2010 nsac conference fraud in the workplace conrad davis, cpa/cff, cfe annette stalker,...
TRANSCRIPT
2010 NSAC Conference
Fraud in the Workplace
Conrad Davis, CPA/CFF, CFE
Annette Stalker, CPA/CFF/CITP, CFE
Outline Fraud Statistics Test Your Fraud Awareness Level Major Fraud Categories and Schemes A View from the Field
Non-cash larceny Small business embezzlement Financial statement fraud
Participant Knowledge Check Has anyone uncovered fraud in the course of
their normal work function? Do you have a fraud tip-line? How many private industry participants have
an internal audit team? What analytical tools do you use to watch for
fraud?
Fraud Statistics 2008 Report to the Nation on Occupational
Fraud & Abuse Published by the ACFE every two years Based on case studies submitted by CFEs
who investigated the matters
Significance? What percent of annual revenues are lost due
to fraud? Seven percent $994 billion in fraud losses (applied to GDP)
Most common means of detection? Tips (46%), most common since 2002 Accident (20%)
Significance? Results for the Agriculture, Forestry, Fishing
& Hunting industry group: Lowest number of fraud occurrences at 13 (1.4%) Second highest median loss of $450,000 (first
was Telecommunications industry)
Three Major Fraud Categories
$$
Asset Misappropriation
Financial Statement Fraud Corruption
Asset Misappropriation Accounts for 88% of frequency
(was 91% in 2006) Median loss is $150,000 (same in 2006) Major Types
Skimming Larceny Fraudulent Disbursements
$$
Asset Misappropriation
Fraudulent Statements Accounts for 10% of frequency
(same in ‘06) Median loss is $2,000,000 (same in ‘06) Major Types
Financial: over- and under- statements of assets and revenues, concealed liabilities, improper disclosures, improper asset valuations
Non-Financial: employment credentials, internal documents, external documents
Financial Statement Fraud
Corruption Accounts for 27% of frequency
(was 30% in 2006) Median loss is $375,000 (was $538,000 in
2006) Major Types
Bribery (invoice kickbacks, bid rigging) Conflicts of Interest (purchase / sales schemes) Illegal Gratuities
Corruption
Fraud Awareness Quiz
Some material derived from “What’s Your Fraud IQ?” by Andi McNeal, published in Journal ofAccountancy, May 2010.
Copyright American Institute of Certified Public Accountants. Used with permission.
Test Yourself1. What is the purpose of performing a Benford’s Law
analysis?2. How would you pursue suspicions regarding a
purchasing agent and kickbacks?3. Name two signs of deceptive behavior in an
interview situation.4. What is the most common behavioral red flag
exhibited by fraudsters?5. How can you monitor billing functions for possible
embezzlement activity?
1. Benford’s Law Analysis Also known as the “first-digit law” In a population of multidigit financial numbers, the
first digit will be distributed in a predictable way In 30% of the cases, the first digit will be a 1 In 4.6% of the cases, the first digit will be a 9
Many fraudsters fail to take this non-intuitive pattern into consideration
Many analytic software tools available to perform Benford’s Law Analysis
2. Kickbacks Determine potential conflicts among employees (who have
authority or a role in disbursements) and vendors Public records search can provide information on identity of
“vendors” Business filings with the Secretary of State provide ownership
names Available Corporation and LLC information typically include:
Company Directors and Executives Principle business address Date of incorporation Business ID numbers
3. Interview Deception Repeating the interviewer’s questions (buying time to think
of a response) Beginning responses with “honestly” or “to tell the truth”
(can be a liar’s way of attempting to add credibility) Respond with a question such as “Why would I…” (deflect
the question without providing a directly dishonest answer) Several other non-verbal responses may be more subtle but
indicate stress and discomfort (crossing arms, no eye contact, perspiration, change in posture/behavior after ‘friendly’ questions)
4. Behavioral Red Flag Living beyond his or her means
Exibited in 38.6% of cases cited in the ACFE’s 2008 Report to the Nation
Other Red Flags Include: Divorce or family problems (17.1%) Unwillingness to share duties (18.7%) Unusually close relationship with a vendor or
customer (15.2%)
5. Billing Function Analysis Billing is a common target for employee embezzlement Tools to help detect schemes include:
Queries that identify vendors with no listed contact person (indicative of accounts set up solely to submit fraudulent invoices)
Vendor usage on extremely high end (may signal conflict or kickback scheme)
Vendor usage on extremely low end (may signal fraudster testing waters)
Compare vendor and employee contact information (similar address, phone number, tax ID numbers)
Search for duplicate or consecutive invoice numbers from same vendor
Stratify invoice amounts to identify those just below approval thresholds
A View from the Field Example #1 – Non-cash Larceny Fraud Example #2 – Cash Larceny Fraud Example #3 - Financial Statement Fraud Others (as time permits)
1 – Non-cash Larceny Fraud Scenario
Service industry Manager and key employees
Initial predication Decline in profitability
Work performed Analysis of materials used against costs of
service
1 – Non-cash Larceny Fraud Resolution
Weird Claimed oral contract Settled for sale of business on discounted basis
2 – Cash Larceny Fraud Scenario
All cash and accounting authority resident with one long term “trusted” employee
No effective management oversight Initial predication
Vendor inquiry regarding aged and unpaid invoice
2 – Cash Larceny Fraud Work performed
Discovery that bank reconciliations had not been properly performed
Sub-ledgers were not reconciled with General Ledger
Bank deposits were shorted by currency portion Resolution
Pending criminal prosecution (matter turned over to district attorneys office)
3 – Financial Statement Fraud Scenario
Pressure: company losing money, collateral-based loan facility
Auditor not provided with lender examinations Initial predication
Bank collateral review yielded unsatisfactory results
3 – Financial Statement Fraud Results
Review of actual company assets revealed the misrepresentations
Bank called LOC Company no longer had sufficient cash to be a
going concern Management is terminated and charged with
fraud
3 – Financial Statement Fraud Resolution
Company filed for bankruptcy protection Receiver appointed by the courts Calculation of damages is not just the “lost”
assets but the cost of insolvency of the company What happened to the auditors?
Other Case Examples Property Diversion Ponzi Schemes Small Company Embezzlements External Auditor and Internal Investigations
Questions?
Conrad Davis [email protected]
Annette Stalker [email protected]
ACFE Fraud Tools:
http://www.acfe.com/resources/fraud-tools.asp
AICPA JoA Fraud IQ Article: http://journalofaccountancy.com/Issues/2010/May/20102566.htm