Internal Control and Anti-Fraud Program for the Small Business

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1 Internal Control and Anti-Fraud Program for the Small Business Steve Dawson

2 Preface: Maybe It s Time We Get Back to the Basics... i Anti Fraud Program Design for the Small Business... i Small Business Defined... i The Public Company versus the Nonpublic (Private) Company... ii Why the Distinction?... ii We Get It; We Need to Try to Prevent Fraud So How Do We Do This?... ii The Anti Fraud Program Structure... ii Chapter 1 The Architect s Blueprint: Establishing the Framework... 1 Learning Objectives... 1 Introduction... 1 The Elements of Anti-Fraud Program Design... 1 Anti-Fraud Environment... 1 Fraud Risk Assessment... 2 Control Activities... 2 Information: Program Documentation... 2 Communication: The Company Fraud Training Program... 3 Monitoring and Routine Maintenance... 3 Review Questions... 5 Review Answers... 6 Chapter 2 Foundational Policies: The Fraud Policy... 7 Learning Objectives... 7 Introduction... 7 Foundational Policies... 7 The Fraud Policy: The Essential Elements of an Effective Fraud Policy... 7 Element 1. Policy Statement... 8 Element 2. Scope... 8 Element 3. Actions Constituting Fraud... 8 Element 4. Nonfraud Irregularities... 9 Element 5. Reporting Structure... 9 Element 6. Investigation Responsibilities... 9 Element 8. Acting in Good Faith Element 9. Whistle Blower Protection Element 10. Suspension or Termination Element 11. Acknowledgment and Signature Case Presentation Review Questions Review Answers Chapter 3 Foundational Policies: The Fraud Reporting Policy Learning Objectives Introduction The Essential Elements of an Effective Fraud Reporting Policy Element 1. Policy Statement Element 2. Scope Element 3. Reportable Actions Constituting Fraud Element 4. Predication Element 5. Reporting Mechanism Element 6. Acknowledgment and Signature Review Questions Review Answers... 22

3 Chapter 4 Foundational Policies: The Expense Reimbursement Policy Learning Objectives Introduction Case: No Questions Asked Case: It Will Never Be Missed Case: Larry the Chief Financial Officer The Elements of an Effective Expense Reimbursement Policy Element 1. Policy Statement Element 2. Scope Element 3. Authorized Uses Element 4. Unauthorized Uses Element 5. Violations Element 6. Documentation Element 7. Statement of Responsibility Review Questions Review Answers Chapter 5 The Ground Floor: The Fraud Risk Assessment Process Learning Objectives Introduction Ground Rules for Fraud Risk Assessment Rule 1. Don t Be Misled; It s Not as Hard as It Seems Rule 2. Place What You Know on the Back Burner, and Think the Unthinkable Rule 3. Whether You Like It or Not, You Have to Think Like a Criminal Rule 4. Don t Overdocument the Process An Example of Risk Assessment Procedural Steps for Performing a Fraud Risk Assessment Understand the Guiding Principles Determine the Participants Determine How Information Will Be Gathered Identify Areas of Fraud Risk Cash in Bank Case: The Trail Is Gone Case: Friends in Low Places Asset Misappropriation Corruption Financial Statement Fraud Review Questions Review Answers Chapter 6 Control Activities: The Absolutes Learning Objectives Introduction Critical Principles of Control Activity Design Principle 1. Design the Internal Control around the Position, Never around the Person in That Position Principle 2. The Perception of Detection Is the Strongest Internal Control That Can Be Implemented Foundational Control Activities Anti Fraud Environment Fraud Risk Assessment Control Activities Case: The Mail Drop in Las Vegas Information: Program Documentation Communication: The Company Fraud Training Program Monitoring and Routine Maintenance Review Questions Review Answers ii

4 Chapter 7 Control Activities: The Segregation of Duties Dilemma Learning Objectives But I Only Have Two Employees Prevention Versus Detection Controls The Necessary Review Processes Review Questions Review Answers Chapter 8 Control Activities: General Processes Learning Objectives Introduction Two Operational Questions How Does Money Go Out of Our Organization? Common Control Activities Control Area: Disbursement Process Control Area: Receipt Process Control Area: Charge Offs of Accounts, Notes, and/or Loans Receivable Control Area: Inventory Write Offs Other Than the Physical Count Adjustment Control Area: Payroll Processing Control Area: Contract Procurement and Competitive Bid Process Control Area: Journal Entries Case: The Cell Phone Reimbursement Control Area: New Vendor Establishment Other Control Activity Considerations Review Questions Review Answers Chapter 9 Control Activities: Specific Control Areas Learning Objectives Introduction Financial Statement Line Item Control Activities Control Area: Cash in Bank Control Area: Accounts Receivable Allowance for Uncollectible Accounts Control Area: Investments Control Area: Inventory Review Questions Review Answers Chapter 10 The Ceiling: Documenting the Anti-Fraud Program Learning Objectives Introduction Information Documentation Keeping It Simple The Elements of High Quality Documentation Documentation Format Review Questions Review Answers Chapter 11 The Ceiling: The Company Fraud Training Program Learning Objectives Introduction The Elements of Effective Communication Why Should We Teach Our Employees How to Commit Fraud? The Structure of Continuous Fraud Awareness Training The Company Fraud Training Program Anti Fraud Program Training on an As Needed Basis Continuous Fraud Awareness Training Annual Fraud Awareness Training Content Requirements iii

5 Other Potential Training Topics Review Questions Review Answers Chapter 12 The Roof: Monitoring and Routine Maintenance Learning Objectives Introduction Monitoring and Routine Maintenance Defined The Monitoring and Routine Maintenance Structure Compliance Audits Continuous Amendments/Routine Maintenance Review Questions Review Answers Chapter 13 The Sample Anti-Fraud Program Learning Objectives Introduction Appendix 13A: Fraud Risk Assessment Framework Form Appendix 13B: Control Activities Form Appendix 13C: Documentation of Control Activities Appendix 13D: Compliance Audit Programs and Related Compliance Audit Working Papers Review Questions Review Answers Appendix A: The Fraud Policy Sample Fraud Policy * Policy Statement Investigation Responsibilities Authorization for Investigation Acting in Good Faith Whistle Blower Protection Suspension/Termination Acknowledgment and Signature Appendix B: The Fraud Reporting Policy Sample Fraud Reporting Policy * Policy Statement Scope Reportable Actions Constituting Fraud Predication (Reasonable Cause) Reporting Mechanism Acknowledgment and Signature Appendix A: The Expense Reimbursement Policy Sample Expense Reimbursement Policy * Policy Statement Scope Authorized Uses Unauthorized Uses Violations Documentation Statement of Responsibility Appendix D: Forms Glossary Index iv

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!

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! THE CONSTRUCTION PROCESS OF FRAUD PREVENTION: The Absolutes of the Company Anti-Fraud Program Presented for the Fort Worth Chapter of the TSCPA Presented by STEVE DAWSON, CPA, CFE Dawson Forensic Group