Letchworth Controls. Nonprofit Fraud Prevention

LetchworthControls

Fraud & Embezzlement Prevention

Fraud Awareness & Prevention

Daniel P. Healy, CPAPROFESSIONAL EXPERIENCE

• Genworth Financial 9/05 – Present; Director Operations & Controllership

• The Brink’s Company 11/03 – 9/05; Audit Manager (Acting Audit Director)

• Carpenter Co. 2/00 – 11/03; Audit Director

• Cendant Corporation 12/97 – 2/00; Senior Manager – International Audit

• RCSB Financial 10/94 - 12/97; Corporate Audit - Senior Manager• HSBC 12/88 – 12/94; Corporate Investigations Officer / Audit Officer

• Public Accounting 9/87 – 12/88; “Big 8” Firm Internship & Staff Accountant

EDUCATION• University of Rochester- MBA Finance• Canisius College – BS Accounting

PUBLICATION• M2 Fraud Case Study – American Institute of Certified Public Accountants

Embezzlement Definition

The wrongful appropriation of money or property by a person to whom it has been lawfully entrusted.

Embezzlement implicitly involves a breach of trust, it's not necessary to show a fiduciary relationship among the parties.

Control/Efficiency Balance

Controls

Efficiency

•The More Control Steps the Longer the Process Takes•The Less Control Steps the More Exposed to Fraud

Control/Efficiency Balance

Controls

Efficiency

To Decide on Balance Must Have Understanding of Risk

Do We Need to Act Now ?

2,347,200

1,800 PresidentMary Washington College Student Gov.20

2,500 PresidentPeabody Middle School PTA19

3,100 Union OfficialRadford Iron Foundry 18

4,000 PresidentBlandford Elementary School PTA17

4,900 PresidentClover Hill High School Band Booster Club16

5,000 Office MgrShady Grove United Methodist Church 15

8,900 PresidentTuckahoe Football & Cheerleading Assoc.14

10,500 ParentCharity for Grand daughter Jackie 13

15,000 TreasurerJacob Adams Elementary School PTA12

17,500 TeacherSt. Michael's Episcopal School 11

20,000 PresidentArthur Ashe Jr. Elementary School PTA10

31,000 VolunteerBig Island Emergency Crew9

34,000 EmployeeLand America Financial Group 8

44,000 TreasurerPortmouth Firefighters/Paramedics Union7

70,000 VolunteerBacon District Volunteer Fire Dpt.6

75,000 DirectorSanta Pal - Christmas Program Kids5

170,000 AccountantNational Kidney Foundation of VA4

350,000 PresidentSkating Club of Staunton 3

480,000 TreasurerRichmond Metropolitan Youth Soccer 2

1,000,000 Priest Catholic Diocese of Richmond 1

Recent Area Non-Profit Embezzlements

_______

Average Loss $117,000

Richmond Times Dispatch

2,347,200

1,800 PresidentMary Washington College Student Gov.20

2,500 PresidentPeabody Middle School PTA19

3,100 Union OfficialRadford Iron Foundry 18

4,000 PresidentBlandford Elementary School PTA17

4,900 PresidentClover Hill High School Band Booster Club16

5,000 Office MgrShady Grove United Methodist Church 15

8,900 PresidentTuckahoe Football & Cheerleading Assoc.14

10,500 ParentCharity for Grand daughter Jackie 13

15,000 TreasurerJacob Adams Elementary School PTA12

17,500 TeacherSt. Michael's Episcopal School 11

20,000 PresidentArthur Ashe Jr. Elementary School PTA10

31,000 VolunteerBig Island Emergency Crew9

34,000 EmployeeLand America Financial Group 8

44,000 TreasurerPortmouth Firefighters/Paramedics Union7

70,000 VolunteerBacon District Volunteer Fire Dpt.6

75,000 DirectorSanta Pal - Christmas Program Kids5

170,000 AccountantNational Kidney Foundation of VA4

350,000 PresidentSkating Club of Staunton 3

480,000 TreasurerRichmond Metropolitan Youth Soccer 2

1,000,000 Priest Catholic Diocese of Richmond 1

Recent Area Non-Profit Embezzlements

_______

Average Loss $117,000

Consistent National Average for Embezzlements

Richmond Times Dispatch

2009 Area Embezzlements

Local JetBlue manager guilty to $338,000 embezzlementPublished: March 21, 2009

Woman guilty in swindle Ex-JetBlue terminal boss pleads to stealing $338,000 fromairline. The former manager of JetBlue Airways' terminal operations in Richmond pleaded guilty yesterday to swindling the airline of more than $338,000.

