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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
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
2
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
3
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
4
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
5
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
6
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
7
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
Study
College
Credit cardJuly 1, 2009 – January 31, 2015
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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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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
10
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
11
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
12
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
13
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
Where did the money go?
How was the fraud concealed?
Mostly, it wasn’t
In some instances, lack of supporting records
Some purchases were from vendors that offered a wide variety of goods
Case study
14
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
15
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
16
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
17
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
Study
School district
credit card
August 2008 – January 2015
18
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
19
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
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:
20
Case study
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
21
Examples of personal purchases:
Pet supplies ($10,600)
Multiple vacations
Clothing
Shoes
Perfume
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
22
Examples of personal purchases:
Cosmetic services
Furniture
60-inch LED HD TV
Refrigerator (over $3,000)
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.
23
Case study
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
24
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
25
How to avoid credit/purchase card fraud?
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
26
How to avoid credit/purchase card fraud?
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?
27
How to avoid credit/purchase card fraud?
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?
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?
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
30
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
31
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
32
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
33
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
34
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. “
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
36
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?
37
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
Stephanie SullivanAssistant Fraud Manager
(509) [email protected]
Sadie Armijo, CFEAssistant Director of Local Audit
(360) [email protected]