FRAUD:
Risks and Prevention
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Fraud: Risks and Prevention
• Implications of fraud
• What motivates one to commit fraud
• The importance of internal control
• Fraud indicators – what to look for
• Professional resources
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Implications of fraud
• According to the Association of Certified
Fraud Examiners (ACFE), U.S.
organizations lose an estimated 7% of
annual revenues to fraud.
• Among those, the median loss suffered
by organizations with fewer than 100
employees was $200,000 higher than any
other category.
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Implications of fraud
• The average length of occupational
fraud goes on about 18 months before
being discovered.
• Fraud is not limited by industry or size of
an organization.
Motivating Factors
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Motivating Factors
• Employee motivation:
• Personal financial matters, the
unexpected (I’m just borrowing it)
• Entitlement, getting back at the
employer
• Support lifestyle
• Challenge
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Motivating Factors
• Business weaknesses:
• Limited controls – lack of division of
responsibilities between employees
• Inadequate employee prescreeningreference checks, criminal records,
professional recommendation, drug
screening, etc.
• Too much trust – the human element.
Never having faith in your employees is a
bad thing; so is always trusting them.
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Types of Fraud from Within
• Asset misappropriation
• Cash
– Skimming: stealing money before it is
received and recorded. Usual culprits are
salespeople and accounting personnel.
– Larceny: Theft of currency after the
company has received and recorded it.
Usually a cashier or someone with easy
access to currency.
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Fraud from Within
• Asset misappropriation [cont’d]
• Cash
– Fraudulent disbursements – the most
expensive of the cash frauds.
» Employees in accounting or bookkeeping
dept.
» Employee submits a false invoice the
company unknowingly pays to the benefit of
the thief, commonly for services not rendered
to the company
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Fraud from Within
• Asset misappropriation [cont’d]
• Non-cash
– Items that are important to the employee
personally, such as electronics or jewelry.
– Laptops, handhelds, software and
calculators top the list of items likely to be
stolen.
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Fraud from Within
• Corruption
• Less common but more expensive
• Corrupt employee conspires with someone
outside the company
• Can involve accounting personnel, bank
employees, purchasing agents and buyers
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Types of External Fraud
• Check Fraud
• Forged, stolen or counterfeit checks are
common.
• Know your customers and train your
employees who accept checks to be alert
to common signs.
• Credit Card Fraud
• Four types: stolen credit cards, identity
fraud, altered cards, and counterfeit cards
• Like checks, the front line of defense is
employee education.
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Types of External Fraud
• Shoplifting
• Internet and Computer
• With limited personnel an attempt should be
made to assign separate workers to the
functions of data entry and asset control.
• Cyber security
– Passwords, virus protection, firewalls
• Computer fraud has increased with the
increase in identify theft.
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Indicators of Potential Fraud
• Rising expenses and/or declining
revenue
• Abnormally high inventory shrinkage
• Unfamiliar vendors or other payees
• Excessive spending by employees
Prevention and
Detection
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Prevention and Detection
• Internal control reviews with Segregation of
duties
• Reasonable internal controls are critical. Review the
existing systems and make improvements.
• Segregate duties to ensure no employee has
complete authority over one area – create checks
and balances
• Utilize Passwords and software module access
controls.
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Prevention and Detection
• Cash reviews and reconciliations
• Since 9 in 10 occupational frauds involve the
company's cash, regularly review receipts and
disbursements for anomalies.
• Owners should receive unopened bank statements
and review for suspicious transactions
• Secure check stock and limit access
• Perform daily register reconciliations
• Require dual signatures for large transactions
• Limit access on authority to initiate wire transactions
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Prevention and Detection
• Accounts Receivable review
• Review aging and investigate old balances
• Review for write-offs of balances
• Inventory observations and asset verifications
• For companies with inventory or other assets that
make attractive targets, observe inventory
procedures and/or verify specific items.
• Financial statement review
• Review financial reports on a monthly basis and look
for unusual amounts or trends
• Accounts Payable & Payroll review
• Ensure vendors and expenses are valid
• Review Payroll registers for employees and amounts
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Prevention and Detection
• Physical Controls
• Consider security cameras and locked areas – helps
prevent internal and external fraud.
• Security systems
• Control receiving and shipping areas
• Utilize bank controls
• Tools such as positive pay, payroll accounts or
approved vendor lists are available at most banks and
can greatly reduce check fraud
• Run background checks on potential employees
• Train employees on Risks and have documented
procedures
Seek professional assistance when have concerns
– don’t wait!
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Professional Resources
• Questions, assistance:
• Certified Public Accountant (CPA)
• Certified Fraud Examiner (CFE)
• Online general resources:
– American Institute of Certified Public Accountants
www.aicpa.org
Public pages section on fraud, forensics and valuation:
http://www.aicpa.org/ForThePublic/Pages/ForthePublic.aspx (browse by
topic)
–
Association of Certified Fraud Examiners www.acfe.org
http://www.acfe.com/documents/Fraud_Prev_Checkup_IA.pdf