FRAUD: Risks and Prevention

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.

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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 prescreening-

reference 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

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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

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