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1FinancialServicesGroup
Fraud Detection and PreventionPresentedby:CarrieKennedy,CPA,PartnerAnthonyPorter,CPA,Manager
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Thematerialappearinginthispresentationisforinformationalpurposesonlyandshouldnotbeconstruedasadviceofanykind,including,withoutlimitation,legal,accounting,orinvestmentadvice.Thisinformationisnotintendedtocreate,andreceiptdoesnotconstitute,alegalrelationship,including,butnotlimitedto,anaccountant‐clientrelationship.Althoughthisinformationmayhavebeenpreparedbyprofessionals,itshouldnotbeusedasasubstituteforprofessionalservices.Iflegal,accounting,investment,orotherprofessionaladviceisrequired,theservicesofaprofessionalshouldbesought.
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PRESENTATION OBJECTIVES
• Attheendofthepresentation,participantsshouldbeableto:o Understandthekeyglobalstatisticsonfraudandhowtheyrelatebacktotheircreditunion
o Identifythekeyfraudrisksandkeyfraudprevention/detectioncontrols
o Establishacultureoffraudawareness,prevention,anddetection
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WHY THE FOCUS ON FRAUD?
“Atanygivenmoment,thereisacertainpercentageofthepopulationthat’suptonogood.”
J.EdgarHoover
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WHY THE FOCUS ON FRAUD?
Report:82% ofexecutivesadmittocheatingonthegolfcourse
Source:FastCompany
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SIGN OF THE TIMES…
Loyalemployeeshavebillstopayandfamiliestofeed.Inagoodeconomy,theywouldneverthinkofcommittingfraudagainsttheiremployers.Butespeciallynow,organizationsmustbevigilantduringtheseturbulenttimesbyensuringproperfraudpreventionproceduresareinplace.
ACFE President James D. Ratley, CFE
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ECONOMIC RECESSION
• Employeesposethegreatestfraudthreatinthecurrenteconomy
• Layoffsareaffectingorganizations’internalcontrols
• Fraudlevelsareexpectedtoremainelevated
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FRAUD RISK
Opportunity
Pressure/Incentive Rationalization
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ASSOCIATION OF CERTIFIED FRAUD EXAMINERS
• TheAssociationofCertifiedFraudExaminers(ACFE)completesareporteverytwoyearssummarizingthekeycharacteristicsoffraud.
• Themostrecentreportisfrom2012.
• Thefollowingareexcerptsfromthatsummary(totalof1,388cases– worldwide)
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MOST COMMON FRAUD – FREQUENCY
Source: ACFE 2012 Report to Nations
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MOST COMMON FRAUD – MEDIAN LOSS
Source: ACFE 2012 Report to Nations
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INITIAL DETECTION OF FRAUD
InitialDetectionofOccupationalFraudsTip:43.3%
ManagementReview:14.6%InternalAudit:14.4%
ByAccident:7.0%AccountReconciliation:4.8%DocumentExamination:4.1%
ExternalAudit:3.3%Source: ACFE 2012 Report to Nations
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SOURCE OF TIPS
Source: ACFE 2012 Report to Nations
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IMPACT OF HOTLINES
Source: ACFE 2012 Report to Nations
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TYPE OF VICTIM - FREQUENCY
Source: ACFE 2012 Report to Nations
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SIZE OF VICTIM - FREQUENCY
Source: ACFE 2012 Report to Nations
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DISCUSSION
• Loanofficerperpetratesafraudbyadvancingfundsonarevolvingline
• Fraudgoesundetectedforanextendedperiodoftime
• Ultimatelyidentifiedbyarandomaccountconfirmation
• Whatcouldhavebeendonetoeitherpreventthefraudortodetectitsooner?
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INDUSTRY OF VICTIM ORGANIZATIONS
Source: ACFE 2012 Report to Nations
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IMPACT OF FRAUD-PREVENTION CONTROLS
Source: ACFE 2012 Report to Nations
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IMPACT OF FRAUD-PREVENTION CONTROLS
Source: ACFE 2012 Report to Nations
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DISCUSSION
• Internalaccountantresponsibleforapprovinginvoicescreatesafictitiouscompany(avalidcorporationisformed)andgeneratesinvoicestorunthroughthecreditunion
• TheywerealsoresponsiblefornewvendorapprovalandentryintotheAPsystem
• Theyapprovetheinvoiceswhicharesubsequentlypaid• Onlyidentifiedaftertheycontinuedtoincreasethesizeoftheinvoicetolevelthatwasverynoticeable
• Howcouldthishavebeenpreventedordetectedearlier?