Investigators discovered $800 worth of pizza, $8,000 in sports club memberships forfamily members and their friends, $104,000 in travel expenses, $45,000 in clothing and the costs of a trip taken by the James River High School Robotics team.

Carol Davidson, 43, of Midlothian, pleaded guilty to 13 felony charges for embezzlement, forgery or uttering bogus checks, all in a matter of months in 2007 and 2008. She forged employee names on JetBlue checks and used a company credit card for her own expenses.


Woman embezzled $300,000 from churchPublished: May 1, 2009

ISLE OF WIGHT -- A former secretary has admitted embezzling more than $300,000 from a Smithfield church. Debra Lee Epps pleaded guilty yesterday in Circuit Court to eight counts of embezzlement and one count each of forging and uttering checks. The 51-year-old Epps apologized to the congregation of Christ Episcopal Church.

Commonwealth's Attorney Wayne Farmer says Epps took the money over a 10-year period beginning in 1998. Farmer says Epps told investigators she used the money to pay school tuition and credit card debt, and to pay for horseback riding lessons and

her family's annual trip to Florida. Epps faces 180 years in prison when she's sentenced. -- The Associated Press


Ex-bookkeeper guilty of embezzlingPublished: February 26, 2009

A former bookkeeper for an arts program at Shady Grove United Methodist Church in western Henrico County is facing up to 40 years in prison in June when she is sentenced on two embezzlement convictions.

Henrico Circuit Judge Burnett Miller III found Lisa H. Pauley, 49, guilty yesterday of stealing nearly $1,000 through two checks she wrote on church accounts linked to an arts program at the church.

The thefts turned up when questions were raised about unaccounted for funds and church officials looked more closely at the church's loose payroll and check-writing controls.

Pauley was convicted of swindling a realty firm of nearly $5,000 in 2003 and received a suspended sentence. She has made restitution in both cases.Sentencing is scheduled for June 3. -- Bill McKelway


Former Farm Bureau lawyer gets 15 yearsPublished: February 4, 2009

A former Virginia Farm Bureau lawyer will spend 15 years in prison for stealing at least $2 million from the organization from 1996 through last summer.

Judge Timothy K. Sanner yesterday sentenced Lawrence H. Bidwell in Goochland County Circuit Court to 30 years in prison but suspended half of that term, said Goochland Commonwealth's Attorney Claiborne Stokes.

Sanner also ordered Bidwell to pay $2,103,737 in restitution. Bidwell, 49, of the Farmville area, pleaded guilty Nov. 14 to five embezzlement charges and a forgery count. Authorities say Bidwell had been stealing money since 1996, a pattern that was discovered in August.

In 1996, the Farm Bureau had learned Bidwell had been disbarred in Tennessee, where he earned his law degree, Stokes has said.


Chesterfield County Woman Faces 20 YearsDrytac Corporation Embezzlement Published: May 7, 2009

Faye G. Barksdale, 48, faces up to 20 years in prison or, at the discretion of the court, 12 months in jail and a fine of up to $2,500 for embezzlement after she pleaded guilty yesterday to stealing $151,000 over five years from her employer, Drytac Corp., where she worked as the accounts payable clerk for nearly a decade.

Henrico prosecutor David Stock said Drytac might not have ever discovered the theft had Barksdale not left one of her counterfeit checks in the company's copying machine on the Friday before she went on vacation last year.

"Another employee checked the copier [the following] Monday and sees a check on the copier that's got Faye Barkdsale's name and address taped over" the name of the recipient, Stock said. "They never would have caught her [otherwise]."Her employer manufactures and sells heat-activated and pressure-sensitive mounting adhesives, over laminating films and inkjet media, as well as other products. The company has a local office on Glen Alden Drive in Henrico.


