1. The Detection and Prevention of Fraud ( Or The Company You Save May Be Your Own) Dennis L. Thompson, CPA, CFE

2. Todays Agenda

Occupation Fraud Three Major Categories

• Case Studies

Elements of Internal Control

Use of Accounting Software

Other Considerations to Deter Fraud

I Think I am a Victim of Fraud Now What?

3. Occupation Fraud Defined

The Use of Ones Occupation

For Personal Enrichment

Through the Deliberate Misuse or Misapplication

Of the Employing Organizations

Resources or Assets

4. Characteristics of Fraud

Material False Statement

Person who uttered it knows it is False

Reliance on False Statement by Others

Other Person is Damaged Financially

5. Three Fraud Categories

Asset Misappropriations

Corruption

Fraudulent Financial Statements

6. How Occupational Fraud is Committed

Occupational Frauds by Category Frequency

7. How Occupational Fraud is Committed

Occupational Frauds by Category Median Loss

8. Fraud Triangle Donald Cressey

Opportunity

Pressure

Rationalization

9. Opportunity

Trusted Employee

Necessary Skills

Weak Internal Controls

10. Pressure Non-sharable Problems

Living beyond Means

Gambling Losses

Medical Expenses

11. Rationalizations

Just Borrowing

Employer is Unfair

Unique Circumstances

12. Asset Misappropriations Most Common

Cash

Inventory/Other Assets

13. Cash Receipts

On Book

• Larceny

Off Book

• Skimming

14. Fraudulent Cash Disbursements

Billing Schemes

Payroll Schemes

Expense Reimbursements

Check Tampering

Register Disbursements

15. Inventory/Other Assets

Misuse

Larceny

16. Case Study Fraudulent Disbursements

Combination of Expense Reimbursement and Billing By Shell Company

Poor Internal Controls

• Not enforcing Reimbursement Policy

• Not monitoring Vendor Lists

• Employees Picking Up Vendor Checks

17. Corruption

Conflicts of Interest

Bribery

Illegal Gratuties

Economic Extortion

18. Case Study Conflict of Interest

Purchasing Agent Working As Travel Agent

Company Overbilled 10% - 30% on Travel

19. Fraudulent Financial Statements

Asset/Revenue Overstatements/Understatments

• Timing Differences

• Fictitious Revenue

• Concealed Liabilities & Expenses

• Improper Disclosures

• Improper Asset Valuations

20. Case Study Fraudulent Financial Statements

Crazy Eddies

• Skimming

• Fictitious Revenues

• Inventory Overstatement

21. Detection of Fraud Schemes

Initial Detection of Occupational Frauds

22. Prevention & Detection of Fraud

Internal Control

Reconcile All GL Accounts

Accounting Software Controls

Ratio Analysis

Digital Analysis

Tip Lines

Other Considerations

23. Internal Control

Segregation of Duties

• Do Not Allow One Person To Have Recorded Keeping Responsibility And Physical Custody of Asset

Have Procedures Documented

• Reveals Potential Weakness

24. Account Reconciliation

Bank

• Segregation of Duties

• Timely

• Bank Statement Mailed to Owner

• Review Canceled Checks for Signatures, Payees & Endorsements

Credit Card

• Review for Charges

• Statement to Owner

25. Accounting (QB) Software Controls

Roles and Passwords to Limit Access

• Only Enough Access to do Job

Review Audit Log

• Look for Deletions

26. Accounting (QB) Software Controls

Lock Prior Periods

• Change Closing Date to Match Bank Reconcilation

• Password Protect Closing Date

• Only Admin Can Change Date

Budgets

• Facilitates Analytical Procedures

27. Accounting (QB) Software Controls

Review Reports

• Voided/Deleted Transactions

• Closing Date Exception Report

• A/R and A/P Aging Analysis

• Bank Reconciliation Discrepancy

• Budget Vs Actual

• Missing Checks

28. Ratio Analysis

Look For Unreasonable Relationships

Compare to Industry Standards

Compare to Previous Periods

29. Digital Analysis

Benfords Law

Highest, Next Highest

Same, Same, Different

30. Benfords Law 31. Benfords Law 32. Tip Lines

Most Effective

Confidential

No Penalty For Good Faith Reporting

33. Other Considerations

Be Suspicious of Employees

• First to Arrive, Last to Leave

• Never Want to Take a Vacation

• Changes in Lifestyle Not Supported by Salary

34. Other Considerations

Expense Reimbursement Policy

• No Company Credit Cards

• Employees Use Their Cards & Get Reimbursed

Background Checks on New Hires

Backup Data

35. I Think Someone is Stealing Now What?

Dont React Emotionally

• Need to Find out if any Accomplices

Call Your Attorney

• Possible Legal Problems

• • Invasion of Privacy

• • Slander & Libel

• • False Imprisonment

36. I Think Someone is Stealing- Now What?

Do You Have Fraud Policies & Procedures?

• If Yes, Make Sure You Follow Them

• If No, Create Them for Future Fraud

Contact Certified Fraud Examiner

37. Summary

Fraud Increasing, Especially In This Economy

Adversely Impacts Companys Survival & Employee Jobs

No Stereotypical Fraudster Sometimes Someone You Would Never Suspect

38.