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FRAUD AWARENESS & PREVENTION

Nancy Wonderlich Koonce,CPA/MBA/CVA/CFE

[email protected]

Leforgee, Braga & Donnelley, Chtd.2

What is 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.”


Fraud Statistics:

6% of revenues will be lost due to fraud– Estimated at $660 billion annually in the United

States– $4,500 per employee

Small businesses are the most vulnerable– Average scheme for small companies (under 100

employees) costs $98,000 in losses– 45.8% of frauds reported were from small

companies


Fraud Statistics:

7.9% of occupational frauds involve fraudulent financial statements

– Median loss is over $1 million per scheme

30% of occupational frauds involve corruption.– They cause over $250,000 in losses on average

92.7% of occupational frauds involve asset misappropriations.

– Cash is targeted asset 93.4% of the time– Median loss is $93,000


Fraud Statistics

Breakdown of cash misappropriations:– 74.1% were fraudulent disbursements

Median loss of $125,000

– 28.2% were skimmingMedian loss of $85,000

– 23.9% were cash larcenyMedian loss of $80,000


Fraud Statistics:

Frauds committed by employees cause median losses of $62,000Frauds committed by managers cause median losses of $140,000Frauds committed by owners/executives cause median losses of $900,000


Fraud Statistics:

The typical occupational fraud perpetrator has been employed by the victim organization for over 6 years.The average fraud scheme lasts 18 months before detection.Losses caused by perpetrators older than 60 are 27 times higher than losses caused by employees 25 and younger.


Key Elements of Fraud:

The activity is clandestine;The perpetrator violates his fiduciary duty to the victim organization;It is committed for the purpose of direct or indirect financial benefit to the perpetrator; andIt costs the employing organization assets, revenue or reserves.


The Fraud Triangle:

OpportunityMotive

Rationalization


Typical Cash Misappropriation Schemes:

Skimming– Unrecorded sales– Understated sales– Theft of payments received in the mail



Cash Larceny– Theft of cash from register– Deposit lapping– Deposits in transit


Typical Cash Misappropriation Schemes

Fraudulent disbursement:– Billing schemes– Check tampering schemes– Expense reimbursement schemes– Payroll schemes– Register disbursement schemes



Billing schemes– Shell companies– Pass-through schemes– Accomplice vendors (collusion)– Pay-and-return schemes– Personal purchases



Check tampering– Forged maker schemes– Forged endorsement schemes– Altered Payee Schemes



Expense reimbursement schemes– Mischaracterized expenses– Overstated expense reports– Fictitious expenses– Multiple reimbursements



Payroll schemes– Ghost employees– Falsified hours and/or salary– Commission schemes– Workers compensation



Register disbursement schemes:– False refunds– Overstated refunds– Credit card refunds– False voids


Warning Signs:

Skimming– Decreasing cash to total current assets– A decreasing ratio of cash to credit card sales– Flat or declining sales with increasing cost of

sales– Increasing accounts receivable compared with

cash– Delayed posting of accounts receivable payments


Warning Signs:

Cash Larceny– Unexplained cash discrepancies– Altered or forged deposit slips– Customer billing and payment complaints– Rising “in transit” deposits during bank

reconciliations


Warning Signs:

Fraudulent disbursements– Increasing “soft” expenses (consulting,

advertising, etc.)– Employee home address matches a vendor’s

address– Vendor’s address is P.O. Box or mail drop– Vendor name consists of initials or vague

business purpose– Excessive voided, missing or destroyed checks


Warning Signs:

Others– Unexplained reduction in net income– Unexplained employee wealth– Employees who don’t take vacations and always

seem to be at work even when others are not– Employees with credit problems– Confusing, missing or jumbled records

Always behindNeed to take books home


Prevention:

Currently, the most common method for detecting fraud is a tip from an employee, customer, vendor or anonymous source.Second most common method for small businesses is by accident.90% of frauds can be prevented with appropriate and enforced internal controls.


Prevention:

Skimming– Receipt or sales level controls– Check conversion controls– General controls

Segregation of duties


Prevention:

Cash larceny– Segregation of duties– Mandatory vacations– Assignment rotation– Surprise cash counts and procedure supervision– Physical security of cash


Prevention:

Billing schemes– Segregation of duties– Competitive bidding– Proper documentation and approvals


Prevention:

Check tampering– Segregation of duties– Check disbursement controls– Mandatory vacations– Physical tampering prevention– Check theft controls


Prevention:

Expense schemes– Detailed expense reports– Require original receipts– Periodic reviews


Prevention:

Payroll fraud– Segregation of duties– Periodic review and analysis of payroll– Personal distribution of paychecks


Prevention:

Register disbursement schemes– Segregation of duties– Monitor register access and secure access codes– Supervisor presence– Review supporting documentation


Prevention:

Other good ideasPut policies and procedures in writingEstablish and follow a written code of conductImplement or subscribe to a HotlineDo background and reference checks prior to employmentConduct fraud prevention checkups and examinations


If You Suspect Fraud:

Don’t make any assumptionsGet a professional to investigateDon’t be afraid to prosecute or file suit


NANCY WONDERLICH KOONCE, CPA/MBA/CVA/CFE

Leforgee, Braga & Donnelley 864 Filer AvenueTwin Falls, ID 83301

208-733-4730

[email protected]

fraud awareness & prevention › download › ... · 3 leforgee, braga & donnelley, chtd....

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