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Office of the Washington State Auditor Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 Sarah Walker, CFE, Fraud Manager

Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

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Page 1: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Fraud Prevention, Detection and Red Flags

Budget, Accounting and Reporting CouncilMay 3, 2018

Sarah Walker, CFE, Fraud Manager

Page 2: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Fraud statistics

Red flags

Case study reviews

Credit card best practices

Questions

Agenda

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Page 3: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Year Cases Amounts

1989 31 $358,654

1990 15 $120,121

1991 15 $264,027

1992 20 $226,629

1993 18 $642,439

1994 30 $903,304

1995 37 $689,080

1996 48 $958,805

1997 33 $1,540,368

1998 31 $597,479

1999 42 $1,047,113

2000 30 $167,363

2001 68 $484,060

2002 56 $1,122,328

2003 62 $2,253,394

Fraud history

Year Cases Amounts

2004 47 $331,803

2005 57 $258,960

2006 33 $611,711

2007 24 $1,722,207

2008 35 $548,855

2009 53 $2,055,775

2010 75 $1,864,6522011 50 $1,352,3962012 64 $3,490,235

2013 59 $1,021,759

2014 64 $797,302

2015 34 $457,120

2016 42 $897,504

2017 74 $434,000

Totals 1,247 $27,219,443

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Page 4: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Deposits not made promptly

Mode of payment differences

Unusual adjustments

Concerns with cost of goods sold

Not posting payments to accounts promptly

Safe access not limited

Red flags: Cash receipting

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Page 5: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Unusual vendors

Expenditures exceed budget

Purchases don’t make sense

Missing receipts/invoices

Unusual shipping addresses

Red flags: Payments

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Page 6: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Excessive hours paid

Unusual amounts of overtime

Pay exceeds expectation

Changes made after approval

Leave cash-outs

Red flags: Payroll

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Page 7: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Missing supporting records

Altered documents

Lack of review

Untimely bank reconciliations

Untimely financial reporting

Trusted employee!!! (without adequate monitoring)

Red flags: General

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Page 9: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

How was it detected?

The Procurement Department identified questionable activity during a review of transactions on a credit card issued to a department director.

When asked about the questionable activity, the director acknowledged making purchases for personal use.

Case study

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Page 10: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

What did we find?

Our investigation focused on the director’s credit card purchases from July 2009 through January 2015.

1,651 credit card transactions, totaling $163,675

Case study

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Page 11: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

What did we find?

1,094 unsupported transactions (issued five subpoenas)

701 misappropriated transactions, totaling $50,712

457 questionable transactions, totaling $46,169

Case study

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Page 12: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

What did we find?Purchases for:

Gift cards

Fitness activity trackers

Nutrient extracting blender

Make up and beauty products

Electronics and wireless connection charges

Cleaning supplies

Clothing

Case study

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Page 13: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

What did we find?Purchases for:

Watches and jewelry

Vacation related expenses

Household items

Items shipped to an out-of-state relative

Gifts

Shoes and other accessories

Case study

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Page 15: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Lessons learned: Control weaknesses

The Supervisor did not adequately review the Director’s credit card transactions.

Procurement and Accounting Departments were not adequately monitoring the review and approval of credit card transactions by individual departments to ensure that transactions were legitimate, reviewed and approved before the credit card bill was paid.

Case study

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Page 16: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

What happened to the employee?

She is no longer an employee.

We referred our report to the county prosecuting attorney’s office.

Case study

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Page 17: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Were there any red flags?

Trusted employee with very little to no oversight

Unusual vendors

Purchases that didn’t make sense

Large volume of transactions/amounts

Purchases with an out-of-state “ship to” address

Lack of records

Case study

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Page 19: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study

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Timeline:

1977: Subject starts with the District as a bus driver

2005: Moves into A/P Secretary role

2010: Payroll added to responsibilities

December 2014: High School Principal requests a copy of the District credit card statement

Page 20: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Our investigation identified:

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Case study

Page 21: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study

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Examples of personal purchases:

Pet supplies ($10,600)

Multiple vacations

Clothing

Shoes

Perfume

Page 22: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study

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Examples of personal purchases:

Cosmetic services

Furniture

60-inch LED HD TV

Refrigerator (over $3,000)

Page 23: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Lessons learned: Control weaknesses

The review of expenditures was not sufficient to ensure all purchases were allowable, for a District purpose and in compliance with District expectations.

No supporting statements for credit card purchases were provided for review.

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Case study

Page 24: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Procurement and credit cards: Best practices

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Page 25: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Develop a written policy

Allowable uses

Prohibited uses

No personal use

Responsibilities

Rewards/points use

What happens if policy is not followed

Have everyone with card responsibilities sign off on policy

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How to avoid credit/purchase card fraud?

Page 26: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Records

Require original, itemized receipts

Think about who will be responsible for retaining them

Where are they stored?

Banking controls

Consider setting a monthly limit

Consider prohibiting certain vendor types

Ask if supervisors/Accounts Payable can have read-only access to credit card account

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How to avoid credit/purchase card fraud?

Page 27: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Review: Who is responsible for what?

Employee

Supervisor knowledgeable of activities

Accounts payable

100% detailed review

Documentation of review

Step-back analysis

Who actually needs a card?

Is the volume of transactions necessary and reasonable?

Does the credit card holder ask for personal reimbursements?

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How to avoid credit/purchase card fraud?

Page 28: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Review: What do I look for?

Unusual vendors

Unusual or unallowable items

Large volume of transactions

Only the credit card slip, not the itemized receipt

Photocopies

Scanned documents

Missing receipts

28

How to avoid credit/purchase card fraud?

Page 29: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Review: What do I look for?

Alterations—bank statement or supporting records

Supporting documents with missing information

Documentation that does not look professional

Invoices that are different than the others from the same vendor

“Ship to” addresses that don’t make sense

29

How to avoid credit/purchase card fraud?

Page 30: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study example

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Page 31: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study example

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Page 32: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study example

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Page 33: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study example

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Page 34: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study example

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Page 35: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 35

“State agencies and local governments shall immediately report to the state auditor’s office known or suspected loss of public funds or assets or other illegal activity. “

Page 36: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

What to do if it happens to you:

Fill out a report on the Web at www.sao.wa.gov | Investigations | Fraud Program | Report a Suspected Fraud (RCW 43.09.185).

It takes only a few minutes!

Fraud happens

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Page 37: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Questions?

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Page 38: Fraud Prevention, Detection and Red Flags · Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 ... Fraud history Year Cases Amounts 2004

O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 38

Contacts

Sarah Walker, CFEFraud Manager(509) 454-3621

[email protected]

Stephanie SullivanAssistant Fraud Manager

(509) [email protected]

Sadie Armijo, CFEAssistant Director of Local Audit

(360) [email protected]