Agenda Introduction Internal Controls the textbook version ACFE - - PDF document

6/21/2018 1 Fraud Happens….but it doesn’t have to. A Simple Perspective on how to Protect You and Your Organization

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David Mol, CPA

Redpath and Company,Ltd

Agenda

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• Introduction
• Internal Controls – the textbook version
• ACFE Report to the Nations
• Real Life Examples
• Solutions

Introduction

• Introductions

– Speaker – Class Participants

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6/21/2018 2 Internal Controls

• So what’s the big deal about internal controls?

– Safeguarding assets – Provide reliable data

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COSO

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• Committee Of Sponsoring Organizations of the

Treadway Commission

– “Joint initiative of five private sector organizations dedicated to providing thought leadership through development of frameworks and guidance on enterprise risk management, internal control and fraud deterrence.”

COSO

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6/21/2018 3 COSO

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• Documents issued by COSO

– 1992 – Internal Control – Integrated Framework – 2006 – Internal Control over Financial Reporting – Guidance for Smaller PublicCompanies

U.S. Government Accountability Office

• GAO’s Green Book –

Standards for Internal Control in the Federal Government

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GAO’s Components of Internal Control

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6/21/2018 4 COSO’s Integrated Framework Principles

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Internal Controls

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• Internal controls and financial audits

– Auditor is required to report on internal control – Report discloses deficiencies in internal controls when “the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis”. – Misstatements may be caused by error or fraud.

Internal Controls

• Assessing the risk of error

– Changes in operating environment – Inherent risk – Control risk

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6/21/2018 5 Internal Controls

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• Assessing the risk of fraud

– Definition of fraud

• “The use of one’s occupation for personal enrichment

through deliberate misuse or misapplication of the employing organizations resources or assets.”

Fraud

• Common types of fraud

– Misappropriation of assets – Fraudulent financial reporting – Corruption

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Fraud

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• Misappropriation of Assets

– Theft of cash on hand – Theft of cash receipts – Fraudulent disbursements – Inventory and other assets

6/21/2018 6 Fraud

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• Fraudulent Financial Reporting

– Grant reporting – Regulatory reporting – Improper asset valuation – Budgetary concerns

Fraud

• Corruption

– Conflicts of interest – Bribery – Economic extortion

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The Fraud Triangle

Incentive or pressure Opportunity Rationalization/attitude

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6/21/2018 7 The Fraud Triangle

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• Pressure

– Motive or incentive which provides a reason to commit fraud (debts from gambling, unemployment, medical costs)

• Rationalization

– Justifying the action (I’ll pay it back later, I don’t get paid what I’m worth, nobody will miss the money)

• Opportunity

– The circumstance within the organization that allows the fraud to occur (ineffective internal controls, lack of segregation of duties)

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What Type

• f Fraud is

Committed?

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6/21/2018 8 How long do fraud schemes last?

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Top 8 Fraud Concealment Methods

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Top 8 Fraud Concealment Methods

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6/21/2018 9 How is Fraud Detected?

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Who Reports Fraud?

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Who is Victimized by Fraud?

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6/21/2018 10 What Levels of Government?

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Most Common Schemes

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Internal Control Weaknesses

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6/21/2018 11 Real Life Examples

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• “Just Horsing Around”
• “Milking an Illicit Opportunity”
• “the Gambling Addiction”
• “The Gambling Addiction – part II”
• “The Car Hobby”
• “How Things Get Done”

“Just Horsing Around”

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“Just Horsing Around”

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• $54 million embezzled from City of Dixon over

a 22 year period.

• Opened a secret bank account named RSCDA

(Reserve Sewer Capital Development Account)

• It was assumed she either inherited wealth or

her horse breeding business was profitable.

• Discovered by City Clerk while on an extended

vacation.

• Sentenced to 20 years in federal prison.

6/21/2018 12 “Just Horsing Around”

Sentenced to 20 years in federal prison.

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“Milking an Illicit Opportunity”

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“Land O’Fakes”

• $1.035 million embezzled from Land O’ Lakes
• ver a 5 year period by a/p supervisor.
• Daughter was set up as a vendor.
• Created fake invoice and authorized payments

(489).

