FRAUD,it could happen to

you

Presented by: Laura Gannon, CPA

SULLIVAN AND GANNON, LLC22 Central SquareChelmsford, MA 01824www.sullivangannoncpas.com

Fraud is: a deception intended to result in personal gain tricking someone out of their assets a material misrepresentation of facts which is relied upon

by a victim to the victim's damage.

No matter how it is defined, fraud is a growing problem…

Fraud reduces a business’s income on a dollar-for-dollar basis. For every $1 of fraud, NET INCOME is reduced by an equal

amount . This means a firm with a 50% profit margin must

generate $2 of additional revenue to compensate for the $1 of fraud.

WHAT IS FRAUD?

WHO COMMITS FRAUD? 70% of frauds are committed by long-term employees

with 4 to 35 years of “loyal” service.

Age group of highest instances of fraud involves both men and women between the ages of 35 and 44 years old.

STOP & THINK…Why is it easier for a long-term employee to commit fraud? Owners/managers have confidence in these employees’

abilities to perform their duties and often don’t monitor them closely as they are considered trusted employees.

TYPES OF FRAUD

Fraud can be separated between those perpetrated AGAINST businesses and those perpetrated on BEHALF of businesses.

Frauds committed against businesses – Most prevalent type of fraud

Employee embezzlement: employee misappropriates/uses company assets

Vendor Fraud: vendors work w/employee to steal company assets

Customer Fraud: customers work w/employee to steal company assets

Fraud committed on behalf of businesses - Financial statement fraud or management fraud

Occurs infrequently, but is extremely costly

Three key elements common to EVERY fraud include - Perceived pressure

Financial Vices Work-related

Perceived opportunity Lack of internal controls Lack of an audit trail

Rationalization The company owes me No body is getting hurt It’s for a good purpose I’m only borrowing the money and will pay it back

THE FRAUD TRIANGLE

FRAUD PREVENTION

Successful fraud prevention incorporates two essential activities: 1. Creating and maintaining a culture of

honesty and ethics.2. Assessing the risks for fraud and

implementing controls to help prevent, detect and deter fraud.

CREATING AN HONEST CULTURE

Tone at the top Management must be a proper model

Hiring honest employees Check at least 3 references Perform credit and background checks

Communicating expectations Implement a code of conduct policy

Cultivate a positive work environment Fraud transpires less when employees have

positive feelings about a business.

ASSESSING & MITIGATING FRAUD RISKS

Identify fraud risks Think like a thief… How can fraud be perpetrated in your

company?

Implement appropriate internal controls to eliminate risks Segregation of duties System of authorization Independent checks Physical safeguards Documents and records

Widespread monitoring by EMPLOYEES Most frauds are discovered by employee complaints and tips. Create a whistle-blower policy so employees have an avenue by

which to report abuses/potential fraud acts. Most effective fraud prevention tool.

FRAUD SYMPTOMSFraud symptoms fall into six categories and are indicative

fraud may be occurring. 1. Accounting irregularities2. Internal control weaknesses3. Analytical anomalies4. Lifestyle indicators (easiest symptoms to observe)

Fraudsters tend to live beyond their means An A/R clerk who makes $20,000 a year, but

drives a high-end Lexus and takes extravagant vacations frequently .

A manager who has means, but NEVER takes a vacation from work.

FRAUD SYMPTOMS CONTINUED…5. Atypical behavior

Most perpetrators of fraud feel guilty about their crime, this guilt manifests itself as stress. Stress typically induces behavioral changes.

Inability to relax Inability to look others in the eyes Defensiveness Irritability General lack of social behavior with co-workers

Keep in mind no specific behavior indicates fraud rather changes in behavior do…

6. Tips Employees are often in the best position to detect fraud As previously mentioned, most frauds are uncovered via

employee tips and complaints.

FRAUD AND SMALL BUSINESSES It is vital small business owners recognize they are more at risk

of fraud than larger, publicly held companies as they frequently lack the means to implement effective internal controls and employ internal and external auditors to help prevent, detect and deter fraud.

Media reports may suggest financial statement fraud is pervasive, but the fact is the majority of all frauds are employee embezzlements.

To help protect their livelihood small business owners should always perform the following functions or ensure the proper segregation of duties surrounding these responsibilities:1. Reconcile the bank statement (or at minimum open the

bank statement and review for any suspicious activity)2. Write checks or sign every check (do not delegate this

duty)3. Make deposits

Remember most victims of fraud respond with disbelief: “ I can’t believe he would do this. He was my most reliable and trusted employee.”

Sullivan and Gannon, LLC22 Central Square

Chelmsford, MA 01824www.sullivangannoncpas.com