Speaker: Steve Dawson 7/13/2017

Transcription

1 Speaker: Steve Dawson 7/13/2017 THE CONSTRUCTION PROCESS OF FRAUD PREVENTION: The Absolutes of the Organization s Anti-Fraud Program Presented for the 2017 TACA On the Road Area Training Presented by STEVE DAWSON, CPA, CFE DAWSON FORENSIC GROUP The Not Dead Yet Employee An accountant changed the direct deposit routing number and account number to her own bank account on six previously terminated employees. No one noticed until $250,000 and 7 months later, a former employee called asking why his W-2 reflected $50,000 more than he was paid! Anti-Fraud Program Design Why? I m a true believer that you have a moral obligation to keep your employees honest, and that is why you have controls; so I m never tempted or put in a position where I could do something to defraud my employer Frank Abagnale, Jr. 3 1

2 THE FRAUD TRIANGLE JOSEPH T. WELLS; OCCUPATIONAL FRAUD AND ABUSE; (OBSIDIAN PUBLISHING CO. 1997); PG. 11 Perceived Nonshareable Financial Need (Incentive/Pressure) Rationalization Opportunity Fraud Awareness The majority of the people that are committing fraud are the truly decent people. They have found themselves in a severe financial crisis; can rationalize that all they are doing is borrowing and will pay it back; and are in positions with weak to no internal controls Steve Dawson 5 Principles of Self-Preservation Q: What are the ramifications of following up on suspicions of fraud (investigation) and no fraud is found? A: It Depends 2

3 Principles of Self-Preservation It depends on the policies (anti-fraud program) in place, the content of those policies and, how those policies are followed in practice Principles of Self-Preservation FRAUD RULE #1 Fraud and Stupid Look Just Alike Mens Rea (the criminal state of mind) Turns Stupid Into Fraud Intent, Knowledge, Reckless Conduct 8 As Long As It s Paid in Full The accountant used the company Mastercard for personal purchases as well as for business purposes. She paid the business purpose portion of the balance with a company check and the personal portion with a personal check. Is this fraud? 3

4 As Long As It s Paid in Full The accountant used the company Mastercard for personal purchases as well as for business purposes. She paid the business purpose portion of the balance with a company check and the personal portion with a personal check for the most part she may have misclassified $30k, $40k, $50k of personal charges as business charges. As Long As It s Paid in Full Evidence: Fictitious reports to the board regarding usage White-out on the credit card statements to conceal true nature of the charges Is this fraud? 11 Principles of Self-Preservation A properly designed anti-fraud program serves to protect you in two ways Serves to reduce the probability of fraud occurring at your organization Protects you in the event of mishandled accusations or investigations 12 4

5 THE CONSTRUCTION PROCESS OF FRAUD PREVENTION: Internal Control / Anti-Fraud Program Design Considerations The Architect s Blueprint Establishing the Framework The Anti-Fraud Environment: Laying the Foundation Fraud Risk Assessment: Installing the Ground Floor Control Activities: Raising the Walls Information: Program Documentation Constructing the Ceiling Communication: The Company Fraud Training Program Constructing the Ceiling Monitoring and Routine Maintenance Putting on the Roof The Architect s Blueprint Establishing the Framework 5

6 Anti-Fraud Environment No Tolerance 16 Foundational Absolutes: Anti-Fraud Environment Fraud Policy Fraud Reporting Policy (Anonymous Reporting Mechanism) Expense Reimbursement Policy Foundational Absolutes: Anti-Fraud Environment Organizational Chart Formal Written Employee Job Descriptions Required Annual Employee Evaluations Payroll Advance / Financial Counseling Programs Employee Dishonesty Insurance / Fidelity Bond 6

7 FRAUD RISK ASSESSMENT Laying the Ground Floor Smash n Grab X 2 A financial institution had two vault cash locations in the same building, with different vault custodians (referred to as Custodian A and Custodian B). Custodian A left one evening with $400,000 in her backpack. During the investigation regarding the missing $400,000, Custodian B came in and confessed to the cash theft of $850,000. She had no idea the investigation didn t involve her theft that had occurred six months prior. Avoid the Mail The accountant for a CPA firm stole $3.6 million dollars over a 3 year period by paying her personal credit cards directly from the firm s bank account through normal online payments - EFTs. 7

8 FRAUD RISK ASSESSMENT Laying the Ground Floor Goal: To Identify the Areas Vulnerable to the Risk of Fraud in Our Organization The Objective is not to prevent fraud the Objective is to determine what frauds need to be prevented. Control activities have the objective of preventing fraud. FRAUD RISK ASSESSMENT Laying the Ground Floor Designate the Fraud Risk Assessment Team Determine How Information Will Be Gathered Identify Areas of Fraud Risk Communicate the Identified Risks to the Control Activities Development Team CONTROL ACTIVITIES Raising the Walls 8