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PRIMARY INTERNAL CONTROL WEAKNESSES OF VICTIMS
Source: ACFE 2012 Report to Nations
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DISCUSSION
• Individualresponsibleforreconcilingsuspenseaccountsstealsfromthecreditunionforanextendedperiod
• Theyalsohavemaintenanceaccesstobothdepositaccountsandthegeneralledger
• Ultimatelycaughtwhentheygottoogreedyandtheimpactwasnoticeableontheincomestatement
• Howcouldithavebeenpreventedordetectedearlier?
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WHO COMMITTED THE FRAUD
Source: ACFE 2012 Report to Nations
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WHO COMMITTED THE FRAUD
Source: ACFE 2012 Report to Nations
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WHO COMMITTED THE FRAUD
Source: ACFE 2012 Report to Nations
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WHO COMMITTED THE FRAUD
Source: ACFE 2012 Report to Nations
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WHO COMMITTED THE FRAUD
Source: ACFE 2012 Report to Nations
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WHO COMMITTED THE FRAUD
Source: ACFE 2012 Report to Nations
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SIGNIFICANT FRAUD RISK FACTORS
• Lackofdetailedformalwrittenpoliciesandprocedures
• Lackofsegregationofduties• Membercomplaints• Unreconciledaccountsandreviewofreconcilements
• Recurringauditfindings• Missingfinancialrecords
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SIGNIFICANT FRAUD RISK FACTORS
• Untimelypreparationoffinancialstatements• Lackofemployeevacations• Lackofsignificantcontrolovertransactioncycles• Lackofmanagementoversight• Excessiveemployeeaddictions(gambling,drugs)• Incorrect,incomplete,orerroneousfinancialreporting
• Lackofinternalcontrolreportsfromdataprocessingsystem
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SIGNIFICANT FRAUD RISK FACTORS
• Bonusorincentiveplans• Complextransactions• Rapidgrowth• Corporatecreditcards• Employeefinancialproblems• InactiveSupervisoryCommittee• Lackofaudit/verification• Lackofemployeetraining• Highemployeeturnover
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ACFE – EXECUTIVE SUMMARY
• Assetmisappropriationmostfrequentfraud,butfinancialfraudhasthebiggestdollarimpact.
• Averagelifeoffraudapproximately18months.
• Tipscontinuetobetheprimarydetectionsource.
• Smallerorganizationsmostsusceptibleduetolackofcontrols.
• Anti‐fraudcontrolshelpedtoloweroveralllossandduration.
• Fraudsbyexecutivescausethemostdamage.
• Organizationstendtoover‐relyonexternalauditsasthefraud‐preventiontool.
• Surpriseauditswereunderutilized.Lessthan30%ofvictimsactuallyperformedthem.Theyarekey“perception”toolstoeliminatethe“opportunity.”
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INTERNAL CONTROL AND FRAUD PREVENTION TIPS
• Evaluatemanagement’sassessmentoffraudandmitigatingcontrols.
• Evaluatetheinternalauditor’stestingoftheeffectivenessofeachfraudcontrol.
• Evaluatehowmanagementhas“setthetonefromthetop”topromoteethicalbehavior.
• Communicatezerotolerance.
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INTERNAL CONTROL AND FRAUD PREVENTION TIPS
• EnsuretheinternalauditfunctionreportsdirectlyandcandidlytotheSupervisoryCommittee.
• Ensurethatinternalauditorscontinuallyconductteststodetectfraudorcontrolgaps
• Followuponpriorauditfindingsfromtheinternalauditor,externalauditor,andregulators.
• Evaluatethenatureandcauseoffindings.• Ensurethatannualfraudpolicy(orcodeofconduct)issignedbyallemployees.
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BASIC INTERNAL CONTROL SAFEGUARDS
• Toneatthetop• Segregationofduties• Whistleblowerpolicyandhotline• Rotationofpersonnel• Mandatoryvacations• Reconciliationandreviewprocess• Settingofaccountingsystemprivileges• Accesslevels– reviewandadjust
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THE REPUTATION RISK ASPECT OF INTERNAL FRAUD
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THANK YOU
CarrieKennedy,CPA,PartnerMossAdamsLLP(509)777‐[email protected]
AnthonyPorter,CPA,ManagerMossAdamsLLP(425)258‐[email protected]
