Stats, Facts & Stories: What’s Your Fraud IQ?

Agenda

1. What is Fraud and Abuse?

2. Measuring the Cost of Fraud

3. How is Occupational Fraud Committed?

4. Detection of Fraud Schemes

5. Perpetrators

6. What’s Your Fraud IQ?

1. What is Fraud & Abuse?

The term ‘occupational fraud’ may be defined as:

“The use of one’s occupation for personal enrichment through

the deliberate misuse or misapplication of the employing

organization’s resources or assets.”

a. Perception, Prevention and Protection

b. Opportunity, Incentive and Rationalization

c. Intention, Significance and Materiality

d. Raleigh, Durham and Chapel Hill

Question 1

Which of the following represent the

elements of the Fraud Triangle:

The Fraud Triangle

2. Measuring the Cost of Occupational Fraud

Fraud, by its very nature, does

not lend itself to being

scientifically observed or

measured in an accurate

manner.

One of the primary

characteristics of fraud is that

it is clandestine, or hidden;

almost all fraud also involves

the attempted concealment of

the crime.

a. 1%

b. 3%

c. 5%

d. 7%

Question 2

When fraud occurs, the typical organization

loses what percentage of its annual revenue

due to fraud?

Measuring the Cost of Occupational Fraud

a. Government

b. Retail

c. Banking/Financial Services

d. Real Estate

Question 3

What industry has the highest frequent for

fraud?

Measuring the Frequency

of Fraud

Previous ACFE research has

identified three primary

categories of occupational fraud:

1. Asset misappropriation

2. Corruption schemes

3. Financial statement fraud

3. How Occupational

Fraud is Committed

Question 4

In the United States, what is the most

common fraud scheme?

a. Check Tampering

b. Skimming

c. Payroll

d. Billing

Fraud Techniques

a. Bribes and kickbacks

b. Economic extortion

c. Undisclosed conflicts of interest

d. Accepting illegal gratuities

Question 5

On average, the most expensive corruption

scheme committed by employees of an

organization is:

Bribery/Kickback Red Flags Rising expenses for goods and services.

Slow deliveries from or substandard performance by a vendor.

Rapidly increasing purchases from one vendor.

Excessive purchases of goods or services.

No divisions of duties between new vendor approval and

authorization for purchasing.

Contracts written to limit competition (for example, sole-

source contracts).

The same vendor always wins contracts by small margins.

The contract always goes to the bid received last.

Splitting one purchase into multiples to avoid the approval

process.

Paying above-market prices for goods or services.

How Occupational Fraud is Committed: Asset Misappropriation

Sally’s Skimming Scam Story

See Sally Steal

Sally was the court administrator for the municipal court of a

small city – responsible for collecting fines imposed by the

court.

She maintained the court’s accounts receivable records from

customers and collection agencies.

6 ½ year scheme (she started on her 25th day of

employment).

Recorded non-cash JE’s to A/R to reduce fines and account

for stolen checks (community service, court actions, etc).

Amount stolen = $290,227 (10% of the courts revenue).

BUT WAIT, THERE’S MORE…

Sally’s Second Scheme

Sends Her Screaming To the Slammer

She began a second scheme – cash payment from night

court fines ($5,100 from 49 fines).

Didn’t enter the fine or the collection of the payment

This is how she was caught:

Temporary employee noticed several missing $100 bills in the

deposit the next day.

Initially she admitted only this fraud, but after further questioning

the bigger fraud was discovered.

What went wrong…

No segregation of duties.

No independent monitoring of the “non-cash credit” reports

(which would have been very inconsistent with levels of revenue

earned).

The Legend of King Klein

Finance Director

Sumter 17 School Board

Sumter, South Carolina

Over two decades he stole

and/or diverted at least $3.5

million dollars.

A King’s Ransom

Klein took money in a variety

of ways:

Stole from school activity funds.

Stole from capital projects funds.

Created over 15 fake companies

and invoices.

Paid deposits on school field

trips, then cancelled the trips.

The King’s Court

Days after being suspended, he took

$45,100 of the stolen money and

bought 28 months of credit in the SC

retirement system, thereby reaching

30 years of full benefits…which pays

$3,800 each month for the rest of his

life.