President of Chesterfield Group Jailed EmbezzlementPublished: May 22, 2009The former president of the Providence Athletic Association will spend three months injail for stealing nearly $2,000 meant to benefit sports-minded children.

Pulliam, who has two other theft convictions in the past two years, originally was charged with stealing about $5,000 from the athletic association in March and Aprilof last year.

Lastly, Pulliam created a phony bill from the Internal Revenue Service that said the Association needed to pay $300 to keep its tax-exempt status. "She struck off a check for that and it ended up in her own pocket," Hogan said.


Newport News detective charged embezzling from groupPublished: March 5, 2009NEWPORT NEWS — A Newport News police detective is on administrative leave after being charged with embezzling from a fraternal group.

Thomas David Crouch of Portsmouth is charged in Norfolk with using a credit card from the Police Emerald Society for personal use between late 2007 and mid-2008.

Norfolk police spokesman Chris Amos says the 45-year-old Crouch was an officer for the society. Crouch turned himself in at the Newport News police headquarters yesterday. He remains free on $1,000 bond.

Newport News police spokesman Lou Thurston says Crouch has been placed on administrative leave and the department is conducting an internal investigation


2009 Area EmbezzlementsVa. law-office worker charged with embezzlementPublished: March 30, 2009

FAIRFAX -- Fairfax County police say a former law-office administrator has been charged with stealing tens of thousands of dollars from theoffice.

Police announced last week that 36-year-old Lisa Mylan McCormick of Sterling has been charged with four counts of felony embezzlement.

Police say that after McCormick stopped working for lawyer Kevin Fitzpatrick, he discovered the thefts and reported them.

The thefts allegedly occurred between 2006 and 2008. McCormick was questioned by police and surrendered this month.

-- The Associated Press

Lee County woman guilty of embezzlingPublished: January 29, 2009

A Lee County woman faces up to 120 years in prison after pleading guilty to embezzling nearly a half-million dollars from the bank where she worked.

Rebecca Dawn Long likely will receive a much shorter sentence, however, because she reached a plea agreement with prosecutors, said U.S.Attorney Julia C. Dudley.

Long, 35, of Jonesville, pleaded guilty Tuesday in U.S. District Court in Abingdon to all five counts against her: bank fraud, bank embezzlement, money laundering, making a false statement on a loan document and engaging in a monetary transaction with criminally derived property.

Long was an employee of The Peoples Bank in Lee County between 2004 and 2008 when she established a line of credit under a fictitious name, then withdrew $487,685 under the name, according to prosecutors. The withdrawals occurred over her four years of employment.


Do We Need to Act Now ?

yes

Embezzlement Triangle



Rationalization

OpportunityPressure/Need

Reduce Fraud Opportunity

Reduce Fraud Opportunity

1. Tone at The Top / Leadership

2. Segregation of Employee Duties

3. Instilling a Perception of Detection

Small Organizations 100X More Fraud Risk

• Basic accounting controls often lacking

• Small organization often have one employee write &

sign checks, reconcile the bank statement & keep the

books.

• Level of trust exists due to entity's size,

• Small companies were less likely to be audited.

Fraud Fact

FBI & Association of Fraud Examiners

Fraud Fact

The U.S. Department of Justice reports that morethan one-third of all thefts from organizations are by employees.

It is imperative for today’s organizations to build a company culture of integrity and honesty.

U.S. Department of Justice

Fraud Fact

Fraud levels are expected to continue rising

Almost 90 percent of respondents said they expectfraud to continue to increase during the next 12 months. Additionally, the fraud most expected to increase is embezzlement.

2008 ACFE Report on Occupational Fraud

Fraud Fact

Employees pose greatest fraud threat currently

When asked which, if any, of several categories of fraudincreased during the previous 12 months, the largest number of survey respondents (48 percent) indicated that embezzlement was on the rise.


Fraud Fact

Layoffs affecting internal control systems.

