Shannon Haas, Senior Manager
FRAUD
DETECTION
AND
PREVENTION
The material appearing in this presentation is for informational purposes
only and should not be construed as advice of any kind, including, without
limitation, legal, accounting, or investment advice. This information is not
intended to create, and receipt does not constitute, a legal relationship,
including, but not limited to, an accountant-client relationship. Although
this information may have been prepared by professionals, it should not be
used as a substitute for professional services. If legal, accounting,
investment, or other professional advice is required, the services of a
professional should be sought.
Sign of the Times…
Loyal employees have bills to pay and families to feed. In a
good economy, they would never think of committing fraud
against their employers. But especially now, organizations
must be vigilant during these turbulent times by ensuring
proper fraud prevention procedures are in place.
ACFE President James D. Ratley, CFE
Economic Recession
• Employees pose the greatest fraud threat in the current
economy
• Layoffs are affecting organizations’ internal controls
• Fraud levels are expected to continue rising
Employee Fraud
In How to Embezzle a Fortune, Bev Harris says that fraudsters
and embezzlers are the nicest people in the world:
• Wide-eyed mothers of preschoolers
• People who profess deep religious commitments
• CPAs with impeccable resumes
• Loyal business managers who arrive early, stay late,
and never take vacation
• Your best friend
• Your partner
• Family members
Fraud Risk
• Fraud Triangle:
Incentive/Pressure
Opportunity
Rationalization
Association of Certified Fraud Examiners
• The Association of Certified Fraud Examiners (ACFE)
completes a report every two years summarizing the key
characteristics of fraud.
• The most recent report is from 2012.
• 1,388 cases worldwide.
• The following are excerpts from that summary.
3 Major Types of Fraud
• Asset misappropriations.
• Corruption - bribery, extortion and a conflict of interest.
• Financial statement fraud.
Most Common Fraud – United States
Source: ACFE 2012 Report to the Nation
Magnitude of Losses – United States
Source: ACFE 2012 Report to the Nation
Misappropriation Methods
• Billing (fake vendors)
• Skimming (cash is taken before recorded)
• Expense reimbursements (inflated)
• Check tampering
• Cash on hand
• Others
Source: ACFE 2012 Report to the Nation
Misappropriation Ranking
Source: ACFE 2012 Report to the Nation
Fraud Schemes – Financial Services
Source: ACFE 2012 Report to the Nation
Duration
Source: ACFE 2012 Report to the Nation
Fraud Detection
Initial Detection of Occupational Frauds- U.S
Source: ACFE 2012 Report to the Nation
Source of Tips
Source: ACFE 2012 Report to the Nation
Impact of Hotlines
Source: ACFE 2012 Report to the Nation
Presence of Anti-Fraud Controls
Source: ACFE 2012 Report to the Nation
Median Loss Based on Presence of Anti-Fraud
Controls
Source: ACFE 2012 Report to the Nation
Duration and Anti-Fraud Controls
Source: ACFE 2012 Report to the Nation
Primary Internal Control Weakness Observed
by CFEs
Source: ACFE 2012 Report to the Nation
Position of Perpetrator - Frequency
Source: ACFE 2012 Report to the Nation
Position of Perpetrator - Median LossUnited States
Source: ACFE 2012 Report to the Nation
Position of Perpetrator - Duration
Source: ACFE 2012 Report to the Nation
Age of Perpetrator - Frequency
Source: ACFE 2012 Report to the Nation
Age of Perpetrator – Median Loss
Source: ACFE 2012 Report to the Nation
RED FLAGS
Source: ACFE 2012 Report to the Nation
ACFE – Executive Summary
• Asset misappropriation – 87% of all frauds.
• More than 1/5 of frauds in study caused at least $1
million in losses.
• Average life of a fraud = 18 months.
• Tips continue to be the primary detection source.
Source: ACFE 2012 Report to the Nation
ACFE – Executive Summary
• Smaller organizations most susceptible due to lack of
controls.
• Banking industry once again at the top of the list.
• Anti-fraud controls helped to lower overall loss and
duration. Even as simple as employee education on
fraud and tolerance.
• Frauds by executives cause the most damage.
Source: ACFE 2012 Report to the Nation
ACFE – Executive Summary
• Organizations tend to over-rely on external audits as
the fraud-prevention tool.
• Surprise audits were underutilized. Less than 30% of
victims actually performed these. These are key
“perception” tools to rid of the “opportunity”.
Source: ACFE 2012 Report to the Nation
External Auditor’s Consideration of Fraud
• Discussion among engagement personnel regarding the
risk of material misstatement due to fraud in the planning
stages of the audit
• Obtain information needed to identify risk of material
misstatement due to fraud by:
 Inquiring of management and staff about fraud and
fraud risk
 Analytical procedures
 Considering fraud risk factors
 Other input/observations
External Auditor’s Consideration of Fraud
• Perform additional audit tests to detect fraud and perform
tests to bring an element of unpredictability
 Review of employee loan and deposit accounts
 Review of bonus arrangements
 Review approval of large loans
 Review low interest rate loans
 Review of travel expenses
 Review of variable rate loans
 Review of journal entries
 Review and testing of expenses
Fraud Risk Factors
• Lack of detailed formal written policies and procedures
• Lack of segregation of duties
• Member complaints
• Unreconciled accounts and review of reconcilements
• Recurring audit findings
• Missing financial records
Fraud Risk Factors
• Untimely preparation of financial statements
• Lack of employee vacations
• Lack of significant control over transaction cycles (LOANS)
• Lack of management oversight
• Excessive employee addictions, gambling, or drug addiction
• Incorrect, incomplete, or erroneous financial reporting
• Lack of internal control reports from data processing system
Fraud Risk Factors
• Bonus or incentive plans
• Complex transactions
• Rapid growth
• Corporate credit cards
• Employee financial problems
• Inactive Supervisory Committee
• Lack of audit/verification
• Lack of employee training
• High employee turnover
Supervisory Committee Fraud Tips
• Evaluate management’s assessment of fraud and
mitigating controls
• Evaluate the internal auditor’s testing of the effectiveness
of each fraud control
• Evaluate how management has “set the tone from the top”
to promote ethical behavior
• Communicate zero tolerance
• Evaluate the tests of detection of fraud used by your
external auditors
Supervisory Committee Fraud Tips
• Ensure the internal audit function reports directly and
candidly to you
• Ensure that internal auditors continually conduct tests to
detect fraud
• Follow up on prior audit findings from the internal auditor,
external auditor, and regulators
• Evaluate the nature and cause of finding
• Annual fraud policy signed by all employees
Basic Internal Control Safeguards
• Tone at the top - diligence
• Segregation of duties
• Whistleblower policy
• Rotation of personnel
• Mandatory vacations
• Reconciliation and review process
• Setting of accounting system privileges
• Access levels – review and adjust
Questions
Shannon Haas
Moss Adams LLP
415-677-8314
shannon.haas@mossadams.com