Fraud Happens.but it doesnt have to. A Simple Perspective on how - - PowerPoint PPT Presentation

▶
fraud happens but it doesn t have to a simple perspective
SMART_READER_LITE
LIVE PREVIEW

Fraud Happens.but it doesnt have to. A Simple Perspective on how - - PowerPoint PPT Presentation

Jan 05, 2024 382 likes •982 views

Fraud Happens.but it doesnt 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

slide-1
SLIDE 1

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

slide-2
SLIDE 2

Agenda

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

2

slide-3
SLIDE 3

Introduction

  • Introductions

– Speaker – Class Participants

3

slide-4
SLIDE 4

Internal Controls

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

– Safeguarding assets – Provide reliable data

4

slide-5
SLIDE 5

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

slide-6
SLIDE 6

COSO

6

slide-7
SLIDE 7

COSO

  • Documents issued by COSO

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

7

slide-8
SLIDE 8

U.S. Government Accountability Office

  • GAO’s Green Book –

Standards for Internal Control in the Federal Government

8

slide-9
SLIDE 9

GAO’s Components of Internal Control

9

slide-10
SLIDE 10

COSO’s Integrated Framework Principles

10

slide-11
SLIDE 11

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

slide-12
SLIDE 12

Internal Controls

  • Assessing the risk of error

– Changes in operating environment – Inherent risk – Control risk

12

slide-13
SLIDE 13

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

slide-14
SLIDE 14

Fraud

  • Common types of fraud

– Misappropriation of assets – Fraudulent financial reporting – Corruption

14

slide-15
SLIDE 15

Fraud

  • Misappropriation of Assets

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

15

slide-16
SLIDE 16

Fraud

  • Fraudulent Financial Reporting

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

16

slide-17
SLIDE 17

Fraud

  • Corruption

– Conflicts of interest – Bribery – Economic extortion

17

slide-18
SLIDE 18

The Fraud Triangle

Incentive or pressure Opportunity Rationalization/attitude

18

slide-19
SLIDE 19

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

slide-20
SLIDE 20

20

slide-21
SLIDE 21

What Type

  • f Fraud is

Committed?

21

slide-22
SLIDE 22

How long do fraud schemes last?

22

slide-23
SLIDE 23

Top 8 Fraud Concealment Methods

23

slide-24
SLIDE 24

Top 8 Fraud Concealment Methods

24

slide-25
SLIDE 25

How is Fraud Detected?

25

slide-26
SLIDE 26

Who Reports Fraud?

26

slide-27
SLIDE 27

Who is Victimized by Fraud?

27

slide-28
SLIDE 28

What Levels of Government?

28

slide-29
SLIDE 29

Most Common Schemes

29

slide-30
SLIDE 30

Internal Control Weaknesses

30

slide-31
SLIDE 31

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

slide-32
SLIDE 32

“Just Horsing Around”

32

slide-33
SLIDE 33

“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

slide-34
SLIDE 34

“Just Horsing Around”

34

Sentenced to 20 years in federal prison.

slide-35
SLIDE 35

“Milking an Illicit Opportunity”

35

slide-36
SLIDE 36

“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.

36

slide-37
SLIDE 37

“The Gambling Addiction”

37

slide-38
SLIDE 38

“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
  • nline transfers from the Association’s payroll

account.

38

slide-39
SLIDE 39

“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

slide-40
SLIDE 40

“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

slide-41
SLIDE 41

“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

slide-42
SLIDE 42

“The Car Hobby”

42

slide-43
SLIDE 43

“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

slide-44
SLIDE 44

“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

slide-45
SLIDE 45

“How Things Get Done”

45

slide-46
SLIDE 46

“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

slide-47
SLIDE 47

“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

slide-48
SLIDE 48

The Fraud Triangle

Incentive or pressure Opportunity Rationalization/attitude

48

slide-49
SLIDE 49

Red Flags

49

slide-50
SLIDE 50

Red Flags

50

slide-51
SLIDE 51

Internal Controls

  • What can be done about money sneaking out

the door?

51

Security vs. Inconvenience

slide-52
SLIDE 52

Internal Controls

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

52

slide-53
SLIDE 53

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

slide-54
SLIDE 54

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

slide-55
SLIDE 55

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

slide-56
SLIDE 56

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

slide-57
SLIDE 57

Internal Controls

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

57

slide-58
SLIDE 58

Questions?

58