What is Fraud?

MRWA 35th Annual Conference

December 9, 2015

Nick Henry, CPA

Horton, McFarland & Veysey, LLC

PO Box 543

Ellsworth, ME 04605

207-667-5529

nick@hmvcpas.com

Presentation Outline

Fraud Definition Abuse Fraud Triangle Types and Examples of Fraud Fraud in Maine ACFE Report

Presentation Outline - Continued

Preventing Fraud Comprehensive Control System Internal Controls – General Internal Controls – Specific Trustee Involvement Audit Process

Fraud Definition

The act of obtaining something of value through willful misrepresentation.

Abuse = Behavior that is deficient or improper when compared with behavior that a prudent person would consider reasonable.

Abuse - Examples

Indian Tribe Casino Creating Unneeded Overtime Requesting Staff Perform Personal Errands Extravagant or Expensive Travel Choices Extravagant or Expensive Vendor Selections Superintendent / Board Chair Weekly Lunches

Fraud Triangle

Factors that Cause Someone to Commit Fraud

Types and Examples of Fraud

Larceny / Embezzlement Stealing money after it has been recorded on the books.

Skimming Stealing money before it has been recorded on the books.

Shell Companies Checks issued to a fake company with a valid sounding name.

Personal Purchases

Types and Examples of Fraud

Payroll Schemes: Issuing Fake Paychecks / Bonuses

Inflated or Unauthorized Pay Increases

Inflated Hours Worked

Not Contributing To Health Insurance

Employee Reimbursements Check Tampering:

Preparing Check for Own Benefit

Intercepting Check for Third-Party

Types and Examples of Fraud

Inventory & Equipment Theft Credit Card Personal Purchases Gas Card Personal Purchases Fraudulent Financial Statements

Asset & Revenue Overstatements

Fictitious Revenues

Fraudulent Nonfinancial Statements

Fraud in Maine

Veterans of Foreign Wars Post 8835 & Ladies Auxiliary Winslow $9,000

Travel Soccer Club Winslow $15,000

High School Wrestling Booster Club Winslow $10,000

United Mid-Coast Charities Camden $4,600,000

Fraud in Maine

Passamaquoddy Tribe Pleasant Point $25,000

Brooklin Boat Yard Brooklin $700,000

Winthrop United Methodist Church Winthrop $10,000

Maine Tourism Association Hallowell $116,000

ACFE Report

Association of Certified Fraud Examiners 2014 Global Fraud Study Summary of Findings:

Typical organization losses 5% of revenue per year to fraud

Median detection time = 18 months

Men & women; all ages; managers & employees

Majority of fraudsters are first-time offenders

External audits are not an effective control

Fraud Detection

Tip 42% Management Review 16% Internal Audit 14% By Accident 7% Account Reconciliation 7% Document Examination 4% External Audit 3% Surveillance / Monitoring 2% Notified by Law Enforcement 2% IT Controls 1% Confession 1% Other 1%

Behavioral Red Flags

Living Beyond Means 44%

Financial Difficulties 33%

Unusually Close Association with Vendor / Customer 22%

Control Issues, Unwillingness to Share Duties 21%

“Wheeler-Dealer” Attitude 18%

Divorce / Family Problems 17%

Irritability, Suspiciousness or Defensiveness 15%

Addiction Problems 12%

Complained About Inadequate Pay 9%

Past Employment-Related Problems 9%

Refusal to Take Vacations 9%

Control Weaknesses

Primary Internal Control Weaknesses Observed By CFEs

Lack of Internal Controls 32%

Lack of Management Review 20%

Override of Existing Controls 19%

Poor Tone at the Top 8%

Lack of Competent Personnel in Oversight Roles 7%

Other5%

Lack of Independent Checks 4%

Lack of Employee Fraud Education 3%

Lack of Clear Line of Authority 1%

Lack of Reporting Mechanism 1%

Preventing Fraud

Ethics Policy Policy Communication & Training Hotline Whistle-Blower Protection Employee Screening Risk Assessment – “what could go wrong?” Implement Controls

Comprehensive Control System

Financial Controls Management Oversight & Behavior Nonfinancial Systems

Internal Controls - General

Authorize Reconcile Segregate Duties Safeguard Support Documentation

Internal Controls - Specific

Mail Opening – Not The Bookkeeper Receipts Listing When Mail Is Opened Invoices Approved Before Payment Dual Signatures on Checks Bank Transfer Approval Capital Asset Purchase Approval Opening Bank Statement Bank Reconciliations Bank Statement & Reconciliation Review

Internal Controls - Specific

Time Card Review & Approval

Benefit Time Tracking & Approval Forms

Employee Handbook / Personnel Policies

Pay Rate Change Approval

Accounts Receivable Adjustment Approval

Accounts Receivable Reconciliations

Establish Policies & Procedures

Follow Policies & Procedures

Accounting Manual

Internal Controls - Specific

Lock Up Assets Use Passwords Bonding Employees Contract Approval Year End Review Procedures Budget Inventory Usage Sheets Credit Cards Detailed Meeting Minutes Review & Approve Financial Statements

Trustee Involvement

Regular Meetings Review of Financial Reports Approve Warrants Sign Checks Approve Budget Review Bank Statements Approve Pay Increases Approve Accounts Receivable Adjustments

Audit Process

Assess Internal Controls & Fraud Risk Internal Control Testing Balance Sheet Testing Income Statement Testing Other Procedures & Testing Draft Financial Statements & Notes

THANK YOU

GOD BLESS

QUESTIONS?