Scenario #1 - WA PRIMA
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Transcript Scenario #1 - WA PRIMA
Crooks You Work With
Larry Bailey
Executive Director WSRMP
Someone You Trust
Church Treasurer
Deacon Board
Leader in Professional Association
PTA Board President
Self Deception
Procrastination
Rationalization
The “Fraud Triangle”
Motive/Pressure
Opportunity
Rationalization
Catching the Office Manager
Isn’t it the SAO’s job to Find Fraud?
Auditor’s Role
“Expectation Gap”
Public assumes purpose of the audit is to catch fraud.
Statement on Auditing Standards 99 (AICPA Acct Stds Bd)
“The auditor has responsibility to plan and perform the
audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement,
whether caused by error or fraud. “
Auditors prepare report on whether the financial
statements are fairly presented. They should investigate
suspected frauds uncovered during their review, but not
primary objective.
How Much Fraud Is There?
Association of Certified Fraud Examiners (ACFE)
Annual Report (www.acfe.org)
1,843 cases surveyed Jan08-Dec09 (40% outside US)
Average loss 5% of annual revenue
Median Loss $160k, 25% > $1m
Financial Statement Fraud $4.1m, Corruption
$280k, Asset Misappropriation $135k
Asset misappropriation cases most common 90%,
Corruption 22%, Financial Statement Fraud 4%
(Overlap because many cases involve more than
one)
SOURCE: 2010 ACFE Annual Fraud Report
Who Commits Fraud?
Employees 42% (median loss $80k)
Managers 41% (median loss $200k)
Executives 17% (median loss ($723k)
SOURCE: 2010 ACFE Annual Fraud Report
Gender and Age of Fraudsters
Men 57%
40% have between 1-5 years seniority
The median $ loss is 2.5x women
The longer they have worked there, the
bigger the average theft
50% between ages 31-45
Losses sharply increase with age
SOURCE: 2010 ACFE Annual Fraud Report
Fraudster’s Departments
Accounting 22%
Sales 14%
Upper Management 14%
Purchasing 6%
IT 3%
HR 1.3%
Internal Audit 0.2%
SOURCE: 2010 ACFE Annual Fraud Report
Fraudsters Records
87% had no previous
criminal record
83% never punished
or terminated from
earlier job
SOURCE: 2010 ACFE Annual Fraud Report
How Long Does Fraud Last?
Median time before detection 18
months
Our frauds for two Water
& Sewer Districts went on
for 6-7 years
SOURCE: 2010 ACFE Annual Fraud Report
How Did They Do It?
Missing/Weak Internal Controls (37.8%)
Override of Good Internal Controls (19.2%)
Lack of Management Review (17.9%)
Poor “Tone at the Top” (8.4%)
Incompetent Oversight (6.9%)
No Independent Oversight (5.6%)
All others (4.2%)
SOURCE: 2010 ACFE Annual Fraud Report
How Do Manager Think Fraud is
Detected?
External Audit – 76%
Internal Audit 69%
Fraud Training-Managers 42%
Fraud Training-Employees-40%
Job Rotation/Mandatory Vacations-15%
SOURCE: 2010 ACFE Annual Fraud Report
How is Fraud Actually Detected?
Fraud Tip Line (40.2%)
Management (15.4%)
Internal Audit (13.9%)
Accident (8.3%)
Account Reconciliations (6.1%)
Document Review (5.2%)
External Audit (4.6%)
SOURCE: 2010 ACFE Annual Fraud Report
Warning Signs
Living beyond means (43%)
Financial difficulties (36%)
Control issues (23%)
Close with vendors/customers (22%)
“Wheeler-Dealer” style (19%)
Divorce/Family Issues (18%)
Addictions (12%)
Never takes vacations (10%)
Frequent complaints about pay/promotions (5%)
SOURCE: 2010 ACFE Annual Fraud Report
Three Steps to a Fraud
Commit-Take the money, create the false
vendor, etc.
Conceal-Alter records to make detection
difficult
Perception of effective internal controls is best way
to stop this.
Effective internal controls make hiding the fraud
more difficult
Convert-Alter the form of what has been
taken into something useful to the fraudster
Conversion can be internal (check for cash) or
external (ebay?)
Magic Anti-Fraud Bullet:
Segregation of Duties
When one person can perform any two of the
following, there it’s a fraud opportunity:
Custody Function
Approval
Who actually handles the cash, stuff, etc? This includes
the District checkbook.
