Fraud Prevention Training The Massachusetts Collectors and Treasurers Association Sixty-Sixth Annual Education Conference June 15, 2015 Presented By: Eric Demas, CFE Melanson Heath edemas@melansonheath.com @governmentfraud
Association of Certified Fraud Examiners 2014 Report On average, the typical organization loses 5 % of their annual revenues per year to occupational fraud. Applied to the 2013 Gross World Product, this 5 % would translate to approximately $3.5 trillion in global fraud losses per year. The median loss incurred was $140,000. Median fraud lasted 18 months before detection.
Association of Certified Fraud Examiners 2014 Report Majority of fraud detected from tips by employees of the organization. Most commonly victimized industries: Banking and Financial Services Government Manufacturing Organizations that implemented anti-fraud controls experienced lower losses in time to detection.* Most occupational fraudsters are first time offenders with clean employment histories.*
Definition of Fraud General: Any act, expression, omission or concealment, calculated to deceive another to his or her advantage.
Occupational Fraud The use of one s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization s resources or assets.*
Occupational Fraud All Occupational fraud schemes have four key elements in common. The activity: 1) Is clandestine; 2) Violates the perpetrator s fiduciary duties to the organization; 3) Is committed for the purpose of direct or indirect financial benefit to the perpetrator; and 4) Costs the employing organization assets, revenue, or reserves.
Categories of Occupational Fraud Corruption Fraudulent Statements Asset Misappropriation
Corruption Any Scheme in which a person uses his or her influence in a business transaction to obtain an unauthorized benefit contrary to that person s duty to his or her employer. Examples include: Undisclosed conflicts of interest Accepting or paying a bribe
Fraudulent Statements Falsification of an organization s financial statements to make the organization to appear more favorable than actuality. Examples include: Reporting fictitious revenues Recording expenditures and/or liabilities in the wrong period Balance Sheet for Free Cash Fraudulent Audited Financial Statements
Rolling over Expenditures to Next Year No Department may incur a liability in excess of their voted appropriation Any Town having unpaid bills of previous years which are unenforceable due to insufficient appropriation must seek additional appropriations
Asset Misappropriations Any scheme that involves the theft or misuse of an organization s assets. Examples include: Skimming revenues Cash Larceny Fraudulent disbursements Non-cash asset misappropriation Over 90% of occupational fraud cases involve some form of asset misappropriation.
Cash Receipts and Cash on Hand Skimming: Any scheme in which cash is stolen from an organization before it is recorded on the organization s books and records. Cash Larceny: Any scheme in which cash is stolen from an organization after it has been recorded on the organization s books and records.
Fraudulent Disbursements Billing Expense Reimbursements Check Tampering Payroll Wire Transfers Cash Register Disbursements Petty Cash Disbursements
Non-Cash Misappropriations Inventory Supplies Equipment Information Software
The Fraud Triangle Motive
Where to Detect Fraud? Fraud Indicators Autocratic management style Unusual behavior Illegal acts Expensive lifestyles Untaken vacations/holidays Poor quality staff Low morale High staff turnover Compensation tied to performance
How Frauds Are Discovered Insider Governing Board Management Employees Outsider Auditor Bank Vendor Grantor Other Citizen News Media
When Frauds are Discovered Investigations are conducted when adequate predication exists, thus indicating a fraud has occurred. Internal Evaluate resources; expertise and availability External Evidence of criminality Need for expertise or independence
Outside Assistance Legal Auditing Law Enforcement State Agencies Federal Agencies
Consequences Impact on the Government s Reputation Legal and Investigation Expenses Civil and/or Criminal Prosecution Company Management Financial Impact Increased insurance costs Bond rating Employee Morale Employee drag Ability to attract and retain quality employees
Risk Assessment What is a risk? A risk is any uncertainty about a future event that threatens your organization s ability to accomplish a mission.
Risk Assessment What is Risk Assessment? Risk assessment is a discipline for dealing with the possibility that some future event will cause harm. It provides strategies, techniques, and an approach to recognizing and confronting any threat faced by your organization in fulfilling its mission.
Risk Assessment Risk Assessment plays an integral part in sound governance at both a strategic and operational level.
Risk Assessment A formal risk assessment process should: 1) Identify and assess risk 2) Select and implement risk control and financing measures 3) Periodically review risk management efforts
Risk Assessment Basic principles: The risk assessment process is a form of reality check on your plans and proposals Most of us are continually conducting risk assessments in our head as we develop policies and procedures and implement strategies A formal risk assessment process brings the intuitive process to the surface and allows others to give feedback on assumptions and data used in the planning process
Risk Assessment Three Basic Questions: 1) What can go wrong? 2) What will we do (both to prevent the risk event from occurring and in the aftermath of an incident? 3) If something happens, how will we pay for it (what are the costs)?