9 Foundational Absolutes: The Development of Control Activities Guiding Principles of Control Activities Design Design the internal control around the POSITION, never around the PERSON in that position The perception of detection is the strongest internal control that can be implemented Foundational Absolutes: Control Activities Pre-employment Background and Reference Checks Required Annual Completion of the Conflict of Interest Form Required Use of Vacation Time Required Supporting Documentation and Approval for Non-standard Journal Entries Physical Inventory Count Foundational Absolutes: Control Activities Proper Approval of Inventory Write-offs Proper Approval of Accounts Receivable / Debit Balance Accounts Payable Write-offs Proper Approval for Billing Adjustments or Other Nonpayment Credits to Accounts Receivable New Vendor Establishment Procedures Separate Cash Drawer for Each Cashier Proper Check Signing Procedures 9

10 My Other Company(ies) Will Appreciate It So Much A CEO/Board Member created his own shell company, and another shell company owned by his wife. He paid his wife s shell company for services not performed (bogus costs) He then began directly competing against his employer company with his shell company, eventually putting his employer out of business. Total Loss: $6.8 million dollars My Other Company(ies) Will Appreciate It So Much A CEO subsidized costs belonging to her other companies by directly charging a majority of their expenses to her employer s company. Through the simple creation of invoices for bogus services, the funds were disbursed. No one knew she was the owner of all of these other companies. My Other Company(ies) Will Appreciate It So Much A CEO, a City Employee, a County Employee, a Company Purchasing Agent, an Accounts Payable Clerk subsidized costs belonging to their other companies by directly charging a majority of their expenses to their employer s company. Through the simple creation of invoices for bogus services, the funds were disbursed. No one knew they were the owners of all of these other companies. 10

11 A Common Scheme The Shell Company Fraud Causing your employer to make disbursements to a company that you own, without your employer s knowledge that you own that company for either legitimate costs or for bogus costs. The Two Major Defenses 1) CONFLICT OF INTEREST FORM 2) NEW VENDOR ESTABLISHMENT PROCESS Along with compliance audit procedures!!! 11

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14 Information: Program Documentation Installing the Ceiling Information: Program Documentation Telephone Party Game! 14

15 Information: Program Documentation The Elements of High-Quality Documentation Keep it simple Narrative in Design Schedules Referenced Information: Program Documentation 15

16 Information: Company Fraud Training Program Installing the Ceiling Foundational Absolutes: Information: Company Fraud Training Program Requirement # Only Perform Continuous Fraud Awareness Training 16

17 Communication: The Company Fraud Training Program Are you aware of any fraud that is occurring in your organization? The Most Common Answers No, we don t even have a website No, our cyber-security is second to none Our company doesn t allow pets Huh, what? Communication: The Company Fraud Training Program Annual Must Have Training! Review and Re-acknowledgment of the Fraud Policy Review and Re-acknowledgment of the Fraud Reporting Policy Re-completion of the Conflict of Interest Form Communication: The Company Fraud Training Program Periodic Training Fraud Definition Fraud Types Fraud Trends Fraud Costs Industry-specific Fraud Issues Fraud Indicators for the Company Fraud Reporting Policy Suggestions for Improvement in the Anti-fraud Program 17

18 Monitoring and Routine Maintenance Foundational Absolutes: Monitoring and Routine Maintenance The 3 Questions of Monitoring How are things working out? Are processes and controls working as intended? Are there processes or activities that we need to refine, add, or delete? Foundational Absolutes: Monitoring and Routine Maintenance Compliance Auditing Compliance Audits: The Absolutes Authorized check signer approval process Accounts, notes, loans receivable charge-off process Inventory write-off process Journal entry approval and documentation process Master vendor file audit Contract procurement audit 18

19 What if? Preserving the Scene of the Crime Consider the crime scene burglary for example: You arrive home to find that a burglary has occurred. You call family to come be with you and you call the police. Family arrives first and says this place is a mess. Let s clean up so the police will have a clean place to do their investigation. What s wrong with this picture? What if? Preserving the Scene of the Crime If it is determined that an investigation will be necessary, consider the following: Leave the suspect s office exactly as is; don t clean it Sticky notes are an investigator s gold mine Flash drives are a valuable resource Personal bank statements, investment statements, credit card statements are often still in the office Cell phones, cameras are often still in the office What if? Preserving the Scene of the Crime If it is determined that an investigation will be necessary, consider the following: If the computer is off, don t turn it on If the computer is on, don t turn it off If the computer is a desktop, it s on but you NEED to move it; unplug it If the computer is a laptop, it s on but you NEED to move it; remove the battery 19

20 The Completed Anti-Fraud Program The Completed Anti-Fraud Program The information presented today and my full recommendations regarding complete anti-fraud program design can be found in my most recent work published by John Wiley & Sons (New York/New Jersey) THE CONSTRUCTION PROCESS OF FRAUD PREVENTION: The Absolutes of the Company Anti-Fraud Program STEVE DAWSON, CPA, CFE Dawson Forensic Analytics, P.L.L.C. d/b/a DAWSON FORENSIC GROUP P.O. Box Lubbock, Texas