Download - Detecting Frauds
- 1. DetectingMisappropriation Frauds Dr. Raymond S. Kulzick, CPA, CFE, FCPA, CDFA 305.812.4998 [email protected]
2. Detecting Misappropriation Frauds
- Presentation for
- FIU Fall Seminars
- October 24, 2009
- Dr. Raymond S. Kulzick, CPA, CFE, FCPA, CDFA
- St. Thomas University
- Kulzick Consulting, PA
- 305.812.4998 [email protected]
- Information in this presentation is believed to be reliable at the time of the presentation; but the authors do not assume any responsibility for its use and it should not be relied upon as authoritative.
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 3. Ray Kulzick Kulzick Consulting, PA
- Forensic Accounting
- Divorce
- Fraud
- Business Damages
- Data Analysis for Litigation
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 4. Overview
- Introduction
- Responsibilities of CPAs
- Small vs large companies
- Fraud triangle
- Detection Known fraud
- Detection Unknown fraud
- Common symptoms in small business
- Conclusions
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 5. 2008 Kroll/Economist Report
- In past 3 years 85% of firms had fraud
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- 37% theft of assets
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- 27% theft of information
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- 26% management conflict of interest
- Large firms average loss = $ 23 million
- Small Firms average loss = $ 5.5 million
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 6. Large firms perceived causes of increased fraud
- 2007 report
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- 31% complexity of IT
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- 28% entry into new markets
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- 26% greater inter-firm collaboration
- 2008 report
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- 25% weaker controls
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 7. ACFE 2008 Report
- Average loss was 7% of revenue
- 89% involved asset misappropriations
- Average loss $175,000
- Average loss for small business was $200,000
- Average scheme duration = 24 months
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 8. ACFE 2008 Report Types of Small Business Fraud
- 29% Billing
- 25% Check tampering
- 21% Skimming
- 16% Expense reimbursement
- 15% Cash larceny
- 14% Payroll
- 15% Non-cash misappropriation
- Note: Many schemes involved multiple types of fraud
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 9. Responsibilities of CPAs External Audits, Reviews, Compilations
- SAS 99 Fraud in a FS Audit
- SAS 78 Internal Controls
- SAS 103-112 Risk-based Audits & Internal Controls
- SSARS 10, 11 & 12 Reviews and Compilations
- ISA 240 Fraud in a FS Audit
- SOX 404 & PCAOB AS 5 Internal Controls
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 10. Responsibilities of CPAs External Audits, Reviews, Compilations
- If find fraud during an attest engagement that requires further investigation
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- AICPA Rule 101 Independence
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- AU 317 Illegal acts by clients
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- AU 333 Management representations
- Attest engagements include
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- Audits, Reviews, Prospective Financials
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- In conformance with SAS or SSARS
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 11. Responsibilities of CPAs Other types of engagements
- Internal audits
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- IIA PA 1210.A2-1 & -2 Auditors responsibilities relating to fraud
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- IIA PA 2120.A1-1 Assessing & reporting on control processes
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- 1/2009 revisions require assess potential for occurrence and how organization handles risks
- Public perceptions and malpractice
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- CAMICO survey showed 64% of the public believes that CPAs are required to find ALL fraud in an audit.
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 12. Small vs Large Companies Differences Impacting Fraud
- Trust
- Small workforce
- Failure to delegate
- Overlapping/unclear job responsibilities
- Controls not a priority
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 13. The Fraud Triangle Copyright 2007-2009 - R. S. Kulzick October 24, 2009 PRESSURE OPPORTUNITY RATIONALIZATION 14. Known vs Unknown Fraud
- Known fraud
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- Search for symptoms based on specific types of fraud
- Unknown fraud
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- Search for common symptoms not necessarily related to a specific type of fraud
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 15. Detection Known Fraud Approach
- Used for:
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- SAS 99 requires this approach
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- Forensic and proactive audits
- Steps:
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- Risk analysis
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- Identify symptoms based on risk
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- Search for symptoms
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- Further investigation
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- Use of CAATTs recommended
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 16. Detection Unknown Fraud Approach
- Used for:
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- Initial stage or supplementary in audits
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- Reviews
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- Internal audits
- Approaches:
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- Data profiling
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- Fraud ratio/variance analysis
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- Benfords Law
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- Further investigation
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- Use of CAATTs recommended
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 17. Some Common Small Business Fraud Symptoms - General
- Tolerance of petty thefts
- Lack of or override of controls
- No segregation of duties
- High pressure environment
- High turnover
- Complaints or lack of complaint tracking
- No IT access controls
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 18. Some Common Small Business Fraud Symptoms - Individuals
- Living beyond means
- Financial pressures on key individuals
- No vacations in key positions
- Employees complain about low pay or chaotic environment
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 19. Some Common Small Business Fraud Symptoms - Records
- Books & records out of balance
- Transactions not entered timely
- Journal entries at or near year-end
- Missing documents
- Only copies in files
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 20. Some Common Small Business Fraud Symptoms - Specific
- Inventory adjustments
- Credit memos or A/R write-offs
- Debit memos or A/Pay adjustments
- Bank reconciliations not done, not in balance or containing stale items
- New, major vendors or customers
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 21. Some Common Small Business Fraud Symptoms - Analysis
- Significant changes evident in horizontal, vertical or ratio analysis
- Unexplained increased borrowing
- Subsidiary ledgers not in balance with general ledgers
- Payroll taxes dont balance with salaries
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 22. Some Simple Controls For a Small Business
- Pre-number & reconcile forms
- Screen prospective employees
- Segregate cash-related functions as much as possible
- Implement controls over checks
- Limit computer access
- Match invoices with checks
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 23. Some Simple Controls For a Small Business
- Periodically review Accounts Receivable and Accounts Payable
- Receive unopened bank and credit card statements
- Approve all Journal Entries
- Be a good example
- Be aware for red flags
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 24. Conclusions
- Fraud is a major problem in organizations
- CPAs are expected to detect it
- Tools and approaches are available
- Skepticism and common sense are essential
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 25. Questions?
- Thanks for your attention.
- Ray Kulzick 305.812.4998
- Kulzick Consulting, PA
- [email_address]
Copyright 2007-2009 - R. S. Kulzick October 24, 2009 26. Ray Kulzick Kulzick Consulting, PA
- Forensic Accounting
- Divorce
- Fraud
- Business Damages
- Data Analysis for Litigation
Copyright 2007-2009 - R. S. Kulzick October 24, 2009