Fraud and the Small Business Owner

Transcription

1 Fraud and the Small Business Owner Can you recognize it when you see it? National Society of Accountants Annual Meeting August 15, 2009 Erik H. Lindquist, CFE Presenter

2 Definition The use of one s occupation for personal enrichment through the deliberate misuse of the employing organizations resources or assets

3 Trends and Concerns Estimated Losses from Fraud Billion Dollars Billion Dollars Estimates are based on 6% of GDP for period

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5 How we classify fraud Asset Misappropriation - 89% of all cases Corruption - 27% Fraudulent Financial Statements - 10% percentages will be greater than 100% due to cross-over in categories

6 In Asset Misappropriation CASH IS KING 84 % of reported frauds in 2006 survey were cash related Median loss is $93,000 per CASE Types of Asset Misappropriation Fraudulent Disbursements 74.1% Skimming 16.6% Larceny 10.3%

7 Fraudulent Disbursements The greatest opportunity to the employees of a small business Billing Schemes (1) Payroll Schemes Check Tampering (2) Expense Reimbursement (3) Register Disbursement Median Loss - $125,000

8 Summary from ACFE Report to the Nation--2006

9 How do you discover fraud? Tip 46.6% Internal Audit 19.4% Accident 20.0% Internal Controls 23.3% External Audit 9.1% Notified By Police 3.2%

10 How do you discover fraud? Tip from employee - 59% Tip from customer % Anonymous tip % Tip from vendor %

11 How to Prevent Fraud Internal Controls Background Checks on Employees (preemployment) Regular Fraud Audits (six month cycle) Established Fraud Policy Be Willing to Prosecute Ethics Training Anonymous Reporting Mechanism Workplace Surveillance

12 Fraud Vulnerability - another 12 step program Preliminary meeting Gather Information Customize Assessment Management interviews Preliminary Interviews with supervisors Field interviews and Controls testing Use findings to ID Vulnerabilities Determine Prob. of Occurrence Determine Severity of impact Develop Recommendations Post Assessment Report

13 Fraud Prevention Fraud prevention is the most cost-effective way to reduce fraud Involves two fundamental activities: Sustain a culture of honesty and high ethics Assess the risks for fraud, develop concrete responses to mitigate the risks, and eliminate the opportunities for fraud 14

14 Fraud Prevention Sustain a Culture of Honesty & High Ethics Five critical elements: 1. Have management model appropriate behavior 2. Hire the right kind of employees 3. Communicate expectations and require periodic written acceptance to the expectations 4. Create a positive work environment 5. Enforce policies for handling fraud 15

15 Fraud Prevention Research on Why People Lie Have fear of punishment or adverse consequences Have a habit of lying Seen others lie or have had negative modeling Feel if they tell the truth they won t get what they want 16

16 Fraud Prevention Eliminate Fraud Opportunities Organizations should: Identify and measure fraud risks Implement preventative and detective controls Create widespread monitoring by employees Have internal and external auditors 17

17 Organizational Culture Way to Create a Culture of Honesty, Openness, and Assistance 1. Hire honest people and provide fraud awareness training. 2. Create a positive work environment. 3. Provide an employee assistance program 18 (EAP). How This Step Is Accomplished 1. Verify all information on the applicant s résumé and application. 2. Require all applicants to affirm the truth of the matters set forth in their application and résumé. 3. Train management to conduct thorough and skillful interviews. 1. Create expectations about honesty by having a good corporate code of conduct and conveying those expectations throughout the organization. 2. Have open door or easy access policies. 3. Have positive personnel and operating procedures. 1. Implement an EAP that helps employees deal with personal and nonsharable pressures in their lives.

18 Eliminate Opportunities for Fraud Five ways to eliminate fraud opportunities: 1. Have good internal controls 2. Discourage collusion 3. Monitor employees and provide a whistleblowing system 4. Create an expectation of punishment and 5. Conduct proactive auditing 19

19 Early Fraud Detection Three Primary Ways to Detect Fraud 1.By chance 2.By providing whistle-blowing systems 3.By data mining 20

20 Early Fraud Detection Whistle-blowing Systems A reporting hotlines or online system that allows others to call in or submit an anonymous tip of a fraud suspicion Examples: Internal systems/hotlines The Association of Certified Fraud Examiners Allegiance 21

21 Early Fraud Detection Mining Company Databases Mining databases for suspicious trends, numbers, and other anomalies. Data-mining programs: ACL Picalo 22

22 How to delicately ask the owner about this issue Are you concerned about sales and cash trends not tracking consistently? How many employees have access to the checkbook - who signs checks - who reconciles? No less then 3 people should handle the cash disbursements! One to draft check-one to sign and one to reconcile the bank statement

23 How to delicately ask the owner about this issue How often do you count inventory? Are your employees paid a competitive wage? Do you do background checks on financial staff? Have you ever had a fraud vulnerability check-up

24 How to delicately ask the owner about this issue Do you believe an annual audit or review covers your risk to fraud? It doesn t this is called the expectation gap Can your employees anonymously report concerns to you? Do you review your monthly financials for unusual trends? A/P, Inventory, Cash, A/R, Trial Balance Ensure that all Journal Entries have descriptions

25 Preventing Fraud A Summary Create a culture of Honesty, Openness, and Assistance Have a Code of Ethics Implement Employee Assistance Programs Eliminate Opportunities Have good internal controls Provide tip hotlines Discourage Collusion Create a Positive Work Environment Hire honest people and provide fraud awareness training Create an expectation of punishment Monitor employees Publicize company policies Proactively audit for fraud 26

26 Preventing Fraud Suggested Model Tone at the Top Investigation and Follow-up Education and Training Proactive Detection Integrity Risk and Controls 27 Reporting and Monitoring

27 Reforms Bypass Non-Profits Sarbanes-Oxley Does Not apply Public Trust Is Being Eroded IRS Is Raising Alarms in Congress For Regulations To Be Implemented

28 Loss Of Public Confidence Leads To Drop in Donations/Contributions Increase of Negative Press May Actually Attract the Wrong Type of Employee Death Spiral of Drops in Membership and Donations

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30 For more information Erik H. Lindquist, CFE Lindquist & Associates, LLC Resources: Fraud ExaminationW. Steve Albrecht et al Third Edition, Cengage Learning; 2009 Association of Certified Fraud Examiners Fraud Casebook Lessons from the Bad Side of Business edited by Joseph T. Wells, CFE, CPA; Wiley, 2007