal Controls - Specific
 Time Card Review & Approval
 Benefit Time Tracking & Approval Forms
 Employee Handbook / Personnel Policies
 Pay Rate Change Approval
 Accounts Receivable Adjustment Approval
 Accounts Receivable Reconciliations
 Establish Policies & Procedures
 Follow Policies & Procedures
 Accounting Manual
Internal Controls - Specific
 Lock Up Assets
 Use Passwords
 Bonding Employees
 Contract Approval
 Year End Review Procedures
 Budget
 Inventory Usage Sheets
 Credit Cards
 Detailed Meeting Minutes
 Review & Approve Financial Statements
Trustee Involvement
 Regular Meetings
 Review of Financial Reports
 Approve Warrants
 Sign Checks
 Approve Budget
 Review Bank Statements
 Approve Pay Increases
 Approve Accounts Receivable Adjustments
Audit Process
 Assess Internal Controls & Fraud Risk
 Internal Control Testing
 Balance Sheet Testing
 Income Statement Testing
 Other Procedures & Testing
 Draft Financial Statements & Notes
THANK YOU
GOD BLESS
QUESTIONS?