Fraud Prevention Techniques · 2016. 9. 15. · 9/15/2016 1 Fraud Prevention Techniques NMARC/ASMCRA 4th Annual Joint Conference Plante & Moran, PLLC Proprietary & Confidential Plante

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Fraud Prevention Techniques

NMARC/ASMCRA4th Annual Joint Conference

Plante & Moran, PLLC Proprietary & Confidential

Plante Moran Forensics

Professionally trained in both interviewing and interrogation

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A One-Firm Firm:

Over 2,000 industry experts to partner with when specific industry knowledge is needed during investigations

FVS team member’s credentials include:

• Certified Public Accountant (CPA)

• Certified Fraud Examiner (CFE)

• Certified in Financial Forensics (CFF)

• Certified Management Accountant (CMA)

• Juris Doctor (JD)

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Why Should You Care?


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2016 Statistics (Report to the Nations)

General Prevention Measures

Back to the Basics – Bank Statements

Most Common Schemes

Agenda

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Association of Certified Fraud Examiners

ACFE.com

FREE

ACFE


ACFE Report to the Nations

2010 2012 2014 2016

Annual Revenues lost to Fraud

5%

Median Loss per incident

$160,000 $140,000 $145,000 $150,000

Primary factor of loss

Lack of internal controls

Typical scheme time duration

18 months

Clean employment histories

85% 87% 87% 95%

Typical occurrences of fraud

Asset misappropriation

Percentage of AssetMisappropriation

90% 87% 85% 83%

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Occupational Fraud by Industry (2014)


Occupational Fraud by Industry (2016)

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Loss by Industry (2014)


Loss by Industry (2016)

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How is Occupational Fraud Discovered?

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Collusion


SAS 99

Misstatement arising from fraudulent financial reporting

Misstatement arising from misappropriation of assets

Fraud triangle

Fraud Brainstorming – Focus on direct and material impact on financial

statements

Valid A/R and revenue

Adequate reserves for uncollectible accounts

Adequate settlement estimates

Risk for misappropriation due to:

Lack of segregation of duties

Lack of required approvals

Inappropriate access/authorization to bank accounts

Professional Skepticism

Fraud Standards in an Audit

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Issue Auditing Fraud Examination

Timing RecurringAudits are conducted on a regular, recurring basis.

NonrecurringFraud examinations are nonrecurring, conducted only with sufficient predication.

Scope GeneralExamination of financial data.

SpecificConducted to resolve specific allegations.

Objective OpinionGenerally conducted for the purpose of expressing an opinion on the financial statements or related information.

Affix BlameDetermine whether fraud has occurred or is occurring, to determine who is responsible.

Relationship NonadversarialThe audit process is nonadversarial in nature.

AdversarialFraud examinations, because they involve efforts to affix blame, are adversarial in nature.

Methodology Audit Techniques Examination of financial data and obtaining corroborating evidence.

Fraud Examination Techniques1.) Document examination; 2.) Review of outside data such as public records; and 3.) Interviews.

Standard Professional Skepticism Auditors are required to approach audits with professional skepticism.

ProofFraud examiners approach the resolution of a fraud by attempting to establish sufficient proof to support or refute a fraud allegation.

Audits v. Fraud Examinations



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Be familiar with the “typical” fraudster

Employment traits

Personality traits

Lifestyle traits

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Male – 56% of reported US occurrences

Median loss: Male - $187,000 Female - $100,000 (previously $83,000)

Between 31 and 45 years old 55%

First time offender

Long-term employees = larger frauds

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Anatomy of a “Fraudster”

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Motivating Factors


Periodic background checks

Changes in motivating factors

Tone at the Top

Rationalization

Employee Support Programs

Motive

Mandatory vacations and/or job rotation

Who doesn’t like vacation?!

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Effective and consistently enforced employee code of conduct

No excuses

Signed employee handbook requirement

No excuses

Anti-Fraud Training

No excuses

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Back to the Basics – The Bank Statements

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In theory, activity received and disbursed should be “visible” within the bank statements

Bank statements should be mailed directly to someone who is not involved in the cash disbursement and/or receiving processes

Multiple sections provide useful information

Cleared check numbers

ATM or other direct cash withdrawals

Electronic payments

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Back to the Basics – The Bank Statements


Most Common Schemes

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(#2) Billing

(#3) Expense Reimbursement

(#4) Non Cash

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Most Common Schemes

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Billing

Person causes employer, via submission of an invoice, to issue a payment for fictitious goods or services

Shell companies

Inflated invoices

Personal purchases

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Billing Schemes


Prevention Methods

Evaluate process to add new vendors—are duties segregated?

Is there a process in place to periodically review approved vendor list?

Detection Methods – Data Analytics

Invoice numbers out of sequence

Inconsistent invoice numbers

Duplicate invoice numbers

Subtle changes in invoice numbers

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Billing Schemes

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http://www.census.gov/quickfacts/table/PST045214/2606553140/embed

“Small” Budget Doesn’t = “Small” Fraud

2013 Population – 15,333

2012 Median household income - $38,719

2012 Median house/condo value - $83,601

2012 Total expenses $15.6M

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Long-term employee

Started as in intern in high-school in 1970

Named Treasurer and Comptroller in 1983

Lack of internal controls

Reconciled accounts

Made deposits

Requested funds

Controlled the mail (PO Box)

http://www.chicagomag.com/Chicago-Magazine/December-2012/Rita-Crundwell-and-the-Dixon-Embezzlement/index.php?cparticle=3&siarticle=2#artanc

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“Small” Budget Doesn’t = “Small” Fraud

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December 1990 – “secret” account opened at Fifth Third Bank of Ohio

What is wrong?

