Agenda Introduction Internal Controls the textbook version ACFE - PDF document

6/21/2018 Fraud Happens….but it doesn’t have to. A Simple Perspective on how to Protect You and Your Organization David Mol, CPA Redpath and Company,Ltd 1 Agenda • Introduction • Internal Controls – the textbook version • ACFE Report to the Nations • Real Life Examples • Solutions 2 Introduction • Introductions – Speaker – Class Participants 3 1

6/21/2018 Internal Controls • So what’s the big deal about internal controls? – Safeguarding assets – Provide reliable data 4 COSO • 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.” 5 COSO 6 2

6/21/2018 COSO • Documents issued by COSO – 1992 – Internal Control – Integrated Framework – 2006 – Internal Control over Financial Reporting – Guidance for Smaller PublicCompanies 7 U.S. Government Accountability Office • GAO’s Green Book – Standards for Internal Control in the Federal Government 8 GAO’s Components of Internal Control 9 3

6/21/2018 COSO’s Integrated Framework Principles 10 Internal Controls • 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. 11 Internal Controls • Assessing the risk of error – Changes in operating environment – Inherent risk – Control risk 12 4

6/21/2018 Internal Controls • 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.” 13 Fraud • Common types of fraud – Misappropriation of assets – Fraudulent financial reporting – Corruption 14 Fraud • Misappropriation of Assets – Theft of cash on hand – Theft of cash receipts – Fraudulent disbursements – Inventory and other assets 15 5

6/21/2018 Fraud • Fraudulent Financial Reporting – Grant reporting – Regulatory reporting – Improper asset valuation – Budgetary concerns 16 Fraud • Corruption – Conflicts of interest – Bribery – Economic extortion 17 The Fraud Triangle Incentive or pressure Opportunity Rationalization/attitude 18 6

6/21/2018 The Fraud Triangle • 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) 19 20 What Type of Fraud is Committed? 21 7

6/21/2018 How long do fraud schemes last? 22 Top 8 Fraud Concealment Methods 23 Top 8 Fraud Concealment Methods 24 8

6/21/2018 How is Fraud Detected? 25 Who Reports Fraud? 26 Who is Victimized by Fraud? 27 9

6/21/2018 What Levels of Government? 28 Most Common Schemes 29 Internal Control Weaknesses 30 10

6/21/2018 Real Life Examples • “Just Horsing Around” • “Milking an Illicit Opportunity” • “the Gambling Addiction” • “The Gambling Addiction – part II” • “The Car Hobby” • “How Things Get Done” 31 “Just Horsing Around” 32 “Just Horsing Around” • $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. 33 11

6/21/2018 “Just Horsing Around” Sentenced to 20 years in federal prison. 34 “Milking an Illicit Opportunity” 35 “Land O’Fakes” • $1.035 million embezzled from Land O’ Lakes over 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. 36 12

6/21/2018 “The Gambling Addiction” 37 “The Gambling Addiction” • $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 online transfers from the Association’s payroll account. 38 “The Gambling Addiction” • 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. 39 13

6/21/2018 “The Gambling Addiction – Part II” • $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. 40 “The Gambling Addiction – Part II” • 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. 41 “The Car Hobby” 42 14

6/21/2018 “The Car Hobby” • $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. 43 “The Car Hobby” • 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. 44 “How Things Get Done” 45 15

6/21/2018 “How Things Get Done” • 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. 46 “How Things Get Done” • 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. 47 The Fraud Triangle Incentive or pressure Opportunity Rationalization/attitude 48 16

6/21/2018 Red Flags 49 Red Flags 50 Internal Controls • What can be done about money sneaking out the door? Security vs. Inconvenience 51 17

6/21/2018 Internal Controls • Ghost vendor warning signs • Vendors with PO Box addresses • Vendors listed as initials • Excessive voided or missing checks 52 Internal Controls • 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 53 Internal Controls • 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 54 18

6/21/2018 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 55 Internal Controls • 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 56 Internal Controls • What about fraudulent financial reporting? • What about corruption? 57 19

6/21/2018 Questions? 58 20