Fraud Awareness February 27, 2015

Transcription

1 Fraud Awareness February 27, 2015 Clara Ewing Megan Dix

2 Fraud Defined The term fraud is defined in Black's Law Dictionary (Sixth Edition, 1990) as: An intentional perversion of truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right. A false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations, or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury. A generic term, embracing all multifarious means which human ingenuity can devise, and which are resorted to by one individual to get advantage over another by false suggestions or by suppression of truth, and includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated. 2

3 The Fraud Triangle Unrealistic deadlines Unrealistic performance goals Personal vices Inadequate or no: Supervision & review Segregation of duties Management approval System controls a.k.a. Rationalization reconciling behavior with commonly accepted notions of decency & trust 3

4 The Fraud Diamond Pressure Unrealistic deadlines Unrealistic performance goals Personal vices Inadequate or no: Supervision & review Segregation of duties Management approval System controls Convinced self that fraudulent behavior is worth the risk Necessary traits and ABILITIES to be right person to pull it off Recognized this particular fraud opportunity and can turn it into reality

5 Overview Fraud can be classified into 3 primary categories: - Asset misappropriations - Corruption - Financial statement fraud Smaller organizations suffer disproportionately large losses due to fraud What are some of the warning signs? What can we do about it? Source: Red Flags for Fraud by Mark P. Pattison, Deputy Comptroller, State of New York 5

6 No free lunch... Global losses due to occupational fraud and abuse are estimated to be $3.7 trillion a year - Average organization loses 5% of revenue - 58% recover nothing after fraud is discovered School districts are as vulnerable to fraud as the private sector or any other segment of government Reduced funding may lead to reductions in workforce which can create internal control weaknesses 6

7 Just the Facts Fraud schemes frequently continue for years before they are detected The typical fraud lasts 18 months from the time it began until it was discovered Tips are far and away the most common detection method Lack of internal controls was most commonly cited as the factor that allowed fraud to occur Most occupational fraudsters are first-time offenders 7 Source: Association of Certified Fraud Examiners, Report to the Nations on Occupational Fraud and Abuse 2014

8 Top Fraud Schemes Targeting Government / Public Administration Industry Scheme Cases Corruption 36% Billing 19% Non-cash 18% Payroll 16% Expense Reimbursement 13% Cash on Hand 12% Cash Larceny 11% Skimming 11% Check Tampering 6% 8 Source: Association of Certified Fraud Examiners, Report to the Nations on Occupational Fraud and Abuse 2014

9 What s the cost? Economic costs: - Tangible & measurable - Insurable in some cases - Provides basis for prosecution and/or litigation Political costs: - Loss of integrity - Diminished public confidence - Can t be measured, difficult to recover - Employee Morale.. 9

10 What should you be aware of? RED FLAGS Circumstances that are unusual in nature or vary from the normal activity Signal that something is out of the ordinary and may require further investigation Not a definitive indicator of guilt Possible warning signs only 10

11 Behavioral Red Flags Displayed by Perpetrators Living beyond means Having financial difficulties Unusually close association with vendor/customer Control freaks won t share workload or take vacations Shrewd or unscrupulous behavior Divorce or other family problems Irritability, suspiciousness, or defensiveness Source: Association of Certified Fraud Examiners, Report to the Nations on Occupational Fraud and Abuse

12 The Typical Environment in which Fraud Occurs Ineffective or nonexistent internal audit staff Lack of effective internal controls Poor accounting records Related party transactions Incomplete and out of date procedural documentation Management sets a bad example 12

13 The Fraud Diamond Pressure Unrealistic deadlines Unrealistic performance goals Personal vices Inadequate or no: Supervision & review Segregation of duties Management approval System controls Convinced self that fraudulent behavior is worth the risk Necessary traits and ABILITIES to be right person to pull it off Recognized this particular fraud opportunity and can turn it into reality

14 What can Administration do? Take care of the tone at the top Ethical environment created in an organization by leadership Lead by example Communicate expectations Support employees by training and listening Zero tolerance for unethical behavior Consistent and fair treatment of employees Minimize Opportunity Emphasize internal controls Protect employees from suspicion by establishing and following procedures Create positive work environment with open communication 14

