10/6/2018. Frank Gorrell, MSA, CPA, CGMA. Payroll fraud happens! No organization is immune! We ll checks the stats We ll review controls

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1 Frank Gorrell, MSA, CPA, CGMA Payroll fraud happens! No organization is immune! We ll checks the stats We ll review controls 1

2 Association of Certified Fraud Examiners (ACFE) Report to the Nations 2018 Global Study on Occupational Fraud and Abuse Why we may miss what is right in front of us Studied 2,690 real cases of occupational fraud 125 countries 23 industry categories Bad news not even close to ALL cases Actual cost of fraud in incalculable Good news median duration of fraud schemes before detection dropped to 16 months (from 18 months in earlier reports) 2

3 Bad news payroll schemes lasted 30 months before detection (that s UP from 24 months in recent reports) Payroll schemes reported: Ghost employee Falsified wages (see also Timesheet!) Commission schemes These schemes fall under the Asset Misappropriation umbrella, and is a subset of Cash / Fraudulent Disbursements Top 8 Concealment Methods Created fraudulent journal entry (27%) Created fraudulent electronic documents or files (29%) Destroy physical documents (30%) Altered electronic documents or files (31%) Altered transactions in the accounting system (34%) Created fraudulent transactions in the accounting system (42%) Altered physical documents (48%) Created fraudulent physical documents (55%) Only 3% of the cases had no attempt to conceal! 3

4 The top method is a TIP; the study showed that 53% of the tips came from employees Customers tips in 21% of cases; and 14% anonymous Active detection methods stopped a scheme in five to 18 months, costing between $39,000 and $130,000 IT Controls Surveillance / monitoring Account reconciliation Internal audit Management review / document examination Code of conduct (80%) External audit (80%) Internal audit (73%) Management certifies financials (72%) External audit of internal controls (67%) Management review (66%) Hotline (63%) Independent audit committee (61%) Employee support program (54%) Anti fraud policy (54%) Fraud training employees (53%) Fraud training managers (52%) Fraud department (41%) 4

5 Formal fraud risk assessments (41%) Surprise audits (37%) Proactive data monitoring (37%) Job rotation / mandatory vacation (19%) Rewards for whistleblowers (12%) Internal control weakness! Lack of controls (30%) Control override (19%) Lack of management review (18%) Poor tone at the top (10%) Lack of competent personnel in oversight roles (8%) And others such as no independent audits, fraud education, clear lines of authority, or even a reporting mechanism 5

6 Five Assertions management makes relative to the financial statement Existence (or Occurrence) Completeness Valuation (or Allocation) Rights and Obligations Presentation and Disclosure Why is control performed Who performs control What is performed When is it performed How is it performed and documented Outcome when completed 6

7 IT controls, such as system access Accounting system Timekeeping system Human resources system Do you ever run a comparison of what is in the accounting system to what is in the HR system? Duplicate names, addresses, Social Security numbers, address is a PO box Person paid with no deductions other than taxes Given the statistics we ve seen, and that Forbes magazine reported a couple of years ago that smaller organizations with less than 100 employees are more likely to have payroll fraud committed than larger companies, how can we stem the flow? What causes this problem? Please share how long it takes you to do your job each week: 7

8 Time constraints Only so many hours to get the job done, so I am an expeditor rather than a reviewer and approver I am focused on the TASK; let s discuss Harvard University study from 1999 so long ago, most have forgotten it, and younger folks may never have heard of it! The Invisible Gorilla, also called The Selective Attention Test Authors are Christopher Chabris and Daniel Simons, both Harvard psychology students who met in 1997 and after their PhD taught at Harvard for a time 8

9 Subjects were asked to watch a video of six people, male and female, pass two basketballs among one another The six people were either dressed in white tee shirts or black tee shirts; three of each color Subjects were instructed to count the number of times the three people dressed in white tee shirts passed the ball The six people continuously move about, circling and weaving among each other There are two basketballs being passed Each of the persons are wearing different colored pants from their shirt (most seem to be wearing blue jeans) The subject only counts the time when a person in a white tee shirt passes the ball 9

10 Okay, so it s my favorite movie The video plays for several seconds, subjects diligently trying to keep their count straight Out of seemingly nowhere, a seventh person strolls on screen right dressed in a gorilla suit, pauses briefly, and continues to stroll off screen left At the end of the video, the subjects are asked, Did you see the gorilla? Over 50 percent said, not only did they not see a gorilla, there was NO gorilla! The initial video, including instructions, is about 40 seconds! The gorilla is on screen all of 9 seconds The subjects watched the video again and were certain that the video was not changed out (this was the golden era of VHS!) To their astonishment this time with no task to focus intently on they saw the gorilla! Check out the website Moth to a flame a firefighter s tale 10

11 If we are so focused on the task at hand, and the tasks pile up, then We can miss signs of fraud (such as a name we don t recognize, or an out of cycle pay increase) We can miss the new car purchased by someone who doesn t make that kind of money We can miss out on a conversation in which a colleague confesses financial difficulties and lose the opportunity to suggest an employee assistance program before they do something they regret Please share any story you can regarding these missed opportunities 11

12 The internal controls you perform must be performed each and every time, whether daily, weekly, monthly, quarterly, and / or annually Seek ways to improver controls, in either design, operation, or both times and systems change! Above all, do not be afraid to hold the mirror in front of yourself and assess if you are a reviewer or an expeditor If the latter, then certainly speak up and find a way to make more time to perform the controls Take the time to speak with your personnel to assess their overall wellbeing Take the time to speak with those around you to assess their overall wellbeing And spread that time to your family, friends, neighbors, and others 12

13 Now is a great time to share experiences and gain knowledge (change names to protect the innocent!) 13