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The Scheme


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The Scheme

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What is wrong?

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What is wrong?


What is wrong?

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What is wrong?


TEST

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MISSING LOGO

What is wrong?

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TESTWhat is wrong?

INCORRECT ADDRESS


TESTWhat is wrong?

LARGE, ROUND DOLLAR AMOUNT

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REAL INVOICE TEST


Checks were written to “Treasurer” so the bank would not be suspicious

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The Scheme

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How much do you think she stole?


Check Scheme

$53,740,394.81 Total Loss

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How Much?

How much do you think she stole?

Loss by Year


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Discovery – How was she caught?

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Rita Crundwell, at 60 years old, sentenced to 19 years and 7 months in federal prison

Recovery:

$35.15 million to be paid by CliftonLarsonAllen

$3.5 million to be paid by Fifth Third Bank

$1.0 million to be paid by Janis Card and Associates of Sterling

$9.0 million (approximately) paid by U.S. Marshall’s auction after expenses

(Less): $10.35 million in legal fees

http://articles.chicagotribune.com/2014-05-19/news/chi-dixon-rita-crundwell-20140519_1_jason-wojdylo-small-northwestern-illinois-town-rita-crundwell

http://chicago.cbslocal.com/2013/10/16/dixon-oks-40m-settlement-with-auditors-who-missed-massive-embezzlement/

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Results


Expense Reimbursement

Employee makes a claim for reimbursement of fictitious or inflated business expenses

Fraudulent expense report

Claims for personal travel

Non-existent meals

Fraud Methods

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Prevention Methods

Ensure duties are segregated for approval

Ensure reviewers would actually be knowledgeable on expenses

Only accept original itemized receipts

Detection Methods – Data analytics

Duplicate transactions (amount, location, date, people, etc.)

Transactions just under documentation threshold

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Expense Reimbursements


Expense Reimbursements50

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Numerous fake receipt websites exist

Look “beyond” documentation/amounts than those provided by the person seeking reimbursement/payment

Organization credit card statements

Third party travel agency

Online banking activity

Random calls to third parties

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Expense Reimbursements


Recommendations (what you can do)

Require receipts with credit card support (vs. only statements)

Communication between AP and FA

Asset tags with real-time monitoring

Doesn’t have to be expensive RFID system (although preferred)

Could be as simple as a master Excel sheet with critical information (serial number, tag number, location, employee)

The key is to keep the listing updated when assets change hands/locations

Employee policy change holding employees accountable for assets assigned to them

Inventory Situation

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Heavily reliant upon inventory controls

If you don’t know what assets you have, how do you know when they’re sold?

Formal process for asset disposals MUST be put in place (RFD?). It’s very easy to someone to sell something on Ebay or craigslist.

What are you cash collection procedures when a department head sells something at auction?

Documentation is needed (name of auction, assets (and tags) sold, receipt, to be provided with monies). Consider confirming sales amount with auctioneer.

Sale of Fixed Assets


Other Current Risks

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Random invitation…

Unknown Risks


Harmless message from a connection…

Click the link?

Unknown Risks

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Harmless message from a connection…

Hit Reply?

Unknown Risks


Email links are risky

Go to site directly and reply from there

Unknown Risks – Phishing

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Reference: https://www.yahoo.com/tech/how-hackers-are-using-fake-1312602721615926.html

Unknown Risks

Harmless recruiter

You accepted directly through the site… so you’re safe?


Unknown Risks

What’s on your profile?

Co-workers?

Job duties?

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They know you handle wire transfers

They know who you work with

Unknown Risks – Spoofing


This only shows up because I used the “free” version of spoofing.


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Reference: https://www.yahoo.com/tech/how-hackers-are-using-fake-1312602721615926.html

These aren’t amateurs



http://www.bbc.com/news/technology‐34994858

Unknown Risks – Spoofing & Phishing

Controls regarding fake social media profiles

Do a reverse image search by dragging and dropping the profile picture into Google Images

Copy and paste the person’s job information into Google as it might reveal other profiles with the exact same information

Simply do not accept invitations from people you don’t know

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The internet has a wealth of “useful” information

The scammers don’t “need” social media…



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Key Control – Cash Management

Do not approve wire requests via email

Pick up the phone and TALK to the requestor

This one control reduces the majority, if not all, of the risk of spoofing

Key Control – Information Technology

Avoid links in emails

Go to the actual websites in order to reply to messages/invites

Reference: https://www.yahoo.com/tech/how‐hackers‐are‐using‐fake‐1312602721615926.html

Unknown Risks – Spoofing & Phishing


Plante Moran Forensics68

Voted top 3 forensic accounting provider in Chicago in 2014 & 2015

Documents

Fraud Prevention Techniques · 2016. 9. 15. · 9/15/2016 1 Fraud Prevention Techniques NMARC/ASMCRA 4th Annual Joint Conference Plante & Moran, PLLC Proprietary & Confidential Plante