fraud detection and prevention - moss adams

Fraud Detection and Prevention

Rebecca Radell, Senior Manager, Moss Adams

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Understand the key global statistics on fraud and how they relate back to Credit Unions

Identify the key fraud risks and key fraud prevention/detection controls

Understand management responsibilities surrounding fraud and establish a culture of fraud awareness, prevention, and detection

Brainstorm ideas from some case studies

Other presentations have already covered employee accounts and cybersecurity

Presentation Objectives

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Pressure

• A gambling or drug habit

• Personal debt or poor credit

• A significant financial loss

• Peer or family pressure to succeed

Why is Fraud Committed?

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Opportunity:

• Lack of supervision

• Poor internal controls

• Poor record keeping

• Extreme trust in a single individual

• Lack of disciplinary action for previous frauds


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Rationalization:

• I was only borrowing the money and planned to repay it.

• The company won’t even realize this amount is gone; it’s not that much

• I’ve been working with the company for 15 years. They owe it to me.

• I’ll stop once I pay off my debts.

• I deserved this after the way the company has treated me.


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Asset Misappropriation: schemes in which the employee steals or misuses an organization’s assets

• Tampering with monetary instruments

• Accessing member accounts

• Fraudulent loans

• Overstating reimbursable expenses

Types of Fraud

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Corruption: schemes in which a fraudster wrongfully uses his influence in a business transaction for the purpose of obtaining a benefit for himself or another person

• Conflicts of interest

• Illegal gratuities

• Bribery

Types of Fraud

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Fraudulent Statements: fraud schemes involving the intentional misreporting of an organization’s financial information with the intent to mislead others

• Creating fictitious revenues

• Concealing liabilities or revenues

Types of Fraud

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What happened?• Teller embezzled $120,000 from a recently deceased member’s accountHow was it caught?• Discovered as part of the audit and member account confirmation.What went wrong?• Lack of segregation of duties• Lack of review How could it have been prevented?• Controls over segregating employees with cash access and employees who can code member

accounts as no-mail• Effective review of file maintenance and vault activity

Credit Union Fraud Case #1

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What happened?• Credit Union VP purchased unneeded/unauthorized equipment and resold for personal gain.

The individual ordered the equipment, authorized payment, and received the equipment. personally

What went wrong?• Fixed asset inventory not well managed• Segregation of duties on procurement and purchasing controlsHow could it have been prevented?• Better control over corporate credit cards• Controls and oversight of purchasing AND receiving• Regular inventory of fixed assets


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What happened?• Management fraudulently overstated assets, mainly corporate credit union accounts, to cover

up embezzled funds ($2 million)How was it caught?• External audit uncovered discrepancy during a routine external audit in 2015 that resulted in

additional follow-up with the corporate credit unionWhat went wrong?• Lack of segregation of duties• Lack of surprise auditsHow could it have been prevented?• Segregation of duties over access to the vault and the ability to post journal entries• Implementing random audits of vault cash


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Capability

• Technical skills to take advantage of opportunity

• Intelligence to exploit control weaknesses

• Ability to deal with the stress

• Organizational positioning

• Deception skills to lie to the board, auditors, and others and maintain that lie over time

Commonality

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The ACFE is the world’s largest anti-fraud organization

Together with more than 75,000 members, the mission is to reduce the incidence of fraud and white-collar crime.

Premier provider of anti-fraud training and education.

Association of Certified Fraud Examiners

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The Cost of Fraud

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What happened?• Management fraudulently overstated investments to hide money that had been embezzled over

12 years (20 million)How was it caught?• NCUA examinationWhat went wrong?• Lack of segregation of dutiesHow could it have been prevented?• Controls over accounting, accounts payable, and ACH processing functions


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Who Commits Fraud?

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Non-Fraud-Related Misconduct• Nearly 40% of fraudsters had engaged in some form of non-

fraud workplace violations (bullying or intimidation most common)

Behavioral Red Flags• Living beyond means• Complaining about money• Stops complaining about money• Keeps too much control considering position• Frequent delays when requesting information• Doesn’t follow vacation policy

Who Commits Fraud?

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Who Commits Fraud?

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Victim Organizations

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What happened?• Loan officer embezzled $1.6MM over 13 yearsHow was it caught?• Mailer was sent out and returned with a bad address, triggering an investigationWhat went wrong?• Lack of internal controlsHow could it have been prevented?• Segregation of duties• Loan origination controls and loan file reviews


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• Whistleblower hotline

• Compulsory vacations

• Written fraud policy

• Appropriate training at all levels

• Annual independent audit

• Annual independent account verification

• Biennial internal control (expanded scope) audits

• Board oversight

• Segregation of duties

• Rotation of duties

• Appropriate dual controls in place

Safeguards and Internal Controls

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Fraud Detection

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• Continuous education• ACFE website• Exception tracking• Tipline mointoring• Vendor complaints• Brainstorm with colleagues• AIRES file statistics• Other ideas from the group?

Fraud Detection

Questions?

fraud detection and prevention - moss adams

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