Served 5 years in prison and 5 years

on probation paying restitution of

$3,000 per month.

Now living back in Sumter, SC.

The Story of Turner’s Ghost Employees

Just the Facts

Turner was a payroll specialist for a large Florida Not-For-

Profit (he was also experiencing health problems)

Over 2 years he stole $112,000 to cover his medical costs

Segregation of Duties existed = posting of time and

attendance (Turner’s job) was separate from adding / deleting

employee master records. Furthermore, a supervisor

reviewed all payroll distributions

Turner stole user ID and password from other employee to

create ghost employees, prepared fake payroll summary for

supervisor approval, paychecks direct deposited into his

account.

White as a Ghost

Created phony file copies of payroll checks (on white paper).

Legitimate checks were on yellow paper.

Annual audit transaction testing – staff accountant noticed the

white paper and started asking questions

Red Flags:

Infrequent change in passwords by payroll system administrator

SS#’s were for dead people

Employee #’s were much higher than legitimate employees

None of fake employees had personnel file

Net payroll expense was lower than funds actually issued

because it did not include ghost employees

Payroll Summaries created were in different type face

Multiple direct deposits to the same bank account

Detection and Prevention

Look for paychecks w/o deductions

Check payroll for presence of duplicate names,

addresses and Social Security Numbers

Occasionally hand-deliver paychecks to employees and

require positive identification. If you have leftover

paychecks, make sure they belong to actual employees,

not ghosts

Be wary of budget variations

a. 6 months

b. 12 months

c. 18 months

d. 24 months

Question 6

How long does the average fraud go on until

it is caught by the victim organization?

©2012 by the Association

of Certified Frau

Examiners, Inc.

Median Duration by

Scheme

a. Tips and complaints

b. Accidental discoveries

c. Analytical techniques

d. Confessions

Question 7

The #1 method by which fraud is discovered

in an organization is:

©2012 by the Association of Certified Fraud Examiners, Inc.

4. Detection of Fraud

Schemes

Tips have been far and

away the most common

means of detection in

every study since 2002,

when we began

tracking the data.

Initial Detection Methods

% of Tips by Source

Hotline Tips

STEP 1: Plan the Hotline Program

Give employees, vendors, and other sources options for

coming forward

Consider providing an external hotline service

Have a skilled interviewer around the clock

Choose one department to “own” the hotline

STEP 2: Promote Awareness (posters, classes, etc.)

STEP 3: Develop a Follow-Up Process

Enable callers to call back

Investigate allegations discreetly

Document the process

Reporting & Retaliation

Ethics Resource Center 2013

Making the Whistle Louder

Ethics Resource Center 2013

a. Implement harsh penalties for perpetrators

b. Outsource all possible functions

c. Conduct covert audits

d. Increase the perception of detection

Question 8

In general, the best way to prevent fraud

is to:

Control Impact on Median Loss

Control Impact on Duration

5. The Perpetrators

The Impact of Position

The Impact of Position

Tone at the Top is Bottoming Out

Ethics Resource Center 2013

Lone Wolves or Wolf Pack?

Ethics Resource Center 2013

a. Accounting

b. Executive/Upper Management

c. Operations

d. Sales

Question 9

Which department commits the most

fraud?

Frequency by Department

What’s Happening by Dept?

What are the Executives Up To?

Perpetrators by Gender

Perpetrators by Gender

Perpetrators by Gender

By Level

Perpetrators by Age

Perpetrators by Age

a. Poor internal controls

b. Greed

c. Dissatisfaction with employer

d. Personal financial problems

Question 10

The main reason employees commit

occupational fraud is:

Perpetrator Red Flags

The most common red flags displayed by

perpetrators were living beyond financial means

(36% of cases) and experiencing financial

difficulties (27%).

Given that financial difficulties are often

associated with fraudulent behavior, it would

seem advisable for organizations to devote more

efforts to conducting credit background checks

on new applicants.

Perpetrator Red Flags

Stats, Facts & Stories: What’s Your Fraud IQ?

Rob Churchman

Rchurchman@cbh.com