Internal Controls What is an internal control? A process or processes designed to promote efficiency or assure the implementation of a policy or safeguard assets or avoid fraud and error.
Internal Controls - Reconciliations Cash Receivables Turnovers Without adequate reconciliations, errors and irregularities could occur and not be detected.
Risk Assessment Cash Receipts Are receipts summarized in a receipt log? Documentation? Where are receipts held overnight? Are licenses, permits, etc. pre-numbered? Are employees prohibited from co-mingling cash receipts with petty cash? Personal funds? Is the department prohibited from using departmental receipts to make purchases? Are there any specific departments and/or employees that do not remit receipts consistently?
Risk Assessment Cash Receipts Are turnovers to the Treasurer in compliance with Town policy? Does the turnover provide a breakdown of cash and checks? Is a turnover receipt obtained from the Treasurer and retained? Are copies of the turnover forms retained by the department? Are monthly revenue reports reviewed for completeness and accuracy? Does the department reconcile the report with departmental records?
Safeguarding of Turnovers Log or cash register in department The Treasurer s Office reconciles the deposit to supporting documentation. The Accounting department reconciles the GL to departmental turnover. The department should reconcile G/L revenue reports to departmental support.
Red Flags - Receipts Change in timeliness of deposits Decrease in amount of deposits Decrease in amount of currency in deposits Incorrect cut-off Inconsistent deposit dates
Recommendations The Treasurer s office should count the money when the turnover is delivered The money and turnovers should be separated at that time The Accounting office should verify check/cash breakdown on the batch report to their copy of turnover
Risk Assessment - Segregation of Duties No one individual is in a position to both perpetrate and conceal an error or irregularity. Examples: Record transactions and sign checks Enter payments and adjustments
Risk Assessment Payroll Disbursements Does payroll clerk have ability to create new employee in payroll system? Must department heads or supervisors approve all time cards and leave records before payroll processing? Is sick, vacation, personal, holiday, etc. earned and taken reviewed for compliance with Town policies? Must employees complete and sign their time cards and leave records at the end of each pay period? Are payroll registers reviewed by a responsible official to ensure: Terminated employees are not paid after departure; Employees worked shifts as expected.
Payroll Schemes Teachers were receiving grant stipends for work they were performing during their regular hours. Police lieutenant responsible for scheduling and reviewing payroll worked traffic details during regular schedule shifts. Employees took vacation and sick days, yet did not report them to payroll.
Payroll Schemes Employee responsible for entering payroll information had a son and a niece who also worked for the City. This employee would enter time for the relatives for which they never worked. Supervisor went to one of their staff and ordered that employee to submit overtime for which the employee didn t work. The supervisor then required the employee to pay over the money received for the overtime that the employee never worked.
Risk Assessment Vendor Disbursements Are purchase orders approved by personnel separate from the individual making the request? Are invoices received matched to purchase orders and receiving reports prior to approval for payment? Are payments processed by original invoice? Copies? Statements? Are expenses by department compared to the budget monthly by management? Is bid / grant compliance monitored?
Red Flags -Disbursements Complaints from employees or vendors Vendors with same addresses as employees Invoices that appear unusual
Red Flags -Disbursements Missing or incomplete documentation Altered documentation Internal invoices Photocopied invoices Self approved reimbursements
Documentation Documentation needs to be complete. When incomplete documentation is processed, the following exists: Transactions cannot be verified. Limits ability to identify errors and irregularities.
Fraud Prevention Perception of Detection Management Tone Fraud Policy Continual Risk Assessment
Perception of Detection Studies show effective in fraud prevention Take concerns seriously Monitor trends ask questions Observe procedures
Management Tone Philosophy and Operating Style Management & employee integrity and ethical values Organization structure Commitment to competence Governing board Method of assigning authority and responsibility
Whistleblower Hotline What do the experts say: Financial Considerations: Frauds are much more likely to be detected by employee tips than any other method Employment Practices Considerations: Employment-related claims are on the rise Having a hotline in place allows for employers to address a situation early, rather than letting it continue and end in the courts Eliminates the employee excuse that they had nowhere to turn
Fraud Policy Protection for the Organization Protection for the Employees Enforces Management Tone Provides Necessary Guidance
Continual Risk Assessment Every employee has a responsibility in the risk assessment process Rely on instincts When something doesn t feel right, it probably isn t Report concern to supervisor or other responsible official
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