15 The Fraud Diamond Pressure Unrealistic deadlines Unrealistic performance goals Personal vices Inadequate or no: Supervision & review Segregation of duties Management approval System controls Convinced self that fraudulent behavior is worth the risk Necessary traits and ABILITIES to be right person to pull it off Recognized this particular fraud opportunity and can turn it into reality

16 Internal Accounts Fraud Examples Fraudulent Invoices Reimbursement Fraud Check Tampering Payroll / Timekeeping Skimming Cash Receipts Asset Misappropriation 16

17 Fraudulent Invoice Scam Example Bogus invoices sent from a company called Scholastic School Supply - Showed an amount due of $ was due for math or art books that were not ordered or received - Payment addresses were mail drops This scam hit schools in 27+ states including Florida Reminder of importance to verify all bills before they are paid 17

18 Bogus Invoices On a busy day, would you catch this as a fake? 18

19 Reimbursement Fraud Scenarios Falsified receipts fraud Personal expenses presented for reimbursement Double receipts fraud - Employee pays for something using a procurement card (District or internal funds) - Then presents the same receipts to request reimbursement as if they made the purchase using personal funds - Hard to catch systems don t talk to each other - RED FLAG: same employee repeatedly loses receipts 19

20 Check Tampering Fraud Check washing Fraudulent signatures Forged endorsement Altered payee RED FLAGS: - Gaps in check sequence - Manual checks - Checks written to cash - Missing cancelled checks - Declines in cash balances - Vendors complain they were not paid 20

21 Preventing Check Tampering Safeguard blank check stock and deposit slips Maintain proper custody of checks awaiting signature or mailing Review cancelled checks or images Closely monitor account balances Restrict or eliminate signature stamps Maintain strong segregation of duties Write payee and amount out fully and draw line through the unused space to the right to prevent additions 21

22 Payroll / Timekeeping Frauds Ghost employees Inflated pay rates Reporting hours that were not worked Fail to record vacation or sick time used Red flags: - Employees with PO Box addressees - Employees with same direct deposit accounts - Employees with no payroll deductions - Employees with duplicate names/addresses - Missing, unusual looking, or altered timecards 22

23 Payroll Fraud Example School district in Kentucky detected this fraud in 2014 $600,000 stolen / went on for 7 years Took advantage of weak payroll system access controls - Re-activated a former substitute but changed bank account number so the perpetrator got paid - Recorded hours worked for the employee - Hard to detect the employee was a former substitute so her name did not jump out as fraudulent 23

24 Timekeeping Fraud Challenges A big responsibility is placed on the Timekeeper at schools Salaried employees may frequently forget to record their absences - What to do? Best strategies - COMMUNICATION -Talk to your principals - CONSISTENCY - Treat everyone the same and follow a standard process 24

25 Skimming Cash Receipts Schemes Cash is stolen before it is recorded in the accounting records - Collecting cash but not recording the funds - Collecting cash, keeping a portion of the cash, and underreporting the amount received Red flags: - Missing monies collected forms - Substituting cash for checks - Declining cash balances - Negative class/club account balance 25

26 Asset Misappropriation Risk of theft of school property - High dollar - Easy to resell Higher risk around portable items - Laptops - ipads Anything can be stolen - Commercial ovens / Kitchen equipment - Heavy musical instruments - Furniture 26

27 School Enrollment Fraud Example School enrollment fraud is perpetrated in the following ways: - Using relative or friend s address to enroll a child - Using the address of an investment or rental property - Forgetting to inform the school district of a change of address - Falsifying documentation Districts are pursuing enrollment fraud cases more aggressively than ever Source: 27

28 Summary Fraud happens throughout our organizations regardless of industry, size and culture Greater the skill and education greater the losses Management must be proactively engaged in fraud preventive and detective controls Ethics programs are a key component in an effective internal controls If the workforce and vendors know they are being monitored the occurrence of fraud is generally lower 28

29 Don t let it happen to you.. 29