Who approves the use or transfer of the asset?
Recording/Reconciliation
Who records the use or transfer? Who prepares the
source documents?
Types of Fraud
Theft of assets (generally cash, but could be
equipment/inventory)
Most common, but lower in total amount
Improper expenditures
(fake vendors
“ghost” employees)
Less common, but larger
Financial Statement
Cash Receipts Frauds
Is all money getting to bank when it
should, and are all adjustments valid?
Skimming/Underreporting (before entering
system)
Cash Theft (receipts already recorded in
accounting system)
Ways money comes in?
Mail, credit cards, wire, cash receipts at the
counter, etc?
Preventing Cash Receipts Fraud
Segregation of duties
Handlers of cash should never be able to adjust
accounts
Separate tills (can be a challenge)
Use receipts that are difficult to alter (prenumbered,
Z-Tapes,etc)
Daily deposit of ALL funds (RCW requires)
Even if you don’t know why you got it, accounting can
figure it out later
Daily reconciliation of deposit to CR records
Composition of deposits (Does check/cash composition
match what the bank received?)
Are you getting the benefit of all
your purchases?
Small and attractive items
Theft of inventory
Borrowing of equipment
Disposal of “Surplus”
or “Damaged” equipment
Preventing Misappropriation Frauds
Internal Controls
Separate approval of purchases
Separate approval of writeoffs, surplus, scrap
Policy prohibiting personal use of district assets
Tagging the assets
Physical control over inventory/equipment
(locked room)
Periodic inventory count
Fraud Hotline (SAO, District)
Disbursement Frauds
Do you know where your money is going?
False Billing Fraud
Fake invoices/Fake Vendors
Pay & Return Scheme (Real vendors asked to
return “overpayment”)
Kickback schemes (Vendor actually
participates in fraud)
Mileage expenses
Padded mileage expense reports
Preventing Disbursement Frauds
Separate person authorizing payment
Original invoice supports expenditure
Documentation supports vouchers
Person who actually knows is the person who
approves it
Duplicate payments?
Do warrants from the county agree to the warrant
register?
Different person making the comparison
Control of the mailing of the warrants
Different person mails the payments after they are
prepared
Payroll Frauds
Are you paying the right people?
Right people paid wrong amount?
“Ghost” employees/PT padded to FT
Padding timesheets
Unapproved Raises/Benefits
Leave records?
Effectively a raise, since the employee has
more vacation as a result
Padded time sheets
Preventing Payroll Frauds
Internal Controls
Reconciliation of the pay disbursements to the
pay records
Who creates and maintains the payroll/records?
Who approves the timesheets?
Can the fraudster alter them after approval?
Who hands out the checks?
Financial Statement Frauds
Takes place in the public sector as well
Bond covenants
Grant requirements
Types of Frauds
Concealment of expenditures
or liabilities
Improper disclosures
Related parties
Preventing Frauds Generally
“Tone at the Top”
District’s leadership must embrace
integrity as a core value of the
organization.
Truthful reporting more important than
favorable reporting
Segregation of Duties
Challenging in smaller entities.
Compensating controls must be found
Preventing Frauds Generally
Organizational Structure – commissioner as
acting treasurer
RCW 57.12.010 does not require it (Risk vs
Compliance)
Hiring Practices
Background checks on employees and
vendors regarding finance/accounting
Employee Training
All employees are part of the fraud fighting
team
Terminate and Prosecute Fraudsters
What Can Electeds/GMs Do?
Ask Dumb Questions!
Until you understand the answers.
Don’t let accounting’s sophistication
intimidate you.
Review Transactions
Spend an afternoon every few
months at the District looking at
vouchers. Ask more questions
What Can Elected Officials Do?
Listen to Staff
How would they improve their jobs?
Don’t expect to
see fraud
everywhere,
but don’t be afraid
to see it either
Example of What You Can do
Acting treasurer
role – needed for
oversight function
on every district
Board of
“I gave my first treasurer’s report at the
Commissioners
commissioners meeting last night. I only
pretended to know what I was talking
about, fortunately, the other
commissioners only pretended that they
were listening.”
Resources
State Auditor’s Office –www.sao.wa.gov
Fraud Hotline - 1-866-902-3900
Washington State Society of CPAs –
WSCPA.Org
Association of Certified Fraud Examiners –
ACFE.Org
WSRMP Internal Control Handouts
“Trust but Verify”
Answers?
Larry Bailey email: [email protected]
(425) 952-9750