PREVENTING FRAUD BEFORE IT IS TOO LATE Presented to LeadingAge Michigan Annual Conference and Trade Show May 19, 2015

Transcription

1 Arlen S. Lasinsky Frost, Ruttenberg & Rothblatt, P.C. 847/ Phone and Fax PREVENTING FRAUD BEFORE IT IS TOO LATE Presented to LeadingAge Michigan Annual Conference and Trade Show May 19, 2015

2 Definition of Fraud Black's Law Dictionary defines fraud as "All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprise, trick, cunning, or dissembling, and any unfair way, which another is cheated." 2

3 Definition of Fraud, continued For those of us without a Black's Law Dictionary, fraud is the intentional act of deceiving another party for personal gain to the detriment of that party being deceived 3

4 Recent Statistics Report to the Nation-ACFE ,483 cases-48% U.S.-Median loss-$100,000 5% revenues Median loss-$145,000 Amount of time from start to detection-18 months Most common detection method-tips-42%, 43% & 40% Organizations with hotlines-41% less costly, detected 50% more quickly 4

5 Recent Statistics, continued Report to the Nation-ACFE-2014, continued Higher the level of authority, the greater the fraud: Owner/executives-median loss-$500,000 Managers-median loss-$130,000 Employees-median loss-$75,000 Collusion of employees increases the loss: Single perpetrator-median loss-$80,000 Two perpetrators-median loss-$200,000 Three perpetrators-median loss-$355,000 Four or more perpetrators-median loss-$500,000 5

6 Recent Statistics, continued Report to the Nation-ACFE-2014, continued 58% not recovered any loss; 14% made full recovery External audits-3% of detection; accident 7% detection Proactive data monitoring only 35%, correlation was 60% less costly and 50% shorter in duration Only 5% convicted before study and 82% never previously been punished or terminated 92% of the cases at least one common behavioral red flag was identified (more about that later) 6

7 Recent Statistics, continued Report to the Nation-ACFE-2014, continued Top four industries as victims: Banking and financial services 17.8% Government and public administration10.3% Manufacturing 8.5% Healthcare 7.3% In healthcare, top schemes: Billing 29.0% Corruption 36.3% Expense reimbursements 31.3% 7

8 Types of Fraud That Can Occur Check fraud Embezzlement Skimming Financial statement fraud Payroll fraud Bribery and corruption Kickbacks Healthcare fraud Tax fraud Procurement fraud Money laundering Healthcare fraud Credit card fraud Many more 8

9 Who Is the Most Likely to Steal Money from Your Company? Anyone at the company or outside of the company Cash is King; but there are many other assets of value 9

10 The Fraud Triangle/ The Fraud Diamond Opportunity Motivation Rationalization Capability 10

11 Opportunity Lack of internal controls No segregation of duties Ability to consummate the transaction, record it, reconcile it and maintain custody Put an employee in a position to hide their steps Excessive trust in employees 11

12 Motivation Drugs Alcohol Medical bills Gambling Ego Perceived need Extra-marital affairs Work pressures in meeting profit goals Built up debt that can t be paid up 12

13 Rationalization Company is successful because of me I deserve it No one will get hurt The company owes me Only borrowing the money Raise or bonus not acceptable 13

14 Capability Perpetrator s traits and character to actually commit fraud Right person with the right abilities Opportunity opens the doorway Motivation and rationalization leads the person to the door Person must recognize the door is open, and have the ability to walk through it 14

15 Warning Signs-What To Look For To Prevent Potential Disaster Employees who does not take vacations Employee who is the first to arrive and last to leave the office Promotions/transfers that are declined by employees Employees that tend to take their laptop home Employees who are typically against cross-training others in the responsibilities of their duties Employee lifestyle Employees who tend to be very protective of their work product 15

16 Warning Signs-What To Look For To Prevent Potential Disaster, continued A Company not operating with effective internal controls in place Is there always a need to get something completed now? Is there a fire drill mentality in the company? Prospective employees not properly screened Financial statements and underlying accounting records not prepared or maintained currently No control to adding new vendors Frequent calls from bank for verification Large variances between actual results and budget 16

17 Warning Signs-What To Look For To Prevent Potential Disaster, continued Large adjustments made by outside accountants No control over check stock Bank statements not reconciled in a timely fashion Slower than normal collections of accounts receivable Tone at the Top Behavior of contractors only wanting to work with one employee or member of management Vendors/contractors are related to employees and management 17

18 Cannot Stop Fraud, But How Does a Company Prevent It? Establish and document policies for all accounting functions Update and review the procedures with employees Conduct training Maintain segregation of duties Maintain physical security check stock signature plates / actual signatures Conduct periodic reviews Communicate internally and externally with vendors and customers 18

