Transcript Scenario #1 - WA PRIMA

Crooks You Work With
Larry Bailey
Executive Director WSRMP
Someone You Trust
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Church Treasurer
Deacon Board
Leader in Professional Association
PTA Board President
Self Deception
Procrastination
 Rationalization
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The “Fraud Triangle”
Motive/Pressure
Opportunity
Rationalization
Catching the Office Manager
Isn’t it the SAO’s job to Find Fraud?
Auditor’s Role
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“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?
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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?
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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
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Men 57%
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40% have between 1-5 years seniority
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The median $ loss is 2.5x women
The longer they have worked there, the
bigger the average theft
50% between ages 31-45
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Losses sharply increase with age
SOURCE: 2010 ACFE Annual Fraud Report
Fraudster’s Departments
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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
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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?
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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?
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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%
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SOURCE: 2010 ACFE Annual Fraud Report
How is Fraud Actually Detected?
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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
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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
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Commit-Take the money, create the false
vendor, etc.
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Conceal-Alter records to make detection
difficult
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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
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Conversion can be internal (check for cash) or
external (ebay?)
Magic Anti-Fraud Bullet:
Segregation of Duties
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When one person can perform any two of the
following, there it’s a fraud opportunity:
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Custody Function
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Approval
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Who actually handles the cash, stuff, etc? This includes
the District checkbook.
Who approves the use or transfer of the asset?
Recording/Reconciliation
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Who records the use or transfer? Who prepares the
source documents?
Types of Fraud
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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
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Is all money getting to bank when it
should, and are all adjustments valid?
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Skimming/Underreporting (before entering
system)
Cash Theft (receipts already recorded in
accounting system)
Ways money comes in?
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Mail, credit cards, wire, cash receipts at the
counter, etc?
Preventing Cash Receipts Fraud
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Segregation of duties
Handlers of cash should never be able to adjust
accounts
Separate tills (can be a challenge)
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Use receipts that are difficult to alter (prenumbered,
Z-Tapes,etc)
Daily deposit of ALL funds (RCW requires)
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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?
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Small and attractive items
Theft of inventory
Borrowing of equipment
Disposal of “Surplus”
or “Damaged” equipment
Preventing Misappropriation Frauds
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Internal Controls
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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
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Do you know where your money is going?
False Billing Fraud
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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
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Separate person authorizing payment
Original invoice supports expenditure
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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?
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Different person making the comparison
Control of the mailing of the warrants
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Different person mails the payments after they are
prepared
Payroll Frauds
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Are you paying the right people?
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Right people paid wrong amount?
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“Ghost” employees/PT padded to FT
Padding timesheets
Unapproved Raises/Benefits
Leave records?
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Effectively a raise, since the employee has
more vacation as a result
Padded time sheets
Preventing Payroll Frauds
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Internal Controls
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Reconciliation of the pay disbursements to the
pay records
Who creates and maintains the payroll/records?
Who approves the timesheets?
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Can the fraudster alter them after approval?
Who hands out the checks?
Financial Statement Frauds
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Takes place in the public sector as well
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Bond covenants
Grant requirements
Types of Frauds
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Concealment of expenditures
or liabilities
Improper disclosures
Related parties
Preventing Frauds Generally
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“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
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Organizational Structure – commissioner as
acting treasurer
 RCW 57.12.010 does not require it (Risk vs
Compliance)
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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?
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Ask Dumb Questions!
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Until you understand the answers.
Don’t let accounting’s sophistication
intimidate you.
Review Transactions
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Spend an afternoon every few
months at the District looking at
vouchers. Ask more questions
What Can Elected Officials Do?
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Listen to Staff
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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
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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
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State Auditor’s Office –www.sao.wa.gov
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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