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Forensic Accounting and More

Professors Janet Greenlee

and Mary Fischer

Nonprofit Fraud – Cost and Damage

Assessment

per ACFE 06-08 report 2

Fraudster Profile

• Owner Executive with bachelor’s degree or higher

• Tenure of 6 – 10 years• Male aged 41 – 50 acting alone• Living beyond financial means – could

also be a wheeler/dealer, unwilling to share duties, or have personal problems

• Organizations lose an average 7% of revenues annually

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How does fraud happen?

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• Fraudulent billing (largest number)

• Payroll -ghost employee

• Expense reimbursement (least costly)

• Check tampering

• Fraudulent register disbursement – register refunds (most costly)

• Corruption (second largest)

Asset Misappropriation

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• The three M’s• Manipulation, falsification or alteration of

accounting records or supporting documents

• Misrepresentation in or intentional omission of events, transactions or other significant information

• Misapplication of accounting principles concerning amounts, classification or disclosure

Financial Statement Fraud

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• Entitlement and/or greed

• Easy

• Need $ (personal issue or addiction)

• Cover up asset misappropriation

• Meets analysis prediction - bonus

• Increase stock prices

• Avoid loss and/or bolstering financial results

Why?

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Other Fraud Types

Employee Fraud Management Fraud External fraud

Misuse cash/assets Expense account False insurance claims

Lapping False F/S Credit card fraud

Check forgery Misuse cash/assets False invoices

Expense accounts Unnecessary purchases Check forgery

Petty cash Check forgery Bribes/ secret commissions

Kickbacks Kickbacks Bid rigging

Loans Ghost vendors Produce substitution

Avg loss +$ 100 thousand

Avg loss +$ 3 million Avg loss + $250 thousand

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• Control environment and procedures

• Accounting system

• Accountant’s tools– Common sense– Anecdotal evidence

• More considerations …

• More in following session

Internal Controls

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Here is a few 2007 examples of nonprofit mischief:1. Red Cross – (CA)-$110,0002. ABC Humanitarian Trust- (MN)- $137,000 3. Elite Gym Starz Parent Club (MI)- $108,604 4. Leukemia and Lymphoma Society – (MI)- $43,6165. Hickory Grove Elementary PTO- (MI)- $36,000* 6. San Diego (CA) Schools:

i. Friends of Jamul-Dulzura Schools - $131,000 ii. Fallbrook High School - $27,000 iii. Valhalla High School -$19,000 iv. Rancho San Diego -$55,0007. Big Sun Youth Soccer League (FL)- $35,0008. Salvation Army- (AL)- $160,000 9. Best Choice- (NM) - $1.8 million 10. Citi Performing Arts Center-(MA) - $1.9 million+ 11. North Carolina A&T State University - $1 million 12. Salinas Police Activities League-(CA)- $35,000+ 13. Crotched Mountain Rehabilitation Center-(NH)-$1 million* 14. Cornerstone Christian Fellowship Church - $400,000+ 15. Salinas Police Activities League - $35,000+

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Our study - Who are the Victims

Type of Organization

% Median Loss from Fraud

Private Company 41.8 $123,000

Public Company 30.3 $100,000

Government Agency

15.8 $37,500

Nonprofit Organizations

12.2 $100,000

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• 37.9 % of losses $100,000 - $500,000• 53.4 % organizations where fraud was found

had fewer than 100 employees• 27% of the perpetrators had been employed for

less than 5 years (avg loss $120,000) • Size of organization matters – ogr with revenues

over $500M avg loss $1.4 M compared to org with less than $100 M organizations avg loss only $130,000

• Less than half of the losses recovered any $

Interesting Findings

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What Types of Frauds were Committed in Nonprofits?

Type of Fraud % Median Loss

Fraudulent Financial Statements

5.2 $3,000,000

Corruption 22.2 $105,000

Misappropriation of Assets

97.5 $100,000

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Cash Misappropriation

Type of Misappropriation

% Median Loss

Fraudulent Disbursement

76.6 $145,000

Skimming 22.4 $40,000

Cash Larceny 17.2 $145,000

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Fraudulent Disbursements

Type of Disbursement % Median Loss

Billing 46.7 $128,000

Check Tampering 44.8 $163,500

Expense Reimbursement

13.8 $83,373

Payroll 17.2 $110,873

Register Disbursement 3.5 $375,842

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Methods of Detection

Detection Method % Median Loss

Tip from Employee 24.1 $40,333

By Accident 22.4 $85,636

Internal Controls 13.8 $177,900

External Audit 12.0 $91,745

Internal Audit 10.3 $119,000

Anonymous and others such as tips from customer or vendor

17.4

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• The typical perpetrator was a middle aged woman with only a high school education

• Trusted employee

• Over 75% has no criminal history

• Over 70% were terminated

• Only 15+% of the perpetrators made restitution

• 6.9% received no punishment at all

The Perpetrator

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Why noNo Legal Action Taken (80% of cases) Why??

Reason for no legal action %

Private settlement 24.0

Fear of bad publicity 19.0

Too costly 11.9

Internal discipline sufficient 11.9

Organization wanted closure 9.5

Government declined to prosecute 9.5

Lack of evidence 9.5

Perpetrator lacked assets 7.1

Perpetrator disappeared 4.8

Fear of countersuit 2.4

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SAS 109 (cont.)“Amendment to SAS no 95 Generally Accepted Auditing Standards”

• Ensure separation of duties• Implement and install strong internal controls• Employ background checks for new employees• Perform regular fraud audits• Established a fraud policy• Be willing to prosecute• Develop and monitor ethics training for all employees• Install an anonymous fraud reporting mechanism• Apply workplace surveillance if appropriate

Damage ControlWhat can be done!

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SAS 109 (cont.)“Amendment to SAS no 95 Generally Accepted Auditing Standards”Questions and Answers