Small Business Fraud Awareness, Prevention and Detection—Hands on

Consultation with Tangible Results

2012 Conference on Teaching and Learning in Accounting (CTLA)

Presented by: Robert J. Kollar and Valerie C. Williams

Small Business Fraud Awareness, Prevention and Detection

Based on results of a grant funded by the Institute for Fraud Prevention (IFP) which was intended to:Help small businesses better understand fraud

Build awareness of the types of fraud affecting small businesses

Quantify impacts of the potential frauds

Provide techniques to prevent, detect and deter fraud

Involve students in a service-learning consulting project.

Grant Deliverables

Results of fraud risk self assessment survey

Student consultant reports from companies service learning projects

Company follow up reports Presentations at SBDC conferences Presentations via select media outlets

Survey

Development of questions• 20 questions

• Questions focused on:• Organization demographics

• Fraud awareness

• Fraud occurrences

Survey Distribution of the survey

• Home page of Duquesne University School of Business web site for one year http://www.surveymonkey.com/duquesnefraudsurvey

• Duquesne’s SBDC email and data base contacts >400 companies

• Survey link at the Western PA Small Manufacturer's Council

• Email distribution to University of Pittsburgh’s Executive Education Center

• Chamber of Commerce phone calls

• Noted on various radio shows

• SBDC Entrepreneur conferences

• Distributed at national training seminar for Meals-on-Wheels chapter executives

• Urban Redevelopment Authority of Pittsburgh – 100 companies

Survey – Consulting Projects

Companies which volunteered for fraud risk assessment via the survey were screened

Nine companies initially identified Three companies ultimately chosen

Survey Results - Demographics

82 responses received:• 60% of the responses from organizations with

revenues of $250K - $1 million

• 57% had less than 10 employees

• 51% identified as being in the service industry

• 24% were in a non-profit organization

• 74% were the CEO, President or Owner

• 51% indicated they were a victim of a fraudulent act

Theft of Assets – most common

0%

10%

20%

30%

40%

50%

60%

70%

Employees Management

Who committed the fraud?

What was the value of the fraud?

How was the fraud discovered?

0%

10%

20%

30%

40%

50%

60%

70%

80%

Employees Internal Review

% Detection source

Survey Results

54% indicated that they were exposed to fraud; 21% believed it was a possibility

Areas with greatest potential for fraud:• 53% cash receipts

• 50% inventory

• 36% employee expense reimbursement

Fraud Prevention Techniques

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Cash Deposited DailyCash Secured

Physical security (locks)Surprise Audits

Job Rotation and Manatory VacationMethod for employee Fraud Reporting

Previous Employment VerificationBackground Checks

Drug Testing

% of Respondents Using

Interest in Fraud Training

Percentage

Yes

Maybe

No

41%27%

31%

Company Fraud Risk Assessment Tool

ACFE fraud prevention check up publication ACFE small business fraud prevention

manual Joseph Wells, Fraud Examination, 3rd edition Faculty members’ experience

Developed a Company Fraud Risk Assessment Tool

General Demographics Sales and Cash Receipts Purchasing and Cash Disbursement Payroll Employee expense reimbursement Reporting and Monitoring Miscellaneous

Scoring of Self-Assessment Tool

Total score > 50 points – The company has strong controls.

Score between 49 and 10 – Controls can be improved and there is fraud risk.

Score < 9 or negative – Fraud risk is high. Inventory and cash could be at risk for theft. Financial statements could be misstated.

Fraud Awareness Media Outlets Radio Show

• Interviewed twice on The American Entrepreneur show

• Interviewed twice by JoAnn Forrester, Empress of Biz Talkcast host; podcast posted at www.Talkshoe.com

SBDC seminars Booth promoting survey and business owner’s questions Duquesne University issued a press release Contacted local Chambers of Commerce

Student Consulting Projects

Organizations’ Profiles• One $5 million privately held manufacturer of

soaps and lotions

• One $3.5 million non-profit organization providing rental units to families

• One $2.0 million privately held recreation and sports training complex

Consulting Projects Process Faculty led training session on use of the assessment tool Coordination of schedules Initial visit to organizations’ locations Meeting with management Tour of facilities Observation of processes Review of policies Review of financial statements (1 out of 3) Interviews

Consulting Projects Process

Student teams analyzed initial findings and developed follow up questions

Follow up visit First draft of findings and

recommendations

Expanded Phase – One Company Due to red flags identified, including:

• Poor cash flow

• Employee termination

• Personal information known by terminated employee

• Lack of reconciliations

• Control of deposits by terminated employee

• $6K loan to the company by the terminated employee Expanded procedures performed by graduate students in the

Advanced Forensic Techniques course

Steps Performed – Expanded Phase Review of journal entries impacting bad debt

expense and revenue Reconciliation of incoming cash receipts to

bank deposits Comparison of credit card payments to

accounts payable payments reviewing for duplicate payments

Review for duplicate A/P payments Search for additional bank accounts

Results

Approximately $100K of revenue was reversed through debits to revenue accounts

An additional bank account was detected Additional UCC filing under the company’s

name but with different officers other than the owners

No duplicate disbursements were detected

Expended Hours

90 student hours 110 faculty hours

General Conclusions/Lessons Learned Difficulty obtaining companies to volunteer for the project

• Restaurant industry Business owners awareness of fraud risk

• “…just have to trust the employees.”

• Respondents that expressed interest in fraud training was 27% The survey results indicated 51% had experienced fraud; 17% said

they were unsure; 53% indicated that they were exposed to a fraud risk; 21% said they were possibly exposed to a fraud risk

General Conclusions/Lessons Learned

Student comments

• Enjoyed the site visits and was good application of concepts

Graduate students appreciated the ability to utilize academic classroom techniques in the field

Difficulty in schedule coordination with students, faculty and businesses

Difficulty coordinating academic semester deadlines with the workflow of the assessments and investigations

Contact informationBob Kollar, MBA, CPA, CGMADirector, Master of Accountancy ProgramPalumbo-Donahue School of BusinessDuquesne University600 Forbes AvenuePittsburgh, PA 15282412-396-4906 or kollar@duq.edu

OR

Val Williams, MBA, CPA, CIA, CHFP, CFE, CFFAssistant Professor of AccountingPalumbo-Donahue School of BusinessDuquesne University600 Forbes AvenuePittsburgh, PA 15282412-396-5700 or trott@duq.edu