19 Cannot Stop Fraud, But How Does a Company Prevent It? continued... Utilize bank products Screen new employees and temporary help Know your check manufacturer Use fraud deterrent check stock Maintain separate accounts Reconcile accounts promptly Rotate employees in their functions Cross-train employees Protect computer hardware and software Review insurance in force 19

20 Cannot Stop Fraud, But How Does a Company Prevent It? continued... Pursue unusual occurrences and transactions Observe employee behavior Mandatory vacation Fraud hotline Read and understand the monthly financial statements Ask questions - if someone is objecting to your questions, be alert for other motives Be pro-active - don t wait for something to occur before you respond 20

21 Cyber Security Protection of hardware and software No personal use of computer Back-up files Proper use and security of passwords Use of tokens Security alerts Use of firewalls and security programs Monitor internet activity Scan regularly for spyware and viruses 21

22 Cyber Security, continued Dedicated computer for electronic transfers Check software settings to prevent hackers Eliminate unused software programs Update software patches promptly Use separate user accounts Controls for access to computers and system Write/regularly test continuity/recovery plan Procedures to review content/materials before publishing, broadcasted, distributed or displayed 22

23 Payee Positive Pay Fraud Deterrent Payee Positive Pay-best bank product last 35 years Company communicates to the bank If there is a difference with the details when the check is presented, the bank will call the company before honoring the check Still not 100% fool proof, but as close as possible 23

24 Protecting Paper Checks Overt Security Features Watermarks Both true and artificial that cannot be copied or scanned Warning bands Expected to draw attention to check security features and may deter criminals from experimenting Controlled Paper Stock Restricted in its distribution and use by the paper manufacturer Type font size If printed too small or too light, type fonts can be erased and replaced with a new payee name or dollar amount 24

25 Protecting Paper Checks, continued Laid lines Printed on the back of the check to deter cut-and-paste artists Sequenced inventory control number Printed on the back of un-numbered laser checks to account for all checks and to discourage employee theft of the blank stock 25

26 Protecting Paper Checks, continued Covert Security Features Chemical-sensitive paper Reacts to chemicals commonly used to wash checks Copy Void Pantograph Voids the check when copied on most machines Microprinting Print that is too small for most scanners and copiers to capture Toner anchorage Chemical coating on laser checks that bonds the print toner into the paper UV light-sensitive fibers In the paper itself that become visible under UV light 26

27 What is Tone at the Top? Ethical behavior and environment that is built in the workplace by the leadership of that workplace 27

28 The Trickle-Down Effect Managers abide and support ethics and integrity Employees tend to support the same ethics and integrity Managers only focus on the bottom line and not concerned about the ethics in the workplace Employees more prone to commit fraud Employees feel ethics is not a priority 28

29 Employees Perception Managers not setting an example for abiding by code of ethics and morals Employees perceive profitability as the most important concept It is ok to commit fraud, as long as the company is showing a profit More pressure on employees to meet goals is the end justifies the means. 29

30 Employees Perception, continued Those charged with the governance are sufficiently involved Employees buy in to those that are in charge of the company Proper competency for those in charge Consistent reinforcement of internal control objectives 30

31 Steps to Set the Right Tone Communication Lead by example Safe environment to report abuse Reward those that demonstrate high level of integrity and character 31

32 Case Study No. 1 Embezzlement Facts of the case: Employee took control of resident trust accounts Long term employee Embezzled more than $1 million Opportunity Befriended certain residents No effective internal controls, lack of supervision No segregation of duties Motivation Gambling addiction 32

33 Case Study No. 1 Embezzlement, continued Rationalization Residents had plenty of money Tough life Residents run out of cash, they will still be residents 33

34 Facts of the case: Case Study No. 2 Computer Forensics High level executive was violating securities law by communicating via his lap top computer Sanctions by the SEC Opportunity Trusted employee Lack of controls Motivation Kickbacks Greed Rationalization-Ego-high enough in the company 34

35 Case Study No. 3 False Billings and Financial Kickbacks Facts of the case: Senior executive falsifying vendor invoices No inspection of work performed Long time trusted employee Trusted employee More than $1 million State and federal prosecution Opportunity There was no supervision No controls for approval No one watched the store 35

36 Case Study # 3 False Billings and Financial Kickbacks, continued Motivation Mid-life crisis Greed Rationalization I deserve more compensation than I am receiving. The company is making large profits, they won t be hurting I m a long-time employee 36

37 Thank you Questions?