• Forged daughter’s signature and cashed the

checks to support gambling habit.

• Co‐worker suspected something was wrong.
• Sentenced to more than two years in prison.

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6/21/2018 13 “The Gambling Addiction”

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“The Gambling Addiction”

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• $792,829 embezzled from a New Mexico

Water and Sewage Works Association over a 2 year period.

• Used Association’s credit card to obtain cash

advances and initiates charges at casinos.

• Also paid off personal credit card through
• nline transfers from the Association’s payroll

account.

“The Gambling Addiction”

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• 75 transactions ranging from $416 to $15,746
• Whitaker resigned prior to the start of the

fiscal year audit after allegedly admitting “financial wrongdoing”.

• On May 2, 2018, Lori Whitaker pleaded guilty

to one count of wire fraud.

6/21/2018 14 “The Gambling Addiction – Part II”

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• $500,000

embezzled from a Fairfax MN business over a 5 year period.

• Paid off personal credit card through online

transfers from the business’ bank account.

• Linsmeier was an authorized signatory and

had authority to sign and issue checks.

“The Gambling Addiction – Part II”

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• Attempted to conceal her embezzlement by

creating false entries in the general ledger to make it look like the money had been used for legitimate business expenses.

• Used the funds for online gambling.
• On May 9, 2018, Theresa Linsmeier was

charged with 3 counts of wire fraud and 5 counts of filing false tax returns.

“The Car Hobby”

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6/21/2018 15 “The Car Hobby”

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• $1.163 million embezzled from North Central

Stamping & Manufacturing over a 26 year period.

• Controller opened a secret bank account in

the name of NCSM without the company’s knowledge or authorization.

“The Car Hobby”

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• Controller

deposited payments made by customers into the fraudulent bank account.

• Used the money to fund his hobby of buying

and restoring old automobiles.

• On August 18, 2017 John Burwood pleaded

guilty to 1 count of mail fraud and 1 count of filing a false tax return.

• Sentenced to 33 months in federal prison.

“How Things Get Done”

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6/21/2018 16 “How Things Get Done”

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• Former City of Plymouth Facilities Supervisor

allegedly solicited and received bribes and kickbacks for awarding contracts.

• Received cash and non‐cash bribes such as

kitchen appliances, installation of new carpet, concrete driveway, extensive landscaping and electrical work worth $58,532.

“How Things Get Done”

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• Taggart instructed contractors to submit a

second, fake quote to give the appearance that he complied with state statute and city policy regarding competitive bidding.

• Taggart encouraged contractors to inflate their

bids to cover the cost of the kickbacks and bribes.

• On April 24, 2018, Ronnie Taggart was charged

with 1 count of wire fraud.

The Fraud Triangle

Incentive or pressure Opportunity Rationalization/attitude

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6/21/2018 17 Red Flags

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Red Flags

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Internal Controls

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• What can be done about money sneaking out

the door?

Security vs. Inconvenience

6/21/2018 18 Internal Controls

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• Ghost vendor warning signs
• Vendors with PO Box addresses
• Vendors listed as initials
• Excessive voided or missing checks

Internal Controls

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• What can be done about money sneaking out

the door?

– A/P Checks

• Manual signing of checks over a dollar threshold
• Positive pay
• Controls over adding new vendors
• No “one time” vendors
• Physically contact new vendors to ensure they exist

Internal Controls

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• What can be done about money sneaking out

the door?

– Payroll

• Periodic payroll system report on pay rate changes
• Contact each employee to ensure there are no “ghosts”
• Test payroll by comparing payroll records to personnel

files

6/21/2018 19 Internal Controls

• What can be done about money sneaking out

the door?

– ACH and wire transfers

• Separate ability to initiate a wire and approve a wire
• ACH detective controls

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Internal Controls

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• What can be done about money sneaking out

the door?

– Other

• Meet with representatives of the bank to ensure that

all signers are authorized and there are no unauthorized accounts

• Journal entry approvals

Internal Controls

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• What about fraudulent financial reporting?
• What about corruption?

6/21/2018 20

Questions?

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