Nearly 60 percent of CFEs who work as in-house fraud examinersreported that their companies had experienced layoffs during the pastyear. Among those who had experienced layoffs, almost 35 percentsaid their company had eliminated some controls, while 44.2 percentsaid the layoffs had no effect on controls and only 3.2 percent said their company had increased controls.


(The Organization’s Control Expectation)

Tone at The Top

Tone at The Top

• Steps taken by leadership to set expectations • Foundation for all other forms of control• Set’s ethical tone for organization • Leadership integrity, ethical values, competence

Ask Yourself:1. Is Ethical Behavior Demanded in Your Organization ?2. Do Your Organizational Leaders Project Ethical Values ?

How to Set Ethical ExpectationsRequire new hire background investigations Require new hire drug screensCode of Conduct annual refresh meetingAnnual Code of Conduct questionnaire Annual Code of Conduct sign-off onEstablish a anonymous “tip line” to attorneysSet out clear consequences for ethical breachMake sure to follow through – consequencesLeadership consistently display ethical behavior

Tone at The Top

Questions ?

Tone at The Top

Fraud Fact

Most fraud is uncovered as a result of tips and complaints from other employees. To deter and detect fraud and abuse, many experts believea 1-800 employee hotline is the single most cost-effective measure.

Fraud Fact

Segregation of Duties

Ensure that a single person does not have access to cash/checks and the ability to update organizational accounting records



Cash & Receipt Donuts/Assets


CustomerPlaces Order,

Pays & Receives Receipt





CustomerReceives Donuts

Business receives cashCustomer receives receipt

Business receives receiptCustomer receives goods

Typical Cash/Receivable Process


OK

$1,000


Work Flow Problem


OK

$1,000


OK

$1,000

Segregation of DutiesSegregation of Duties

RECALLEnsure that a single person does not have access to cash/checks and the ability to update the organizational accounting records



Pays & Receives Donuts


Customer Pays for Week of DaycareCustomers Account is Updated to Reflect Payment

How do we know the transaction was rung up on the register ?

No Receipt


Cash/Receivable Embezzlement Scam #1

Lapping


Day 2

OK

$1,000

$500

Embezzlement - Lapping Scam

Embezzlement Scam #2

False Debit


OK$500

$500

Embezzlement – False Debit Scam

Recommended Structure






CustomerReceives Donuts

Business receives cashCustomer receives receipt

Business receives receiptCustomer receives goods

OK


OK


A

Disbursements/Accounts Payable Process


A

Disbursements/Accounts Payable Process

Typical Disbursement Process




DirectorAPPROVES

FinanceDirector Vendor

Invoice

Check

Order

Department 1

Department 2

Department 3

ACCOUNTINGAsset 20,000 A/P 20,000

ACCOUNTINGA/P 20,000 Cash 20,000


DirectorAPPROVES


Invoice

Check

Order

Department 1

Department 2

Department 3



Work Flow Problem



DirectorAPPROVES


Invoice

Check

Order

Department 1

Department 2

Department 3



Kay Lemon - Story

Association of Certified Fraud Examiners

Kay Lemon - StoryKay Lemon, a seemingly prim-and-proper grandmother, stole $416,000 from a small Nebraska lighting storewhere she had been employed for 20 years as abookkeeper.

Then spent three years in the Nebraska Women's Correctional institute after confessing that she'd been hitting the books for eight years and had blown all the loot on herself and her family.


Lemon's crime is typical of the risk to small business: The lighting store's CPA only prepared the company's tax returns, so the business was not audited.

Lemon also acted as the store's "accounting department." She made deposits, signed checks and reconciled the store's bank account.

Although any entry-level accountant could recognize this situation as an accident waiting to happen, the store'sowner did not.

Kay Lemon - Story


After 12 years of unrelenting temptation, Lemon finally gave in. Thereafter, for years, she systematically stolemoney from the lighting store using the same method.

She would make out a company check to herself (in herown true name), sign it and deposit the proceeds in herpersonal checking account.

Kay Lemon - Story

To cover the theft, Lemon would do three simple things:

• First, she'd enter "void" on the check stub when she wrote the check to herself.

• Second she would add the amount of the theft to the check stub when she paid for inventory. For example, if she took $5,000 and was paying a vendor $10,000, she would show $15,000 on the vendor's check stub.

• Third, when the checks paid to Lemon were returned in the bank statement, she would tear them up and throw them in the trash

Kay Lemon - Story

Lemon chose the most logical (and common) method for covering a cash embezzlement: the false debit. When Lemon credited the bankaccount for the checks she made out to herself, the correspondingdebit was false. Still, from the standpoint of the accounting equation,the books were in balance.

Lemon and other embezzlers have two choices concerning the falsedebit: The transaction can be allocated to an asset account or an expense account. In Lemon's case, she added her thefts to the inventory account--an asset. A false debit will stay on the books until some action is taken to remove it. In this situation, the lighting store's inventory was overstated by $416,000 over eight years, as the store never performed a physical count of its inventory. As a result, when Lemon's crime came to light, a huge writeoff was necessary, almost bankrupting the store.

Kay Lemon - Story


A less obvious move would have been for Lemon to chargethe false debit to an expense account, which is written off every year. It doesn't matter what the expense is, although these are some favorites: advertising, legal expense,consulting fees and other "soft expenses." Here, the expense for fraud gets written off annually.

If the fraud perpetrator can conceal the fraud long enough for the account to be closed to profit and loss, he or she has gone a long way toward avoiding detection—at least on a current basis.

Kay Lemon - Story


Recommended Structure






•Annual Budget Proposed by Department Heads & Senior Management •Approved by Board of Directors


• Annual Budget Proposed by Department Heads & Senior Management • Approved by Board of Directors

• Budget Variances Brought to Board of Directors Attention Monthly Meetings



Should Have a Process Where Vendor’s Are Approved and Lists Maintained




Department 1

Department 2

Department 3

Rec

Finance Director

Rec

Rec

In Order

Budget

Vendor Approved

NO

Yes

Kicked Back

VendorInvoice

ApprovedPurchase

Order

Exec Director

ApprovedExDir





Questions ?

Perception of Detection

One of the most important anti-fraud stepsis to convince employees & venders that there is no way a fraud or embezzlement will go unnoticed & if noticed will be prosecuted


Select a small number of disbursements each period and request supportingdocumentation including approvals.

Vary requests, large dollar then small dollar,hit each department, select all checks with a employee as a payee, demand support.


Perception of DetectionEnlist the Board of Directors to perform spotreviews on some key aspects of control quarterly.

Have the results of quarterly reviews reported to Board regularly.

Should consider inviting a CPA or Internal Auditor to join the Board (See Last Page)

Potential Quarterly Board Testing

Cash Inflows



OK


OK

1

1


OK

1

1

2

2


OK

1

1

2

2

3


Potential Quarterly Board Testing

Cash Outflows


Board of Directors


Board of Directors


Board of Directors


Board of Directors


Board of Directors

Early Warning Signs

Skimming• Decreasing cash to total current assets. • A decreasing ratio of cash to credit card sales. • Flat/declining sales with increasing cost of sales. • Increasing A/R compared to cash. • Delayed posting of A/R payments. • Unexplained cash discrepancies. • Altered or forged deposit slips. • Customer billing and payment complaints. • Rising "in transit" deposits during bank reconciliations.

Early Warning Signs

Fraudulent Disbursements• Increasing "soft" expenses (like consulting, advertising). • Employee home address matches a vendor's address. • Vendor address is a post office box or mail drop. • Vendor name vague business purpose. "JTW

Enterprises"). • Excessive voided, missing or destroyed checks.

Signs an employee may be inclined toward theft

• Holds a grudge against the organization • Living beyond their means• Experiencing extraordinary medical expenses• Spouse has lost his/her job• Divorced and/or separated• Other financial struggles, (lawsuits, foreclosures) • Short vacations • Defensive behavior overly nervous when questioned• Over-devotion to the job – working a lot of overtime • Missing documents and support data

Early Warning Signs

Thank You !

Documents

Letchworth Controls. Nonprofit Fraud Prevention